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Part 3 - Anatomy of a Big-Time Non-Compete Dispute

Figure of muscles of the left handOver the past few days, we’ve been covering the non-compete dispute between American Realty Capital Properties, Inc. (ARCP) and the Carlyle Group LP and Jeffrey Holland.  (Here are Part 1 and Part 2 of our series in case you need to catch up).  It’s time to end the suspense and tell you how the judge, the Honorable David Campbell of the U.S. District Court for the District of Arizona, resolved the dispute. 

Judge Campbell issued his ruling on the same day as the oral argument, denying ARCP’s request for a temporary restraining order against Carlyle and Holland.  He decided that ARCP had not made the necessary showing of a “likelihood of success on the merits” of its claim that Holland would violate his employment agreements by marketing Carlyle’s investment products.  It said that Holland’s “non-solicitation provisions appear[ed] to be unreasonably broad,” because “read literally, they would prevent Defendant Holland from soliciting any form of business from any client of Plaintiff, anywhere in the world.”  Further, the applicable Maryland and Arizona law did not allow the court to “blue pencil” these provisions – i.e., to rewrite them to be legally enforceable.  Similarly, the confidentiality provisions in Holland’s agreements were also too broad to enforce, because they would have forever prohibited Holland from using any information related to ARCP’s customers.

The ARCP-Carlyle-Holland saga involves a couple of additional twists.  Soon after the ruling, ARCP dismissed its Arizona case without prejudice.  It then filed an identical case in New York for breach of contract.  Carlyle and Holland moved for attorneys’ fees in Arizona, relying on an Arizona statute that allows a successful party to recover “reasonable attorneys’ fees in any contested action arising out of contract.”  The court awarded Carlyle and Holland $46,140 for five days of attorney work (of the $134,182 they sought). 

Thus, Carlyle and Holland won the battle, with some additional compensation for their troubles thanks to Arizona law.  However, the war over Holland’s work for Carlyle is now raging in a different forum.

Part 2 - Anatomy of a Big-Time Non-Compete Dispute

Last week, we introduced you to a non-compete dispute between American Realty Capital Properties, Inc. (ARCP), on one side, and the Carlyle Group LP and Jeffrey Holland, on the other side.  Now, it’s time to find out more about the parties’ arguments.

In its application for a preliminary injunction, filed on April 1 of this year, ARCP made two main arguments.  First, it argued that it could legitimately enforce the provisions in Holland’s agreements that precluded him from using its confidential information and from soliciting its investors.  Second, it argued that by marketing Carlyle’s investments, Holland was breaching these provisions.

In the hearing on the motion, held a week later on April 8, the court summarized the dispute as follows:

It seems to me that the key question is this: [ARCP] is concerned that Mr. Holland’s work for Carlyle … will be in direct competition with the plaintiff’s business of marketing REITs … to financial advisors because that was the business Mr. Holland oversaw while he was with Cole, the predecessor to ARCP, and that that business is highly dependent upon relationships with independent financial advisors or financial advisors with firms.

Holland, ARCP said, would be exploiting these relationships in violation of his agreements if he was allowed to market Carlyle’s products to Cole’s investors.  It counsel argued that ARCP would be “irreparably harmed by that because he will be preying upon . . . my client's confidential information and on its good will.”

Holland, meanwhile, argued that Carlyle did not market REITs, that he would be marketing Carlyle’s products mostly to a different class of purchasers, and that if his agreements covered these activities, they would be too broad to be enforceable.  As his counsel summarized: “It cannot be the case that because you learn how to build a retail relationship in one financial product, that you can’t do it in another if you’re not competing.”

Tomorrow, we’ll talk about the court’s resolution of the dispute, as well as an interesting side-effect of its ruling.

The Inbox - August 8, 2014

A recent decision from the Third Circuit proved a boon to employers facing the dangers of class arbitration in costly wage/hour disputes.  In its decision, the Third Circuit determined that courts, rather than arbitrators, should decide whether class arbitration exists in the absence of specific language in the arbitration agreement.  Employers generally oppose class arbitration because of arbitrators’ tendency to allow them, and the low prospects of overturning an unfavorable arbitration decision.  The longer-term consequences of the decision also bode well for employers who seek to insert class waivers in their arbitration agreements.  Law 360 interviewed Steven Suflas, a Ballard Spahr partner, who opined that employers can now take solace in the fact that a court will likely enforce class waivers found in arbitration agreements. 

Speaking of upholding class waivers in arbitration agreements, the California Supreme Court’s recent Iskanian decision did just that.  However, the court did carve out a general exception to the rule, stating that employers may not bar arbitration of claims brought under the Private Attorneys General Act (PAGA) as a matter of California public policy.  As if on cue, plaintiffs in a federal putative wage class action against CarMax Auto Superstores California LLC filed new state claims under PAGA, claiming they could not be arbitrated despite being ordered to arbitrate other claims on July 2.  As reported by Law 360, CarMax argues that plaintiffs are seeking to avoid the arbitration order with the state PAGA claims while plaintiffs maintain that the suits are substantially different.  Read More ›

Anatomy of a Big-Time Noncompete Dispute

“Nasty, brutish, and short” isn’t just Hobbes’s famous explanation of human life in the state of nature.  It also hits close to the mark in describing how litigation over non-compete provisions often proceeds, as a recent case illustrates.

The plaintiff in the case was American Realty Capital Properties, Inc. (ARCP), a publicly-traded REIT (a real estate investment trust).  Allied on the other side were the Carlyle Group LP and Jeffrey Holland.  Holland used to work for Cole Real Estate Investments, a company that ARCP bought in February of 2014.  According to ARCP’s court filings, it paid Holland handsomely when it acquired Cole, giving him $7.1 million in connection with the change.  Holland then told ARCP that he wanted to take some time off.  ARCP was comfortable with that, given that Holland had previously signed both an employment agreement and a consulting agreement in which he agreed not to solicit Cole’s or ARCP’s investors for 12 months.

Within a couple of months, Holland joined Carlyle, one of the world’s largest investment firms, to raise funds for its products.  To put it mildly, ARCP was not pleased with this development.  At the beginning of April, it sued both Holland and Carlyle and filed an application for a preliminary injunction and temporary restraining order (TRO).  Read More ›

Non-Compete That’s Here Today But Gone Tomorrow – Beware The ‎Unintended Consequences Of An “Integration Clause”‎

Magic Hat with Stars Coming OutA recent decision from an appeals court in Pennsylvania is a warning to companies that the non-compete agreement they think they have with their top executive could be unintentionally wiped out with a few words in a later agreement.  In law-speak, the words are called an “integration clause” or a “merger clause.”  Through them, the parties agree that their agreement is their “entire” agreement and that it wipes out any earlier agreements. 

In the Pennsylvania case, Randy Baker was the President and CEO of Diskriter when Diskriter was acquired by Joansville Holdings, Inc.  The terms of the acquisition were memorialized in a stock purchase agreement (“SPA”), which had non-compete and non-solicitation clauses that apparently bound Baker. Read More ›

The Inbox - August 1, 2014

Just when government whistleblowers hoped retaliation was on the decline following the passage of the Whistleblower Protection Enhancement Act, there appears to be a 2.0 version out, and it’s coming with a vengeance.  The latest wave in retaliation comes in the form of criminal investigations lodged by government agencies against truth-telling employees.  Rather than risk detection with a baseless termination or demotion, these employers have increasingly begun to wage criminal investigations, said Tom Devine, legal director for the Government Accountability Project in an interview with Government Executive.  Devine stated that such actions are a scary, dangerous trend, and that forcing someone out of a government position through criminal investigations could forever damage the employee’s prospects for future employment.

NYG Capital LLC made two headlines this week when a former intern accused its CEO, Benjamin Wey, of sexual harassment and wrongful termination, among other things.  The plaintiff, Hanna Bouveng, a Swedish native, was working in the US on a J-1 visa when the alleged actions took place.  Upon her termination, Bouveng alleges that Wey continued to stalk, harass and malign her reputation.  Meanwhile, as also reported by Law 360, a former graphic design artist was terminated shortly after cooperating with attorneys investigating Bouveng’s charges against Wey.  Yonatan Weiss lent credence to Bouveng’s accusations and claims he was fired for being truthful during interviews on the subject. Read More ›

Dov Charney’s Pants And A Sexually Charged Workplace – ‎ What Is A Company Seeking To Minimize Litigation Risk To Do?‎

We at Suits by Suits are so excited by American Apparel’s dispute with its recently-fired CEO and founder Dov Charney that we can barely keep our shirts on.  After all, the dispute between the clothing manufacturer and its controversial former leader is bursting at the seams with takeaway points for feuding companies and C-suite employees (and those wanting to avoid having feuds).  For example, as we described in an earlier post, the dispute illustrates that terminating a key company officer may jeopardize company financing.  The dispute also presents the question:  can a company like American Apparel, which knew that Charney was apparently known for not being able to keep his pants on, decrease its exposure to the inevitable sexual harassment lawsuit by having all of its employees acknowledge in writing that the company’s workplace is sexually charged?   It depends.    Read More ›

Virginia Tech Professor Argues That University Officials Violated His Constitutional Rights When They "Demoted" Him

Virginia Tech SignHarold “Skip” Garner is a tenured professor at Virginia Tech who makes $342,000 a year, according to this article in the Roanoke Times.  Yet he is still suing university officials, including former president Charles Steger, for $11 million.  Why?

He says that the officials violated his constitutional rights when they removed him from his position as Executive Director of the Virginia Bioinformatics Institute (VBI).  In his complaint, available here, he claims that he was demoted without “advance notice of his removal or demotion” and without any “opportunity whatsoever to contest the merits of the action.”  He alleges that this lack of procedural protections “deprived [him] of property and liberty without due process of law.”  This kind of claim is known as a “Section 1983” claim: i.e., a claim brought under 42 U.S.C. § 1983, which provides a federal cause of action to individuals who are deprived of constitutional rights by the actions of state officials.  In the employment context, Section 1983 claims can arise when state officials discipline employees without affording them notice and an opportunity to be heard.  See, e.g., Ridpath v. Board of Governors Marshall University, 447 F.3d 292 (4th Cir. 2006).  That’s the kind of claim Garner is alleging here. Read More ›

Two Federal Agencies Battle In Federal Court Over Whistleblower Treatment

Talk about your inter-family disputes: one federal agency – the Department of Labor – has filed suit against the United States Postal Service, an independent federal agency (but one of the few explicitly authorized by the Constitution).  The reason for the federal lawsuit, filed in Missouri: the Postal Service’s alleged poor treatment, firing, and alleged harassment of an employee who claims he blew the whistle on safety hazards in a mail facility. 

Here’s the background, delivered despite any contrary weather: Thomas Purviance worked for the Postal Service for 35 years, most recently as a maintenance supervisor at a mail distribution center near St. Louis.  He had no record of disciplinary or performance issues.  In late December 2009, Purviance complained to his supervisors about what he perceived to be carbon monoxide and fuel oil leaks from some of the equipment at the center, as well as a pile of oil-soaked rags which he thought was a safety hazard.  Getting no response, Purviance eventually called the local fire marshal and made a 911 call to report the carbon monoxide leak.   Read More ›

The Inbox: July 18, 2014

We’re in the midst of summer and the news outlets are replete with anti-compete and whistleblower developments.  But before we get to those, let’s turn our attention to China:

If the dog days of summer here in the U.S. aren’t sweltering enough, imagine what they must feel like in the bustling, smog-laden cities of China. The Wall Street Journal reports that Coca- Cola Co. offers “environmental hardship pay” to some employees as a condition for relocating to some of China’s cities. Ed Hannibal of the HR consulting firm, Mercer LLC, indicates that it is not uncommon for multinational companies to offer the extra pay to incentivize workers to relocate to polluted cities. It helps to offset severe living conditions and ensure the company’s continued presence on the ground. 

These days it seems employers face an uphill battle to see non-compete agreements prevail in court.  Recently, a Louisiana state court carefully examined the terms of a non-compete in Gulf Industries, Inc. v. Boylan (La. App. 1 Cir. June 6, 2014).  The National Law Review reports that the employer in this case inserted a two year non-compete provision into a one-year employment contract. According to the Court, even though Boylan’s employment extended two years past the date specified in the employment contract, the non-compete provision kicked in when the one year employment term was satisfied. The employer sought to extend the non-compete, arguing that it did not take effect until Boylan resigned. The Court disagreed and held that the non-compete had run during Boylan’s continued employment with the company. Little did he realize at the time, but Boylan was quite the multi-tasker. Read More ›