Case Law Update: Delaware, Missouri; FTC Opposes New Evidence in ATS Case

Case Law Update

Hub Group, Inc. v. Knoll, C.A. 2024-0471-SG (Del. Ch. July 18, 2024).

Read the full opinion here.

Categories: Preliminary Injunction; Reasonableness of Covenants

Tags: Delaware law applied; Preliminary injunction denied; Overbroad geographic scope; Overbroad behavior restriction; Overbroad definition of “Confidential Information”; Overbroad definition of employer

Types of restrictions in case: Non-compete

Summary:

• Litigation Strategy Alert! The non-compete in this case was governed by Delaware law, applied to a C-suite employee, and contained detailed definitions of the plaintiff company, competing businesses, the restricted territory, and the prohibited behavior—all factors presumably favoring enforcement. But in this decision, the Chancellor found that the complexity of the agreement’s interlocking, expansive definitions made the non-compete, ultimately, a “pile of words.” The court rejected the plaintiff’s reliance on commonly used limiting provisions intended to narrow the non-compete, refused to “blue pencil” the provision to make it reasonable, and denied the plaintiff’s motion for a preliminary injunction.

• The plaintiff (“Hub”) was a third-party logistics company that sued its former Senior Vice President of Account Management (“Knoll”) for allegedly breaching his non-compete agreement by joining a direct competitor as Chief Commerce Officer.

• The court denied Hub’s motion for a preliminary injunction because it concluded the non-compete at issue was overbroad and unenforceable. Although acknowledging Delaware is a “contractarian state,” the court emphasized that it does not “mechanically” enforce non-compete agreements, but balances enforcement against the impact on the employee.

  • “Pile of Words”

    • The court examined Knoll’s non-compete by incorporating all of the defined terms into the same provision. The result, according to the court, was a “pile of words.”

    • Here is what the provision stated, once all applicable definitions were incorporated:

      During [Knoll's] employment with Hub [defined as "Hub Group, Inc., and any entity that controls, is controlled by, or is under common control with Hub Group, Inc., including, without limitation, its subsidiaries, affiliates, successors, and assigns" (i.e., 25 entities located in various states in the United States, Canada, Mexico, and India)] and for a period of one (1) year after the end of [Knoll's] employment with Hub, [Knoll] will not, in the Restricted Territory [defined as "any geographic area in which Hub conducts business or provides products or services, including the contiguous United States" (i.e., more than 42,000 zip codes in the United States)], directly or indirectly, manage, be employed by, or otherwise render services (whether as an employee, agent, partner, independent contractor, advisor or consultant) to any Competing Business [defined as "any person (including [Knoll]), company, or entity engaged in, or about to become engaged in, the business conducted by Hub on the date [Knoll]'s employment with Hub ends or any business Hub is actively considering or was considering at any time during the one (1) year period preceding the date of the end of [Knoll's] employment with Hub, without limitation: (i) providers of intermodal, less-than-truckload, truckload, last mile, or other motor carrier freight transportation services; (ii) providers of warehousing and freight consolidation services; (iii) providers of third-party logistics services, including, without limitation, freight brokerage, freight forwarding, expediting, internet load boards, last-mile delivery logistics, contract logistics providers or firms; (iv) providers of parcel and parcel management services; (v) entities that engage in or may engage in acquisitions, mergers, and acquisition activities related to the transportation or third-party logistics industry, including, without limitation, researching, analyzing, and evaluating companies for possible investment in or acquisition of, for itself or clients; and (vi) [o]ther individuals or businesses that otherwise compete with Hub anywhere in the Restricted Territory"]: (a) in a capacity relating to the provision, management, development, manufacture, marketing, sales, or operation of any [products, processes, or services of any person or organization other than Hub, in existence or under development, that are substantially the same as, may be substituted for, or applied to substantially the same end use as, the products, processes, or services with which [Knoll] worked at any time during the last three (3) years of [Knoll's] employment with Hub or about which [Knoll] possessed Confidential Information [defined as "information relating to the present or planned business of Hub that has not been released publicly by authorized representatives of Hub. . . includ[ing] Hub's trade secrets as defined under federal and state law, inventions, and any other information or material that is not generally known by the public and that (i) is generated in, collected by, or utilized in Hub's operations and relates to the actual or anticipated business, research, or development of Hub, or (ii) is suggested by, or results from, any task assigned to [Knoll] by Hub or any work performed by [Knoll] for or on behalf of Hub, in all cases whether existing in hard copy, electronic format, or in [Knoll's] mind or in any derivations, copy, or notes made from any item embodying Confidential Information. Confidential Information also includes all information received by Hub under an obligation of confidentiality to a third party, including, without limitation, Hub's customers, carriers, and other business relationships. Examples of Confidential Information include, but are not limited to, customer and carrier lists, information, and contracts; the identity of suppliers, including contacts, cost, capacity and products and services; financial data, pricing strategies, sales, costs, pricing, margins, load data, lane volumes; compensation and workforce information and strategies; customers plans and strategies; business plans and strategies; regulatory strategies; marketing and sales plans, programs, processes, and practices; information technology, technical know-how, formulae, processes, designs, prototypes, models, software, solutions, research and development; personnel information; competitor information; and any other information that [Knoll] obtains from Hub that could reasonably be expected to be deleterious to Hub if disclosed to third parties. The foregoing list is not exhaustive and Confidential Information also includes other information that would otherwise appear to a reasonable person to be confidential or proprietary in the context in which the information is known or used"]; (b) in a position with responsibilities similar to those [Knoll] had with Hub at any time during the three (3) years preceding the end of [Knoll's] employment with Hub, or (c) in a capacity in which [Knoll] could disclose or use Confidential Information.

  • Rejection of Ainslie

    • The court rejected Hub’s argument that strict scrutiny of non-competes is no longer necessary under Cantor Fitzgerald, L.P. v. Ainslie.

    • As we previously covered, Ainslie dealt with a forfeiture-for-competition provision, not a post-employment non-compete of the type at issue here.

    • The court held this distinction rendered Ainslie inapposite.

  • “General Clause” Is Overbroad

    • Before turning to the limitations Hub argued sufficiently narrowed the non-compete to a reasonable scope, the court held the “general clause” of the non-compete was overbroad.

    • First, the court held the “Restricted Territory” was overbroad because it extended not just to geographic areas in which Knoll’s employer did business, but to 25 subsidiaries, affiliates, successors, and assigns within the “Hub Group,” which were located in four countries.

    • Second, the behavioral prohibition purported to prevent Knoll from working for a “Competing Business,” defined as any entity that competes with any of the 25 entities in the Hub Group. “Hub could not articulate or describe what business was conducted by at least five of the Hub entities included in this definition.”

    • Even if limited to the entire United States, the court concluded the provision would still be overbroad and unenforceable, because it was a “near-uncabined prohibition on employment, and not essential to the protection of Hub’s legitimate business functions.”

  • Hub’s Limiting Provisions Are Not Effective

    • Hub argued the court could not read the “general clause” in isolation, because the non-compete contained three limiting clauses restricting the covenant to Hub’s protectable interests. The court rejected this argument.

    • The first limiting provision was that Knoll could not compete “in a capacity relating to the provision, management, development, manufacture, marketing, sales or operation of any Competing Services.” The definition of “Competing Services” included “products, processes, or services of any person or organization other than Hub, in existence or under development, that are substantially the same as, may be substituted for, or applied to substantially the same end use as, the products, processes or services with which Employee worked at any time during the last three (3) years of Employee's employment with Hub or about which Employee possesses Confidential Information through Employee's work with Hub.”

      • The court held this was not an effective limiting provision, because it “appears to prevent Knoll from providing any services for a Competing Business if he has any information related to any business conducted by Hub.”

    • The second limiting provision was that Knoll could not work for a Competing Business “in a position with responsibilities similar to those Employee had with Hub at any time during the three (3) years preceding the end of Employee’s employment with Hub.”

      • Noting that the language was not limited to Knoll’s actual responsibilities at Hub, the court decided “Knoll would still be prevented from managing any customer relationships or acting in a supervisory manner by setting goals for other employees. This restriction remains so broad that it does not limit the General Clause in a manner that meaningfully protects Hub’s economic interests.”

    • Finally, the last limiting provision was that Knoll could not work for a Competing Business in a “capacity in which [Knoll] could disclose or use Confidential Information.”

      • The court interpreted “Confidential Information” to mean all non-public information relating to Hub, not just information Knoll had access to or utilized in his position, and it extended to all 25 entities within the Hub Group. Further, the court noted that use of the word “could” was not truly limiting, because Knoll “could” disclose Confidential Information in any role.

  • “Successors, Heirs, Executors, and Representatives”

    • The court held the breadth of the non-compete was compounded by a provision that purported to bind Knoll’s “successors, heirs, executors, and representatives.” Noting in a footnote this could apply to Knoll’s children, the court called this provision “baffling.”

  • Refusal to Reform or “Blue Pencil”

    • The court refused Hub’s request to reform the non-compete to parameters the court found reasonable.

    • The court explained: “A recognized problem in the enforcement of non-competes is the perverse incentive that a court might tailor, or limit, the effect of an overbroad non-competition agreement as to render it enforceable. That would encourage the use of overbroad non-competes; with some fraction of employees cowed into accepting unenforceably-broad restrictions, and with the Court available to blue-pencil and enforce the provision where a former and non-compliant employee is harming the legitimate interests of the company. An analog of that problem is illustrated here: a non-compete so complex and difficult to parse that a broad range of conduct may be prohibited, but the entity can propose a reading that saves the provision from a finding of overbreadth. This is with respect to a contract provided by the company without negotiation, and imposed as a condition of future employment. The obvious mal-incentive, and the equitable principles embodied in the doctrine of contra proferentem, weigh against such an interpretation here, I find.”

  • Conclusion

    • The court held: “When the Non- Compete is read as a whole, Knoll is prohibited from working for an entity that competes with any of Hub's 25 entities, located in at least four countries and in 42,000 zip codes within the United States, if Knoll (a) does anything ‘substantially the same as’ what he did while employed at Hub or if he possesses any information related to any Hub entity; (b) is in a position related to sales, customer management, setting strategic goals for sales employees, supervision of a team, or researching sales tools; or (c) could disclose any nonpublic information related to any business conducted by a Hub entity. This is overbroad.”

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Goforth v. Transform Holdco LLC, 6:23-cv-03167-MDH (W.D. Mo. July 18, 2024).

Read the full opinion here.

Categories: Motion to Dismiss; Federal Antitrust Law

Tags: None

Types of restrictions in case: Non-compete

Summary:

• The plaintiffs Matthew and Malinda Goforth (the “Goforths”) filed a lawsuit against owners of Sears Authorized Hometown Stores, LLC (“SAHS”), alleging the non-compete provision in the Dealer Agreement between the parties was an unlawful restraint on trade in violation of the Sherman Act.

  • The Goforths alleged that SAHS added the non-compete provision to all Dealer Agreements in order to prevent the owners from starting competing businesses in rural territories, because SAHS knew its business was in decline and it may enter bankruptcy.

  • When the Goforths’ Dealer Agreement expired in 2019, they planned to open their own home appliance business. However, SAHS initiated arbitration to enforce the non-compete clause, leading to the temporary closure of the Goforths’ new business.

• The trial court denied the defendants’ motion to dismiss for failure to state a claim.

  • The court held the Goforths sufficiently pleaded “antitrust injury” as opposed to mere personal injury. The Goforths claimed that SAHS included the “boilerplate” non-compete language in Dealer Agreements around the country, and they effectively “prohibited any former store owner along with their family from competing . . . anywhere in the United States for at least two years.”

  • The parties disagreed about whether the alleged restraint on trade should be treated as “vertical” or “horizontal.” The court noted, “a vertical restraint typically involves parties at distinct points in the production process, while horizontal restraint occurs between firms that compete at similar points in production.” A horizontal restraint, unlike a vertical restraint, “commands a per se analysis” and “does not allow an inquiry into the intent behind the restraint, its pro-competitive justifications, or its actual effect on competition.” Regardless of the type, the Court examined whether the market was sufficiently defined in terms of product and geography.

    • Product

      • The court noted that the relevant concern is whether Plaintiff has sufficiently alleged a product market that accounts for all reasonably interchangeable alternatives.

      • Plaintiffs alleged the relevant product is “major home appliances” which they claim “can be categorized into four groups based on the function of each appliance.”

      • The court found that because the product market of major home appliances is not reasonably interchangeable with other products, the Plaintiffs sufficiently alleged a product market.

    • Geography

      • Similarly, Plaintiff’s geographic market was satisfactorily pled as consumers in Bolivar, Missouri, whom the Goforths allege “overwhelmingly prefer local retailers.”

Legislative Update

No legislative update.

Regulatory Update

FTC Opposes ATS’s Attempt to Supplement Record with Evidence of Irreparable Harm

Following the July 10 hearing on its motion to enjoin the FTC’s non-compete ban, ATS filed a motion to submit additional evidence of irreparable harm.

The FTC has opposed ATS’s motion, arguing: “Plaintiff’s purported justification for supplementing the record now is that the Court has the ‘apparent view that additional evidence is necessary’ based on the Court’s questions at the hearing regarding irreparable harm. But asking questions about the parties’ evidence and arguments is commonplace; that does not in itself provide cause for introducing new evidence and argumentation following the conclusion of briefing and a hearing, particularly when the parties agreed beforehand to forgo the presentation of any additional evidence.”

The court is set to rule on the motion for a preliminary injunction July 23, so it’s unclear whether it will decide this issue before or in conjunction with that ruling. Either way, stay tuned.