Dealer Track: Legal Issues Facing Team Dealers–Common law contracts govern in some states and will enforce a covenant not-to-compete if it is “reasonable.” –Several states

© Clausen Miller PC, 2014

Dealer Track: Legal Issues Facing

Team Dealers

50th Annual NSGA Management Conference &

16th Annual Team Dealer Summit

April 29, 2014

Ivar R. AzerisClausen Miller P.C.

Chicago, IL

(312) 606-7581

[email protected]

www.clausen.com

Todd M. MurphyClausen Miller P.C.

Chicago, IL

(312) 606-7697

[email protected]

www.clausen.com


Non-Compete Covenants & Trade Secrets


Chicago, IL

(312) 606-7581

[email protected]

www.clausen.com


Introduction

• Trade Restraints vs Protectable Interests


Non-Compete Covenants

Introduction

• Generally, these agreements are used to protect valuable

business interests, such as

– Trade Secrets

– Confidential information

– Proprietary information

• Lack of national uniformity.

– Common law contracts govern in some states and will enforce a

covenant not-to-compete if it is “reasonable.”

– Several states have passed statutes governing covenants not-to-

compete.

• See e.g., California.


Non-Compete Covenants

Introduction

• Most states apply a “reasonableness”

test to determine whether the provision

is enforceable.

– Geographic restrictions

– Durations

– Balancing interests


Case Illustration: Nike, Inc. v. McCarthy, (9th Cir. 2004)

• Facts: McCarthy (“Defendant”) started working for Nike (“Plaintiff”) in

1993.

– Eventually, Plaintiff promoted Defendant to eastern regional footwear

sales manager.

– To this end, Plaintiff required Defendant to sign a covenant not-to-

compete and nondisclosure agreement, which read as follows:

• During EMPLOYEE'S employment by NIKE ... and for one (1) year

thereafter, (the “Restriction Period”), EMPLOYEE will not directly or

indirectly ... be employed by, consult for, or be connected in any

manner with, any business engaged anywhere in the world in the

athletic footwear, athletic apparel or sports equipment and

accessories business, or any other business which directly competes

with NIKE or any of its subsidiaries or affiliated corporations.



– Two years later, Plaintiff promoted Defendant to director

of sales for the Brand Jordan Division, which he held

until he resigned in 2003.

– That spring, Defendant accepted a position with

Reebok as vice president of U.S. footwear sales and

merchandising.

– August 2003, Plaintiff filed a lawsuit against Defendant

claiming that he breached the contract and sought a

declaratory judgment that his employment with Reebok

violated the covenant not to compete.



• Judge: In determining whether the covenant not-to-

compete was enforceable, the appellate court

explained that as Brand Jordan’s director of sales,

Defendant had knowledge of the following:

• (i) Plaintiff’s product launch dates;

• (ii) product allocation strategies;

• (iii) new product development;

• (iv) product orders six months in advance; and

• (v) strategic sales plans up to three years in

advance.



– The appellate court also balanced the hardships the parties would

suffer if the contract was enforced or not.

– In doing so, the appellate court noted several mitigating factors,

such as

• Plaintiff agreed to pay Defendant’s full salary during the

restriction period,

• Reebok agreed to pay health and medical benefits for the

defendant as well as for his family, and

• Reebok agreed to offer the job to Defendant when the one-year

restrictive period was over.

• Holding: The potential disruption to Plaintiff’s sales and products

outweighs the harm Defendant would suffer from enforcing the

contract, and thus, the covenant not-to-compete is enforceable.


Drafting “Reasonable” ProvisionsContract Language Comments

Protectable Interest • Customer lists.• Business information.

• General knowledge.

Duration • Exact length of time.• No greater than necessary for the

protection of the legitimate business interest.

• Between 6 months and a year-and-a-half are often upheld.

• This is consistent with some statutes.

Geographic Scope • No greater than necessary for the protection of the legitimate business interest.

• Included entire northeast, but company only has customers in PA & NJ.

• Prohibited employment within 100 miles of several company offices, but Defendant only worked in 2.


Takeaways

• Although restrictive covenants are often enforceable,

courts strongly dislike them, because they impose a

restraint on trade and hinder an employee’s mobility.

• Court is more likely to enforce a covenant not-to-

compete if mitigating factors are present, such as

– Employee is paid severance. See e.g., Nike, Inc. v.

McCarthy.

– Employee received significant compensation for

agreeing to the covenant.


Takeaways

• Alternatively,

– Garden Leave provisions

• Departing employee must provide mandatory notice of

resignation.

• The employee remains employed throughout the notice period

and receives full salary and other benefits.

• After giving notice, the employee is not required to perform any

further services.

• Thus, the employee still owes a duty of loyalty and is not free to

work anywhere else.


Takeaways

• Given the overall hostility towards restrictive

covenants, other safeguards should be

inserted into the contract in the event the non-

compete clause is unenforceable.

– Must include severability provision.

– Non-solicitation provisions

• Preventing a departing employee from soliciting his

former employer’s clients for a certain period of time.

• Less restrictive, thus it is more likely a court will

uphold it.


Trade Secrets

Introduction• State law governs.

• 46 states, plus Washington, D.C. have adopted the UTSA.

– Massachusetts, New Jersey, New York, & Texas have not.

– A “trade secret” is defined as the following:

• “Trade secret” means information, including a formula, pattern,

compilation, program, device, method, technique, or process, that:

– (i) derives independent economic value, actual or potential,

from not being generally known to, and not being readily

ascertainable by proper means by, other persons who can

obtain economic value from its disclosure or use, and

– (ii) is the subject of efforts that are reasonable under the

circumstances to maintain its secrecy.


Trade Secrets

Introduction– Factors a court takes into consideration when determining whether

information is a trade secret are the following:

• (1) the extent to which the information is known outside of his

business;

• (2) the extent to which it is known by employees and others

involved in his business;

• (3) the extent of measures taken by him to guard the secrecy of

the information;

• (4) the value of the information to him and to his competitors;

• (5) the amount of effort or money expended by him in developing

the information; and

• (6) the ease or difficulty with which the information could be

properly acquired or duplicated by others.


Case Illustration: The Agency, Inc. v. Grove, (2d Dist. 2005)

• Former employer sued former employee

(previously a sales representative) and her

new employer under the Trade Secrets Act.

• Plaintiff alleged former employee appropriated

confidential information while it employed her.

• Plaintiff argued that its sales representatives

had access to profiles of Plaintiff’s clients,

which “could easily be very valuable to

another business.”



• These profiles contained the following

information:

– client’s business cycles;

– contract expiration dates;

– client’s credit information;

– client’s personnel preferences;

– worker replacement history;

– markups used for client and explanations therefor; and

– client’s contact persons along with their particular likes,

dislikes, & idiosyncrasies.



• This confidential information is protected by the following:

– Accessible only by computer password, and

– Plaintiff only allows Internet & e-mail access to branch managers.

• Defendants argued that the information was not confidential and

could easily be obtained from the customers themselves.

• Judge: We find that this information was confidential information

and most of the information was not available to the public.

– Furthermore, the information becomes much more valuable and useful when

the information is compiled and organized individually as it was here.

– Finally, the Plaintiff took several measures to guard its client information from

the public eye.

• Holding: Thus, the client information was protected by the Trade

Secrets Act.


Examples: Business Information &

Customer Lists

• Business information

– Generally, courts conclude that business or

marketing plans are not trade secrets.

• Marketing strategy was not a trade secret because

the alleged trade secret was within the realm of

general knowledge and easily duplicative.

• “It is well-established that marketing concepts and

new product ideas are not considered trade secrets.”



Customer Lists

– Although pricing information may not receive

protection, financial information might.

• Pricing information that varied from customer to

customer had no “independent economic value” for

competitor and thus was not a trade secret.

• Revenue reports and financial statements were

trade secrets.

• Protecting accounting procedures as a trade secret.



Customer Lists

• Customer Lists– Courts may consider customer lists, which include pricing and

preferences, as trade secrets.

• Attorneys who left former firm to create their own violated

UTSA when they solicited clients using their former firm's

secret information.

• Customer list was a trade secret because the list contained the

customers’ amount for previous orders which is valuable to the

defendant.

• Containing unique information regarding customers’ niche

roofing market was a trade secret.



Customer Lists– This information is often available to the public or

widely disseminated and may even qualify as

general knowledge. If that is the case, then it is

not a trade secret.

• The names on the list could be ascertained through

other public sources, and the claimant did not invest

great effort or expense into the list.

• The evidence showed that customer lists were widely

known in the industry and companies that companies

identified their potential customers through public

sources.


Takeaways

• Although most states provide for a statutory cause of

action, it is good practice to also include a

confidentiality agreement in the employment contract.

– Generally, these are enforceable.

– This provides for additional protection on top of the

state statute.

– They are used as evidence for a cause of action under

a state statute to show that the employer intended for

certain information to remain secret.


Conclusion

• Restraint of Trade

• Protectable Interest

• Trade Secrets Statutes

• Restrictive Covenants - Contract


Questions


Key Products Liability Issues for the Sporting Goods Industry


Chicago, IL

(312) 606-7697

[email protected]

www.clausen.com






Introduction

• Basics of products liability law and its effect on

manufacturers, distributors, sellers, retailers, end

users, etc.

• I.e., the “distributive chain”

• Goals: understand the law in order to expand

business, minimize risk, and grow relationships.

• Sporting goods present novel and somewhat specific

issues, due to level of high risk physical activity and

breadth of consumer use


The Distributive Chain

Manufacturer

|

Distributor

|

Retailer

|

Consumer / End User


The Distributive Chain

• Other entities and individuals may be involved:

– Contractors

– Schools

– Teams

– Sales force

– Etc.

• Same individual or entity may occupy the roles of

multiple members of the chain

• Chain may be separate corporate entities that are

wholly-owned, contracted with, or controlled by another

member of the chain.


Types of Claims

• Strict Product Liability:

– Usually brought by end-user

– Inherent dangerousness and/or defective nature of the product

itself at the time it left the defendant’s possession, regardless of the

actual acts or omissions which may have caused the defect.

– Focus on product, not actions

– Design or manufacturing defect

– Defendant “sophisticated” user?

– Any member of the distributive chain potentially liable

– Usually no release or disclaimer available

– “State-of-the-art”


Types of Claims

Negligence:

o Focus on the acts and omissions of party, rather than the product

o Relevant inquiry: duty to the injured party

o Whether the manufacturer was negligent in the design and manufacture of

the product, not whether the product was inherently dangerous

o Industry norms, compliance with law, manufacturing processes, all

relevant


Types of Claims

• Breach of Contract:

– Manufacturers and distributors rarely have

contracts with end users

– Claims can include failure to procure insurance,

indemnification, and/or specific duties

undertaken via contract


Types of Claims

• Breach of Express Warranty:

– Breach of a written warranty

– Warranty usually drafted by the manufacturer


Types of Claims

• Breach of Implied Warranty:

– Unwritten (except in law)

– Availability, breadth, and applicability depend

on particular state law

– Look to the UCC

– Most often cannot be disclaimed

– Often need privity of contract


Types of Claims

• Breach of Duty:

– Manufacturer or seller’s duties after

manufacture and sale

– E.g., breach of post-sale duty to warn

– Must take reasonable steps to notify end-users

– Often related, but not the same, as a recall


Types of Claims

• Express Contractual Indemnification:

– Ultimate and express “transfer of risk.”

– One party (the “indemnitor”) agrees to take on

the risk that the law would normally allocate to

another party (the “indemnitee”)

– “Defend, indemnify, and hold harmless”

– Can indemnitee can get indemnification for its

own negligence?


Types of Claims

• Implied Indemnification:

– Someone else has all of your liability

– E.g., distributor files implied indemnification

claim against the designer

– “All-or-nothing” view of liability


Types of Claims

• Contribution:

– Apportionment of liability


Types of Claims

• Comparative Fault:

– Claimant / plaintiff is all or partially liable

– Plaintiff’s recovery may be reduced by his or

her pro rata share of liability, or recovery may

be completely precluded.


Types of Claims

• Class Actions


Examples of Products Liability

Claims in Sporting Goods Context

• Fitness Equipment– Jury award of $14.4 million against equipment manufacturer and

gym.

– Jury awarded $66 million to Plaintiff, a physical therapy assistant,

who was rendered a quadriplegic after leg extension machine at

physical therapy office fell on her as she leaned on the machine to

stretch her shoulder.

– Lesson: liability can be claimed against – and risk can be limited

and transferred to – parties other than the manufacturer of

equipment.

– Lesson: “sophisticated user” defense?



Claims in Sporting Goods Context• Playground Equipment

– Nine-year-old girl died after falling from school playground

equipment and suffering a severe concussion, sued equipment

manufacturer, seller, and an Oklahoma school district.

– Family of fourth grader filed lawsuit against school, school’s

principal, and school district. Family claimed that equipment

brought over from another elementary school and was installed

over hard, clay-packed earth instead of soft mulch, and that school

failed to respond properly to the injury.

– Lesson: premises liability issues often overlap with sporting goods

product liability issues.

– Lesson: Modification? Misuse? Abuse?

– Lesson: subsequent remedial measures.




• Aluminum Baseball Bats– Family of brain-damaged teenager sued equipment manufacturer,

league, and retailer after being struck in the chest by a line drive

while he was playing in a youth baseball game.

– Family of 11-year-old sued after a line drive struck him in the head

and caused deafness in one ear. Claim that aluminum bats send

baseballs flying at a higher velocity than wooden bats. Result has

led to bans on aluminum bats among little leagues.

– Montana family of youth Little League pitcher awarded $11 million

by jury for death caused by line drive.

– Lessons: an inherently dangerous product does not have to “fail” or

“break” in order to result in liability. These bats acted as intended.




• Football Hemet Litigation– Colorado jury award of $11.5 million in a lawsuit brought against

helmet maker and several high school administrators and coaches

over brain injuries suffered by a teenager.

– NFL player class action lawsuit against league and helmet

manufacturer.

– Lessons: It is difficult to ever avoid liability for a “bad product”, but

a helmet does not have to be “defective” to lead to potential

liability, i.e., for failure to warn.


Crucial Issues for Sporting Goods Manufacturers

and Sellers to Understand and Explore

• Retailers:– How to handle receipt and/or notice of a claim

• Document, document, document.

• Notify those UP the chain, with which you have relationship.

• Get counsel involved early (i.e., attorney-client privilege)

• Do not give “knee jerk” advice.

– Know and understand how product liability law works in the

distributive chain:

• “Anyone in the chain” can be liable

• Strict product liability can be pushed UP, but not DOWN.


Crucial Issues for Sporting Goods Manufacturers

and Sellers to Understand and Explore

• Know and understand your contracts:

– Indemnification clauses should be included and tailored

to the specific transaction.

– Disclaim warranties if possible.

– Venue / choice of law provisions

– Read invoices and purchase orders

– Inspect your warranty

– Key: “Risk Allocation”

– Where and to whom are you selling?


Other Issues

• Personal injury vs. property damage

• Understand your insurance coverage

• Waiver forms

• Recalls


Questions


Dealer Track: Legal Issues Facing

Team Dealers

16th Annual NSGA Management Conference

Team Dealer Summit

April 29, 2014


Chicago, IL

(312) 606-7581

[email protected]

www.clausen.com


Chicago, IL

(312) 606-7697

[email protected]

www.clausen.com

Documents

Dealer Track: Legal Issues Facing Team Dealers–Common law contracts govern in some states and will enforce a covenant not-to-compete if it is “reasonable.” –Several states