Case Law Update: Sixth Circuit, California, North Dakota; Legislative Update: Wisconsin; Regulatory Update: FTC Sets Vote on Non-Compete Ban
Case Law Update
Firexo, Inc. v. Firexo Group Limited, No. 23-3085 (6th Cir. Apr. 12, 2024)
Read the full opinion here.
Categories: Forum-Selection Provision; Appeal
Tags: Forum-selection provision not enforced
Types of restrictions in case: N/A
Summary
Litigation Strategy Alert! The Sixth Circuit called the “closely related” doctrine, under which non-signatories can be bound to forum-selection provisions, “a judicial concoction without underlying authority or justification.” It rejected the application of federal common law to determine the applicability of a forum-selection provision, and instead adopted the “two-step” approach favored by some Circuits, under which courts first determine the governing law under the Erie analysis, and then decide whether the forum-selection provision is enforceable under that governing law.
The plaintiff (“Firexo”) sued its parent company (“FGL”), asserting a variety claims regarding the quality of FGL’s fire extinguishers.
Relying on the forum-selection provision contained in a joint venture agreement (the “JVA”) between FGL and Firexo’s majority owner, FGL moved to dismiss. Firexo was not a party to the JVA.
The district court granted the motion and concluded that Firexo was bound to the forum-selection provision under the “closely related” doctrine.
The “closely related” doctrine is a federal common law rule of equitable contract interpretation. This doctrine represents an exception to the general principle that only parties to a contract are bound by its terms. Under the doctrine, a signatory may enforce the forum-selection clause within an agreement (but no other portion of it) against a non-signatory, where the non-signatory enjoys a “sufficiently close nexus to the dispute or to another signatory such that it was foreseeable that the non-signatory would be bound.”
Firexo appealed, and the Sixth Circuit reversed.
The court’s opinion includes an in-depth history of the “closely related” doctrine, particularly in the Sixth Circuit, and the policy reasons for its existence.
The court also analyzed the Circuit split on this issue. Some Circuits apply federal common law to interpret the scope or applicability of forum-selection clauses, because they see such clauses as “purely procedural issue[s] of venue selection.”
Other Circuits apply a “two-step” approach, in which the court begins with the ordinary Erie analysis to determine the governing law, and then determines applicability under that law.
The Sixth Circuit adopted the “two-step” approach in this case. It concluded that “the ‘closely related’ doctrine is a dubious doctrine at best—a judicial concoction without underlying authority or justification. It appeared ipse dixit and continues to exist primarily because no court has rejected it.”
The court rejected the concept of the “closely related” doctrine under federal common law, but acknowledged that contract interpretation is “fundamentally a matter of state law,” and states could create or adopt the “closely related” doctrine (and some have done so).
The court then proceeded to apply the “two-step” approach here.
First, the court observed that it could either apply English law (as designated in the JVA’s choice of law provision) or Ohio law, but the court accepted English law as governing law without engaging in a choice of law analysis because the parties did not dispute that English law applied.
Relying on the general rule that “a contract binds only the parties to it,” the court held the forum-selection clause in the JVA did not apply to Firexo.
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Faley v. Ferrellgas, Inc., D081184 (Cal. Ct. App. Apr. 15, 2024)
Read the full opinion here.
Categories: Summary Judgment; Discrimination/Retaliation; Appeal
Tags: California law applied
Types of restrictions in case: Non-compete; Employee non-solicitation
Summary
The plaintiff (“Faley”) sued his former employer (“Ferrellgas”) for both intentional infliction of emotional distress (“IIED”) and negligent infliction of emotional distress (“NIED”), among other claims.
Faley based his IIED and NIED claims on his allegation that, after Faley’s termination, Ferrellgas accused him of soliciting another Ferrellgas employee to join him at his new employer and that Ferrellgas contacted his new employer and asserted Faley was in violation of a non-compete clause.
The court affirmed summary judgment for Ferrellgas on the emotional distress-based claims.
Under California law, an essential element of an IIED claim is an allegation of outrageous conduct beyond the bounds of human decency. The court held that the conduct alleged did not meet this standard.
Even as alleged by Faley, Ferrellgas “apologized for the accusation that Faley had solicited another employee once the employee clarified to Ferrellgas that he was not solicited by Faley.” Moreover, it was undisputed that Faley continued to work for his new employer and provided no evidence of emotional or other injury as a result of Ferrellgas’s purported conduct.
The appellate court agreed the trial court’s dismissal of Faley’s NIED claim was not error because it was based solely Ferrelgas’s alleged intentional employment acts, rather than any negligent conduct.
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Midco Diving and Marine Services, Inc. v. CC Steel, LLC, No. 3:22-cv-00164-PDW-ARS (D.N.D. Apr. 15, 2024)
Read the full opinion here.
Categories: Summary Judgment; Tortious Interference
Tags: North Dakota law applied
Types of restrictions in case: Customer non-solicitation; Non-disclosure
Summary
The plaintiff (“Midco”) sued two of its former employees for allegedly breaching their restrictive covenants, and it sued their new employer (“CC Steel”) for tortiously interfering with Midco’s customer relationships.
The court granted summary judgment for the defendants.
The contracts at issue prohibited the former employees from “contacting customers, disclosing contracts, and soliciting customers for two years after termination of employment.”
The court held these agreements violated North Dakota law prohibiting post-employment customer non-solicitation provisions, so the former employees “were not bound by the agreements after their employment ended.”
The court held Midco had neither alleged nor produced evidence that CC Steel interfered with an existing contract, as opposed to “customer relationships.” And even if it had, Midco failed to produce evidence that CC Steel’s actions were “independently tortious or otherwise unlawful.” The court, therefore, granted summary judgment for CC Steel on the tortious interference claim.
Legislative Update
Potential Client Alert! The Wisconsin legislature voted down a series of bills that would have banned post-employment non-competition, employee non-solicitation, and non-disparagement clauses.
Wisconsin - AB481/SB566; AB902; AB903
Bill name: AB481/SB566 - Covenants not to compete in employment contracts; AB902 – Prohibitions on postemployment nonsolicitation clauses in employment contracts; AB903 - Prohibitions on nondisparagement clauses in employment contracts.
Action: Dead
BPB Summary:
AB481/SB566: (1) Continues to allow reasonable non-competes during employment, but bans post-employment non-competes. (2) The presence of an unenforceable non-compete renders any other covenants void and unenforceable, even if they were otherwise reasonable. (3) The post-employment non-compete ban would not apply to “nondisclosure agreements” or a “covenant not to compete that is limited to prohibiting or restricting the unauthorized use of a customer list or intellectual property owned or licensed by the employer or principal.” (4) Requires employers to post physical and electronic notices stating that post-employment non-competes, subject to the statutory exceptions above, are illegal, void, and unenforceable. (5) Applies to covenants entered into, extended, modified, or renewed on or after the effective date of the statute.
AB902: (1) Renders illegal, void, and unenforceable any post-employment restriction that prohibits former employees from soliciting the assistants, servants, employees, or agents of the employer to work for or provide services for a different employer or principal. (2) Requires employers to post notices, both in the workplace and online, that explain the prohibition on post-employment employee non-solicitation provisions. (3) Applies prospectively to agreements entered into, extended, modified, or renewed after the effective date.
AB903: (1) Renders illegal, void, and unenforceable any post-employment non-disparagement provision. (2) Requires employers to conspicuously post notices, both in the workplace and online, that explains the prohibition on post-employment non-disparagement provisions. (3) Applies prospectively to agreements entered into, extended, modified, or renewed after the effective date.
Regulatory Update
FTC Sets April 23 for Vote on Non-Compete Rule, Suggests Changes
The Federal Trade Commission just announced that it will hold a virtual, special Open Commission Meeting on Tuesday, April 23, 2024, at 2:00 pm ET to vote on the proposed non-compete ban that has been pending since January 2023.
At the start of the meeting, the Commission will vote on “whether to authorize public disclosure of the proposed final rule that is under consideration.” Then, Chair Khan will give brief remarks. If the vote is in favor of public disclosure, the Office of Policy Planning will then give a staff presentation on the “final” rule under consideration. Finally, the Commission will vote on whether to issue the final rule.
This procedure suggests that the Commission may issue a different rule than what it initially proposed, which was a near-total ban on all non-compete agreements, with limited exceptions.
The Commission will not be taking further comments from the public during the April 23 Open Commission Meeting, having already received more than 26,000 submissions during the public comment period.
Blue Pencil Box will issue further updates following the April 23 Open Commission Meeting.
