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When a company pursues a former employee for violating a noncompete agreement, one of the first decisions may be whether to include the ex-employee’s new employer in the lawsuit.  While attorneys who practice in noncompete litigation differ in their views on this issue, a number of factors are usually relevant.

For instance, will suing the new employer interfere with the ability to obtain jurisdiction over all of the parties?  In situations involving a contractual forum selection clause, the court may not have personal jurisdiction over the new employer.

Another issue is whether the new employer might be more inclined to pay the ex-employee’s litigation costs if it were a defendant.  In many cases, individual defendants do not have the resources to defend these types of suits, and without their new employer’s assistance, they will often want to resolve the case early (and more favorably to the plaintiff’s advantage).

 

The Delaware Court of Chancery has issued new guidelines to assist those practicing before the Court. This guidance may be particularly helpful to attorneys unfamiliar with the level of civility expected of the Delaware Bar. The guidelines also include advice on “best practices” that will be informative for seasoned attorneys who have not mastered the nuances of Chancery Court practice:

· All cellphones and PDAs are strictly prohibited in the courtroom, even if silenced. Failure to comply with this rule may result in confiscation of the device and/or sanctions.

· Plans for the use of technology during a hearing or trial should be made approximately one week before the proceeding.

A recent Court of Chancery opinion, addressing survival clauses in transactional contracts, provides guidance on the use of contractual statutes of limitations in employment contracts. In the case of GRT, Inc. v. Marathon GTF Technology, Ltd., the Court ruled on a contract governing a joint venture between two businesses in the natural gas industry. The Plaintiff, an investor, contracted with the Defendant to build a testing facility to allow the Plaintiff to conduct research related to new technologies. Because the testing facility involved the Defendant’s proprietary technology, the Plaintiff was not permitted to inspect the facility until the contract establishing the joint venture had been executed. In order to protect the Plaintiff’s investment, the parties’ contract included a Survival Clause.

Pursuant to the Survival Clause, any claim related to design specifications for the testing facility would survive for one year after execution of the joint venture agreement. The Survival Clause thereby preserved the Plaintiff’s rights, while shortening the three-year statute of limitations on contract claims to one year. The joint venture contract was executed in July 2008, but the Plaintiff waited until June 2010 to bring suit regarding alleged design problems and the Defendant’s failure to remedy the problems. The Defendant moved to dismiss the suit as barred by the Survival Clause.

In response to the Motion to Dismiss, the Plaintiff argued that (1) the Survival Clause limited the period during which the Defendant could breach the contract, but did not limit the period for enforcement and (2) it was not suing for failure to comply with design specifications-an issue governed by the Survival Clause-but was instead suing for over the Defendant’s failure to remedy the alleged design flaws. The Court rejected both arguments.

In order to enforce a noncompete agreement, the party seeking to enforce the agreement must first show that a valid contract exists. Usually this requirement is easily satisfied, but employers not take it lightly. For instance, some employees have successfully argued that their former employer’s failure to fully compensate them prevented the employer from enforcing the non-competition agreement. This outcome is premised on the principle of contract law that ‘a material breach by one party to a contract entitles the non-breaching party to suspend performance. A recent Third Circuit opinion indicates that in some cases, an employer’s misclassification of an employee as an independent contractor may result in a breach of contract, which can similarly prevent enforcement of a non-competition agreement.

In Figueroa v. Precision Surgical, Inc., the employer had an independent contractor agreement (“ICA”) with Joseph Figueroa and a medical equipment supplier called Precision Surgical, Inc. The ICA included several restrictive covenants, including non-solicitation, confidentiality, and non-competition provisions.

Figueroa worked for Precision from 2004 through September 2010. During those years, Precision began to treat Figueroa as an employee, rather than an independent contractor. Among Precisions requirements were (1) that Figueroa devote 100% of his energy to selling products offered by Precision, (2) that he report to his supervisors daily and attend monthly meetings, (3) that he abide by a dress code, and (4) that Figueroa obtain permission from Precision before giving quotes to certain prospective customers.

The head of Delaware’s Court of Chancery announced today that he will be stepping down from the bench effective June 17, 2011.  William B. Chandler, III has served as Chancellor since 1997.  He joined the Court of Chancery in 1989, and prior to that served as a judge in Delaware’s Superior Court. 

In 2009, Chancellor Chandler had been reconfirmed for a second 12 year term, and his announcement comes as a surprise to some.  In a letter to Governor Jack Markell, the Chancellor, age 60, indicated he wanted to pursue new opportunities that were available to him.

A more complete story is available at the Delaware News Journal website.

chancerylogo60Disputes involving non-compete agreements more often than not become dependent upon information that is or was stored electronically. It is not, therefore, surprising that Delaware’s Court of Chancery, the trial court where most disputes involving non-compete agreements are filed, posted important Guidelines for Preservation of Electronically Stored Information on its website yesterday. (See www.courts.delaware.gov/Chancery.) Anyone involved in a matter before Delaware’s Court of Chancery must pay particular attention to the Court’s guidelines.

It is clear from the guidelines that the Court considers the preservation of electronically stored information (“ESI”) a very important task that, if performed incorrectly, will have consequences. The first paragraph of the guidelines reminds “all counsel (including Delaware counsel) appearing in any case before the Court of their common law duty to their clients and the Court with respect to the preservation of electronically stored information.” (emphasis added.) Specifically, “a party to litigation must take reasonable steps to preserve information, including ESI, that is potentially relevant to the litigation and that is within the party’s possession, custody, or control.” If a party has not made a good-faith effort to preserve ESI, it is likely that the Court will issue sanctions.

Despite the use of the term “litigant” throughout the guidelines, the guidelines impose particular responsibilities upon counsel that should not be ignored. According to the guidelines, “at the very minimum,” counsel’s common law duty to take reasonable steps to preserve ESI includes but is not limited to developing and overseeing a preservation process that includes the dissemination of a litigation hold notice to custodians of potentially relevant ESI.

Wal-Mart Stores Inc. scored a second victory in its case against a former executive by convincing the Delaware Court of Chancery to extend the injunction preventing him from joining CVS Caremark Corporation.  The world’s largest retailer had sued to prevent Hank Mullany, a former executive vice president, from joining CVS based on the restrictions in his noncompete agreement and the possibility that confidential information involving sales and growth initiatives would be disclosed to its rival.

In a hearing held on December 15, 2010, Vice Chancellor J. Travis Laster sided with Walmart and agreed to convert the temporary restraining order into a preliminary injunction, noting that Mullany took a calculated risk by accepting employment with CVS and that he could have gone to work for a non-competitor.   Vice Chancellor Laster also recognized that Mullany’s knowledge of Walmart’s small store strategy would prove valuable to CVS if it was disclosed.

The new injunction prohibits Mullany from employment or association with any general or specialty retail, grocery or merchandising business with sales in excess of five billion dollars, and enjoins CVS from employing or using Mullany in any capacity.  The order also prohibits Mullany from disclosing any of Walmart’s confidential or proprietary information.

Wal-Mart Stores obtained a temporary restraining order on December 3, 2010 from the Court  of Chancery in Delaware enjoining a former executive vice president from commencing employment with CVS Caremark Corporation. The former executive, Harry S. Mullany, had been president of Walmart North and was scheduled to start work at CVS on December 6, 2010.youngconaway

According to the verified complaint, Mullany had oversight of Walmart’s operations for over 1,300 stores in nineteen states and has extensive knowledge of Walmart’s confidential and proprietary information and trade secrets. Walmart alleges that Mullany executed a covenant not to compete in 2009 which prohibited him from working for a competing business for a two (2) year period or participating in any activity that risks the use or disclosure of Walmart’s confidential information.

On October 24, 2010, Mullany apparently informed Walmart that he was resigning his position effective November 5, 2010. Walmart subsequently learned that Mullany had accepted a position with CVS beginning December 6, 2010 as president of its retail division. The parties purportedly had discussions to resolve the dispute prior to the filing of the lawsuit but these proved unsuccessful.

With the increasingly rapid changes in today’s technological business world, companies are  faced with many new challenges to protect their intellectual property from competitors. This includes developing measures to protect the intellectual property and work created by employees. To this end, many employers require employees to assign over all of their

youngconaway intellectual property rights. These so-called “work made for hire” agreements generally grant the employer ownership of any intellectual property applicable to the employer’s business and developed by the employee during his employment.

A recent case decided by Delaware’s federal district court illustrates the importance of such agreements. In Le v. City of Wilmington, C.A. No. 08-615-LPS, a City employee sued the City for copyright infringement. The employee’s suit related to an Instant Ticketing program designed by Le for the City’s Department of Licensing and Inspection. The program was designed to allow the City to track license violations electronically, rather than through paper tickets. Le alleged that he had developed the program at home, on his own time, with the intention of marketing it to the City and other municipalities.

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