Hulk Hogan, Sex Tapes, And The FBI: Lesson Learned

FBIWhen the celebrity gossip blog Gawker decided to post highlights from a sex tape starring Hulk Hogan, it never thought that decision would lead to suing the FBI. But that’s what happened—and just recently, Gawker prevailed. A federal judge in Florida ordered that the FBI and the Executive Office of United States Attorneys (EOUSA) must respond to Gawker’s FOIA request—even though the agencies argued that the requested evidence related to an ongoing investigation. The case between Gawker and the FBI had nothing to do with alleged trade secret theft or federal hacking violations. But the judge’s decision underscores an important risk that companies should consider before contacting law enforcement about potential trade secret theft or computer security breaches: What is exchanged with law enforcement may become public record—which could have the unintended consequence of stripping an otherwise protectable trade secret of its “secrecy.”

From Hulk Hogan v. Gawker To Gawker v.  FBI. The case between Gawker and the FBI arose from Hulk Hogan’s suit against Gawker. Hogan sued Gawker in Florida state court over an October 2012 post that published a highlight reel from an anonymously received sex tape. Hogan claims that Gawker invaded his privacy by posting the video footage and seeks $100 million in damages.

14-GAWKER-JP4-blog427Hogan’s counsel also contacted the FBI and requested a criminal investigation regarding the creation and attempted sale of the sex tape. The FBI uncovered a large volume of evidence about the sex tape, and in November 2013, Gawker filed a FOIA request with the FBI, seeking “[a]ll documents relating to an investigation, or a request for an investigation, in October 2012 regarding allegations of illegal recording(s) of Terry Bollea a/k/a Hulk Hogan engaged in sexual relations.”

Initially, the FBI denied the request due to privacy concerns, but in the meantime, Gawker convinced the Florida state court judge to compel Hogan and the female in the video to sign privacy waivers because Gawker needed the FBI’s evidence for its defense. Gawker then updated the FBI in November 2014 about the signed privacy waivers and that Hogan had agreed on a specific method that the FBI should use when producing responsive evidence. Hogan agreed that the FBI should produce all responsive documents directly to Gawker and that any responsive video footage must first be produced to the Special Discovery Magistrate in the Florida state court case.

But in January 2015, the FBI refused to produce 1,168 responsive documents and two CDs of video material because they related to an “ongoing investigation.” Gawker ultimately sued both the FBI and the EOUSA in a Florida federal court, seeking an order to compel the production of documents and video footage. Gawker argued that the documents and video were essential to its defense and that the FBI and EOUSA had not provided a sufficient reason to withhold them. Gawker noted that their investigation had concluded several months earlier.

The Federal Court Decision. The federal judge agreed with Gawker. The judge ordered the FBI and EOUSA to produce all documents that did not fall within FOIA’s “law enforcement exception” (5 U.S.C. § 552(b)(7)(A)) and to produce the video footage to the state court’s Special Discovery Magistrate. She also seemed wary of the government’s exemption claims. She ordered that the FBI and EOUSA  must file a “categorical index” of all responsive documents that includes “general categories of documents, the number of pages pertaining to each category, the claimed exemption, and the reason why disclosure of the documents could reasonably be expected to interfere with law enforcement proceedings.” She also ordered that the FBI and EOUSA must “submit a declaration in support of the categorical index” that “shall provide a more particularized explanation as to why the law enforcement exemption applies to each category of documents and why disclosure of each category could reasonably be expected to interfere with law enforcement proceedings.” And it seems that the FBI and EOUSA will fight an uphill battle in trying to persuade her that the “law enforcement proceeding” exemption actually applies. That is, Gawker will likely receive all the requested evidence.

Lesson Learned. The cases between Hulk Hogan and Gawker and Gawker and the FBI do not involve trade secret theft or computer security breaches. But the judge’s ruling against the FBI should give companies pause before contacting law enforcement about potential trade secret theft or federal hacking violations. It’s not uncommon for law enforcement to investigate and gather evidence but, in the end, decline to pursue formal charges. Law enforcement may thus not be able to rely on the “law enforcement proceeding” exemption to withhold information that a competitor seeks through a FOIA request. Companies should keep this in mind when deciding what to provide to law enforcement and how to provide it. We have previously written about precautionary steps to take when disclosing information to a public entity—and this a good opportunity to revisit those suggestions.

Clearly Mark Trade Secrets. Conspicuously identify what documents or information are trade secrets by marking them accordingly. Though a “law enforcement proceeding” may no longer be available, law enforcement agencies can rely, for instance, on FOIA exemptions that protect trade secrets from public disclosure.

Limit What Is Provided. Consider how much information law enforcement needs to start its investigation—and gauge how receptive law enforcement is to pursuing the investigation—before disclosing the actual trade secrets that may have been misappropriated.

Request FOIA Notification. Ask the law enforcement agency for formal written notice of any FOIA-type request for documents or information concerning the investigation.

Consider The Impact. Weigh the potential harm that public disclosure could cause against the benefit of having law enforcement involved. The risk of disclosure may be small—but companies must consider the nightmare scenario of losing potential trade secret protections by involving law enforcement to help protect those same trade secrets. Companies should rely on counsel to guide them on whether and how to involve law enforcement so that their information is best protected.

Tennessee Federal Court Refuses To Apply Inevitable Disclosure Doctrine

sealWilliams-Sonoma is embroiled in a contentious trade secret theft case with its former executive and direct competitor. On June 18, 2015, a federal district court in Tennessee granted a preliminary injunction motion to enjoin Williams-Sonoma’s former vice president and direct competitor from using confidential business information, soliciting Williams-Sonoma employees, and destroying electronic evidence. But the federal court refused to give Williams-Sonoma everything it requested.  It stopped short of prohibiting Williams-Sonoma’s former senior vice president from working for a competitor. And in doing so, the federal court rejected an invitation to adopt the inevitable disclosure doctrine in this trade secret theft case.

The Background. The facts in Williams Sonoma, Inc. v. Arhaus, LLC, echo those in most trade secret cases. An employee is contacted by a competing company with a lucrative offer. The employee accepts — but before leaving, accesses confidential business information on the company’s databases and saves that information onto external storage devices. Then, after leaving, the employee recruits former co-workers to join the competitor and encourages more trade secret theft.

Williams-Sonoma implemented measures to protect its confidential business information relating to its supply chain and distribution channels. The furniture giant required log-in credentials for and restricted access to its network and databases. It distributed employee handbooks and acknowledgment forms explaining the importance of confidential information. The company also forced employees to abide by a code of ethics detailing the ongoing obligations of employees to protect confidential information. Williams-Sonoma even required employees to take a quiz each year on the contents of the code of ethics.

Williams-Sonoma alleged that it employed these preventive measures because its supply chain and distribution channels represented a huge competitive advantage—one that resulted in tens of millions in savings and allowed Williams-Sonoma to have lower retail prices than most of its competitors.

So when Williams-Sonoma’s Senior Vice President of Transportation took a similar position for a competitor—Arhaus, LLC—the company wanted to ensure that information was not stolen. An extensive forensic investigation revealed the executive had downloaded large amounts of confidential business information to external storage devices immediately after announcing his departure. The executive also solicited two of his co-workers and encouraged additional trade secret theft.

As a result, Williams-Sonoma filed suit against Arhaus and its former employee for trade secret theft, breach of contract, breach of the fiduciary duty, tortious interference with contract, and violations of the Computer Fraud and Abuse Act.

The Inevitable Disclosure Doctrine. Williams-Sonoma also sought to immediately prevent the use and disclosure of trade secrets by preventing its former employee from continuing his employment with the competitor. Though Arhaus argued that all trade secrets and information had been returned—Williams-Sonoma argued that the former executive would inevitably disclose or use Williams-Sonoma’s information if he were allowed to continue working for Arhaus.

The Inevitable Disclosure Doctrine provides equitable relief in the absence of an enforceable non-competition agreement. The principle behind the doctrine is that knowledge and skill obtained through employment qualify the employee for a similar position at a competing company, and thus, the employee will have to rely on this knowledge and skill, which include trade secrets, to successfully perform her duties for the competitor. Ultimately, the doctrine presumes that it’s unfair to force an employer to wait for relief until the former employee and competitor misappropriate trade secrets. It allows the employer to prevent the inevitable disclosure of the confidential business information on the front end through injunctive relief.

Acceptance of the doctrine has varied. For instance, Louisiana courts have rejected the doctrine, whereas Texas courts have applied it in certain circumstances. Compare Tubular Threading, Inc. v. Scandaliato, 443 So. 2d 712, 715 (La. Ct. App. 1983) (finding that an injunction is a harsh remedy when based solely on speculation) with Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 551 (Tex. App. 1993) (finding that a former employee in possession of trade secrets and in position to use those secrets should not be able to use them to the detriment of the former employer).

The Court Declined Adopting The Doctrine. The Tennessee federal court declined the opportunity to adopt the Inevitable Disclosure Doctrine. But the court didn’t close the door entirely either. The court found that the knowledge and information remaining in the former employee’s head didn’t rise to the level necessary to invoke the doctrine. The court noted that it wasn’t a secret formula from Coca-Cola or highly specialized information used by only a few obscure companies. The court ruled that much of the information remaining in the former employee’s head “is of the type that one would find in any business school class.” Because the knowledge wasn’t sufficiently specialized, the court denied Williams-Sonoma’s request to enjoin its former employee from competing.

The Take Away. Companies should use non-compete and non-disclosure agreements to ensure confidential business information is protected. Relying on the Inevitable Disclosure Doctrine is unreliable at best.

A Look Inside The Sony Hack

Fortune Magazine released its first installment in a three-part story on what it’s calling “The Hack of the Century.” The story on the Sony hack is turning into a cautionary tale on what companies should not do to protect their computer networks. And it’s worth taking the time to read this compelling and in-depth look into what may well be the hack of the century. We will continue to report on this breaking story and provide some helpful pointers once the full story is published.

The CFAA Debuts In The Big Leagues

imagesAccessing someone’s computer without authorization is a federal crime under the Computer Fraud and Abuse Act (CFAA). This past week, several news sources have reported that the FBI and Justice Department are investigating executives of the St. Louis Cardinals for allegedly violating the CFAA by hacking into the Houston Astros’ internal computer network.  It’s suspected that the Cardinals’ front office were trying to steal the Astros’ player personnel data and other proprietary information. According to the New York Times:

Internal discussions about trades, proprietary statistics and scouting reports were compromised . . . . Law enforcement officials believe the hacking was executed by vengeful front-office employees for the Cardinals hoping to wreak havoc on the work of Jeff Luhnow, the Astros’ general manager, who had been a successful and polarizing executive with the Cardinals until 2011.

Investigators told the New York Times that the Cardinals front office “examined a master list of passwords used by Mr. Luhnow and other officials” and then “used those passwords to gain access to the Astros’ network.”

This internal network contained highly valuable information. The New York Times cited a Bloomberg Business article (titled Extreme Moneyball) that described the database as housing the Astros’ “collective baseball knowledge,” which takes a series of variables and weighs them “according to the values determined by the team’s statisticians, physicist, doctors, scouts and coaches.”

Many businesses are now quite familiar with this type of illegal activity—though it may be the first reported case of corporate espionage involving two professional sports team. But the way that the Cardinals’ front office allegedly accessed the Astros’ computer network underscores specific measures that companies should take to address ever-present risks when employees switch teams.

Controlling Passwords. Companies should already be enforcing a password-duration policy that requires employees to change their computer passwords every few months. But this investigation highlights that, during the on-boarding process, companies should prohibit newly-hired employees from recycling passwords that were used to access their former employer’s computer network. Especially when those former employers are direct competitors.

Monitoring Access. Company network administrators should be utilizing the auditing features built into their computer networks’ operating systems. These audits can alert administrators to abnormal file access or log-in patterns that can help uncover suspicious activity. And there should be an open line of communication between these administrators and executives about potentially suspicious activity.

Understanding Value/Liability. Companies need to start fostering a corporate culture where employees understand the value of keeping business information confidential (as well as the potential liability of attempting to use or steal another competitor’s confidential business information). In addition to confidentiality agreements and policies, regular training on what the company expects will go a long way.

Contacting Law Enforcement. Companies should consider whether contacting law enforcement officials makes the most business sense. The Astros contacted authorities after its information was posted on Deadspin, but that was nearly a year ago. Companies can also pursue civil litigation in state or federal courts—where they may be able to receive quicker business relief through an injunction.

These are just a few suggested measures. But the broader point is that companies must remain proactive, vigilant, and creative when it comes to protecting their business information.

On the Hill: Congress “Attacks” Cyber-Security

downloadCyber-security and data breaches are hot-button issues that recently received some well-deserved attention from the federal government. Last year we posted about the FBI’s efforts to combat economic espionage and trade secret theft. At that time, the Assistant Director of the FBI—who was testifying before a Senate subcommittee—offered salient advice on how American companies could protect themselves from trade-secret theft and insider threats.  But the Assistant Director noted an important trend: companies who learn about trade secret theft often pursue private negotiations or civil litigation—without alerting law enforcement. The FBI wanted this to change:

The FBI is committed to ensuring companies have an established line of communication to report concerns about possible economic espionage or trade secret theft to law enforcement. But the FBI must assure companies the government will work to protect their proprietary information from disclosure during prosecution, so that more companies are willing to come forward and report concerns about possible trade secret theft.

Nearly a year after that call for change—and after a spate of high-profile data breaches—Congress took heed of the FBI’s advice by passing measures to increase the public-private flow of information about hacking attempts. Lawmakers, government officials, and most industry groups agree that more data will help both sides better understand their attackers and bolster network defenses that have been repeatedly compromised. The Chairman of the House Homeland Security Committee recently explained why such comprehensive cyber-security laws are needed:

Make no mistake. We are in the middle of a silent crisis.  At this very moment, our nation’s businesses are being robbed and sensitive government information is being stolen.

THE LEGISLATION.  The reluctance that many American companies have with sharing internal data about cyber-attacks has greatly stymied previous efforts to fight the theft of personal information and state-sponsored campaigns to steal American intellectual property. But two bills recently passed by the House are intended to quell these fears by making it easier for private companies to share information about cyber-security threats among themselves and with the government without fear of lawsuits.

On April 22, 2015, The Protecting Cyber Networks Act passed with overwhelming support from House Intelligence Committee leaders, and members from both sides of the aisle. The bill—which is similar to a measure approved by the Senate Intelligence Committee and headed for that chamber’s floor this spring—would give companies liability protections when sharing cyber threat data with government civilian agencies, such as the Treasury or Commerce Departments.

Similarly, on April 23, 2015 the House passed the National Cyber-security Protection Advancement Act of 2015, which extends liability protections to companies that follow certain procedures and share information about cyber-attacks with the U.S. Department of Homeland Security.

These bills are two of three measures that Congress must pass to get a comprehensive cyber info-sharing law in place.  Under both bills as currently written, companies that share data-breach information with the government would receive liability protection only if that data is stripped of all personal information on two separate occasions—once by the company before it gives the data to the government and another round of cleansing by the government agency that receives the data. These bills will now be merged and sent to the Senate, where similar legislation has bipartisan support.

THE IMPACT.  Congress has contemplated various forms of this law for nearly five years. But the recent computer attacks on corporate giants like Sony Pictures Entertainment, Target, Anthem, and JPMorgan Chase—which exposed confidential business information and compromised credit card data, Social Security numbers, and personal  health information—has changed the political equation and places the onus on Congress to act. Whether or not these two house bills become law, the Committee of Homeland Security Chairman has made clear that cyber-security will remain a priority for Congress:

Cyber criminals, hacktivists, and nation-states will never stop targeting Americans’ private information and American companies’ and government networks to damage, disturb and steal intellectual property and U.S. Government secrets. One of the greatest cyber threats to the homeland is the weakness of our power grids, and energy and water systems. A successful cyber attack on our critical infrastructure could cripple our economy. Congress must take action to defend America’s vital digital networks and help American businesses better protect themselves.

Should the House and Senate come together on final legislation, it would be the federal government’s most aggressive response.  And as these bills go to senate and the white house, we will keep you updated.

Huawei’s Two Bites At The Apple To Dismiss T-Mobile’s Trade Secret Claims

In a previous post, we examined T-Mobile’s complaint against Chinese smartphone marker Huawei and its US subsidiary, in which T-Mobile accused Huawei employees of stealing trade secrets relating to a mobile phone testing robot named “Tappy”.

T-Mobile filed its complaint in September 2014, and the following month Huawei’s US subsidiary responded with a motion to dismiss. Huawei USA argued the complaint failed to identify any information that qualified as a trade secret, urging the Court to consider three published patent applications and a video featuring Tappy (see below). Huawei also challenged T-Mobile’s claim that it created the robot, pointing out the conspicuous Epson logo on one of Tappy’s components.

T-Mobile’s opposition disputed Huawei’s version of the facts and argued that it was improper to consider papers outside of the complaint at the motion to dismiss stage. It also accused Huawei of failing to distinguish between its burden of, on the one hand, identifying its trade secrets, a pleading requirement, and, on the other hand, proving that the information was in fact secret, a question of fact requiring discovery. T-Mobile further stressed that Epson only created one component of its robot and, even when combining known components, trade secret protection may extend to the combination itself, if secret.

By November 2014 briefing on Huawei USA’s motion to dismiss was complete. For five months no substantive motions were filed, and the Court had not yet ruled on Huawei USA’s motion.

Then, last week, on April 22, 2015, the Chinese Huawei parent company filed its own motion to dismiss. It asserted a new argument—lack of personal jurisdiction—but it also adopted and expanded on its subsidiary’s arguments on the merits. It attached to its motion foreign patent applications corresponding to the ones its subsidiary previously identified and several media reports on various aspects of T-Mobile’s robot and testing lab, some of which were not included in the earlier motion to dismiss.

Considering that the same counsel represents both Huawei’s parent and subsidiary companies, it appears Huawei may get a second chance to brief its earlier motion to dismiss before the Court issues its ruling. T-Mobile may cry foul, but it is more likely to attack Huawei’s new evidence and arguments on the same grounds as its previous opposition.

We’ll have more when the Court issues its ruling. Stay posted.

Federal Court Invalidates Tennessee Choice-of-Law Clause in Louisiana Employee’s Non-Compete

logoThe federal district for the Western District of Louisiana added to the growing list of decisions that have applied Louisiana’s non-compete statute to invalidate  choice-of-law or forum-selection clauses. These decisions have struck down clauses that, on their faces, would have required Louisiana employees of non-Louisiana employers to litigate under the law or in the courts of some other state. The decisions should also serve as a reminder that employers should not take a one-size-fits-all approach when drafting non-competes for employees residing in multiple states.

The Ruling. Louisiana’s non-compete statute, La. R.S. 23:921, invalidates a choice-of-law or a forum-selection clause in an employment agreement unless the employee agrees to the clause or expressly ratifies it after the dispute arises. After leaving their employment, employees generally do not ratify these clauses made at the start of the employment relationship  — unless of course the chosen law or forum favors the employee. This scenario played out in Bell v. L. H. Brown Company, Inc., No. 14-2772 (W.D. La. 2015), where a Louisiana employee was able to avoid complying with his non-compete.

Charles Bell was a recently-departed employee who sued his former employer in Louisiana state court, asking for a declaration that the non-compete agreement was invalid under Louisiana law. After his former employer removed the case to federal court, Mr. Bell raised these same arguments. The pivotal question for the court to decide was whether Louisiana law or Tennessee law applied — since the non-compete agreement included a Tennessee choice-of-law clause.

The facts did not present an uncommon scenario: the employer was located in one state while Mr. Bell resided in another. The employer’s principal place of business was in Memphis, Tennessee, and Mr. Bell signed  the non-compete agreement, knowing that it called for Tennessee law to govern his relationship with the company. The Tennessee employer argued that the non-compete complied with Tennessee law and emphasized that the parties formed the employment relationship in Memphis when Mr. Bell personally delivered the agreement with his signature to the company’s Memphis headquarters (where the employer then signed it); Mr. Bell had been the only company employee in Louisiana; Mr. Bell received his company vehicle, telephone, and computer from the Memphis office; and Mr. Bell attended work-related meetings in Tennessee.

Notwithstanding the many contacts with Tennessee, the court refused to enforce the parties’ choice of Tennessee law. As a court sitting in Louisiana, the federal judge applied Louisiana’s choice-of-law rules. The court found that Louisiana’s public policy that Louisiana law and Louisiana courts must determine the validity of non-competes entered into by Louisiana employees was so strong that the policy outweighed the other considerations in the choice-of-law analysis.

The court in Bell v. L. H. Brown went on to invalidate the non-compete agreement. Louisiana law requires that non-compete agreements limit their geographical scope to “a specified parish or parishes [i.e., county or counties], or municipality or municipalities, or parts thereof.” The non-compete agreement did not contain the requisite geographic restriction which, according to the employer, Tennessee law would not have imposed.

The TakeAways.  Employers must be aware of each potential state law that could affect their non-competes with employees working or living in multiple states.  This case shows that a Louisiana court will usually apply Louisiana’s non-compete laws to Louisiana employees — even if the non-compete calls for another state’s law and even if the non-compete (drafted to comply with the law that the parties selected in their agreement) would be invalid under Louisiana law. This case also teaches that employers should consider quickly filing suit in their preferred forum if they question whether their non-compete complies with the employee’s home-state laws. Conversely, an employee who expects his or her former employer to try to enforce  a non-compete agreement should consider prompt legal action as well in his or her own state.

Update: Comfortable With Your Non-Compete?

PennsylvaniaWe previously analyzed a Pennsylvania appellate court decision, which held that a non-compete agreement was unenforceable for lack of consideration. The case, Socko v. Mid-Atlantic Systems of CPA, Inc., is now before the Pennsylvania Supreme Court.

The Court must decide whether Pennsylvania law allows parties to waive the consideration requirement for non-competes through an express agreement.

On the one hand, Pennsylvania’s Uniform Written Obligations Act (“UWOA”) permits parties to a written agreement to waive their rights to challenge the validity of the contract based on lack of consideration.  On the other hand, valuable consideration is necessary for a valid non-compete.

Both parties concede that valuable consideration was not exchanged for the non-compete at issue. But the non-compete explicitly states that the parties “intend to be legally bound” by the restrictive covenants.

The employer argues that the UWOA’s waiver provision should apply to non-competes.  And because the agreement incorporates the waiver language — “intend to be legally bound” — the non-compete is enforceable despite the lack of valuable consideration. Conversely, the employee urges the Court to affirm the appellate court’s holding — that is, the consideration requirement for non-competes cannot be waived.

We will continue to monitor this case, and will post an update as soon as the Pennsylvania Supreme Court issues its ruling. But regardless of the Court’s decision, this case still serves as a reminder: employers need to be proactive and consistently ensure that their non-competes have the greatest chance of being enforceable.

“Professional” Distinction: A New Approach To Bans On Non-Competes?

A recent Florida appellate court decision may alter 200px-Florida-StateSeal.svglong-standing prohibitions against non-compete agreements for certain professionals. In AmSurg New Port Richey FL Inc. v. Vangara, the court upheld a non-compete, finding that it prohibited a physician from operating a rival business—but not from practicing medicine. This was the pivotal distinction for saving the non-compete, and other state courts could adopt this same logic.

Background:   In 2007, Dr. Vangara and his business partners entered into a joint venture agreement with AmSurg New Port Richey FL, Inc. (AmSurg), to form the New Port Richey FL Multi–Specialty ASC, LLC (Multi–Specialty ASC)—an ambulatory surgical center. The joint-venture agreement was governed by Tennessee law and included a non-compete. By its terms, the restrictive covenants prohibited Dr. Vangara from having “any financial interest in any business or entity competing or planning to compete with the [Multi-Specialty ASC].”

But Dr. Vangara failed to comply with this covenant. In 2010, AmSurg learned that Dr. Vangara owned and operated a competing ambulatory surgery business, and after multiple cease-and-desist requests, Dr. Vangara refused to stop. AmSurg finally responded by suing Dr. Vangara for breach of contract and various other business torts.

Rationale:   At the trial court level, Dr. Vangara filed a summary judgment motion, arguing that the non-compete was invalid as a matter of law. The trial court agreed. It found that the non-compete was inimical to Tennessee’s public policy, and therefore unenforceable. The trial court relied on a Tennessee Supreme Court decision that prohibited most contracts that restrict a doctor’s right to freely practice medicine.

In that case, a medical clinic sued to enforce a non-compete that prevented a physician from practicing medicine within a twenty-five mile radius. Finding that the non-compete  was unenforceable as a matter of public policy, the Tennessee Supreme Court placed more value on public interest considerations—such as affordable healthcare and a patient’s fundamental right to freely choose physicians—rather than the specific terms of the contract. These same concerns guided the trial court’s refusal to enforce Dr. Vangara’s non-compete.

On appeal, the court took a narrower interpretation of the Tennessee Supreme Court decision.  It distinguished between “practicing medicine” and “operating a competing business.” The court reasoned that the joint-venture agreement only prevented Dr. Vangara from having ownership interests in competing businesses—not from practicing medicine. The court pointed out that the non-compete specifically provided that Dr. Vangara was “not prevent[ed] from engaging in his … profession, the practice of medicine.” Because Dr. Vangara could freely practice medicine without violating the joint-venture agreement, the court reversed the summary judgment previously entered in Dr. Vangara’s favor.

Take Away:   In states that prohibit non-competes for certain professions based on public policy concerns, this court’s distinction—between “practicing” a profession and “owning” a competing business within that profession—could limit the scope of those non-compete bans. Companies should thus consider making similar distinctions when drafting non-competes for traditionally-protected professionals.

Federal Arbitration Act Preempts Louisiana’s Non-Compete Statute

Eastern_district_Lousiana_seal_v1_AG_126px_0

The U.S. District Court for the Eastern District of Louisiana recently held that the Federal Arbitration Act preempts Louisiana’s non-compete statute (La. R.S. 23:921). Among other things, this statute invalidates forum selection clauses in employment agreements unless the employee agrees to or expressly ratifies the clause after the incident that gives rise to the dispute. Though the statute expresses a strong public policy of Louisiana, the Eastern District found that federal courts must enforce otherwise valid arbitration clauses that select a particular forum—even if the clauses violate Louisiana’s non-compete statute.

Background.   In Sherman v. RK Restaurant Holdings, Inc., No. 13-6054 (E.D. La. 2014), a former employee sued his former employer in state court in New Orleans, where the employee had worked at the employer’s restaurant. The employer removed the case to the Eastern District, and then moved to stay the lawsuit pending arbitration. The employer claimed that an arbitration clause in the employment agreement required that the parties arbitrate their dispute in either Lufkin or Nacogdoches, Texas.

In response, the employee argued that Lufkin and Nacogdoches, Texas, were each more than 350 miles away from his home in New Orleans and that enforcing the arbitration clause would be unconscionable. The employee also argued that the clause was invalid under La. R.S. 23:921 because he had not agreed to or ratified the forum selection clause after the dispute arose. The employee pointed out that the United States Supreme Court had said in M/S Bremen v. Zapata Off–Shore Company, 407 U.S. 1 (1972) that contractual forum selection clauses “should be held unenforceable if enforcement would contravene a strong public policy of the forum in which the suit is brought.” According to the employee, Louisiana has such a policy, expressed in La. R.S. 23:921.

Rationale.  The Eastern District ultimately found that the Federal Arbitration Act preempted La. R.S. 23:921 and required the court to enforce the arbitration agreement as written.

The court agreed that the arbitration clause “contains a forum selection clause that violates La. R.S. 23:921” because it calls for a Texas forum. But the Federal Arbitration Act says that an arbitration clause in a contract involving interstate commerce “shall be valid, irrevocable, and enforceable, save upon such grounds exist at law or in equity for the revocation of any contract.” Thus, the court noted, “as a matter of federal law, arbitration agreements and clauses are to be enforced unless they are invalid under principles of state law that govern all contracts.”

From there, the court concluded that the arbitration clause would be valid under general contract law principles in Louisiana. Consequently, the FAA required the court to enforce the arbitration clause, notwithstanding its conflict with La. R.S. 23:921.

The TakeAway. Louisiana has a strong public policy that limits the enforceability of forum selection clauses in employment agreements. An employer who expects to be able to use a non-Louisiana forum to enforce a non-compete agreement or another employment-related agreement with a Louisiana employee may find its efforts blocked by La. R.S. 23:921. However, an otherwise valid arbitration clause covered by the FAA may be enforceable, even if it would violate the restrictions in La. R.S. 23:921 on forum selection clauses.

LexBlog