Franklin County Court of Appeals Affirms $19.6K Award Against Employer for Pursuing Frivolous Claim Against Employee

Last week the Franklin County Court of Appeals upheld an award of more than $19,500 in attorney’s fees and costs against an employer under R.C. 2323.51 for continuing with a lawsuit against a former employee after it should have been apparent that the lawsuit lacked merit. Bartelt Dancers, L.L.C. v. Icenhour, 2013-Ohio-5604.   Notably, the trial court did not find that the lawsuit lacked merit when it was filed.  However, after the employee’s attorney pointed out the flaws with the employer’s legal theory and lack of factual basis, the employer was obligation to investigate further instead of just continuing with the lawsuit.  The employer’s misconduct was exacerbated because it never made a settlement demand upon the employee and, at the preliminary injunction hearing, it focused only on the other defendant and never produced any evidence against the employee (who was an employee of the other defendant).   The Court also noted that the award of fees and costs was proper even though the employer dismissed the entire lawsuit soon after losing the preliminary injunction hearing and the employee’s attorney filed the motion for costs and fees.

According to the Court’s opinion, the employee resigned his employment and went to work for a former co-worker about 6 months after she formed a competing dance instruction studio.  About six months after that, the employer initiated legal action, including “claims for breach of contract, unfair competition, breach of fiduciary duty, and misappropriation of trade secrets and confidential information (the student list)” taken by the co-defendant.  The employee’s attorney pointed out, among other things, that the student list had not been confidential.  Although the employer’s attorney agreed that the employee was primarily a witness instead of a party, he did not dismiss the claims against her.   The employer also failed to obtain any witnesses to testify against the employee at the hearing.

 

The trial court in this case imposed sanctions under R.C. 2323.51(B), which allows the trial court to sanction a party, counsel, or both for engaging in frivolous conduct in the course of litigation. The statute defines frivolous conduct to include conduct that "consists of allegations or other factual contentions that have no evidentiary support or, if specifically so identified, are not likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." R.C. 2323.51(A)(2)(a)(iii). "Under this definition of 'frivolous conduct,' the test is whether no reasonable attorney would have brought the action in light of the existing law."

 The employer’s conduct was frivolous because the employer and its attorney knew that it lacked a legal basis to continue the lawsuit against the employee.  By failing to dismiss the lawsuit, the employee

and her attorney had to prepare for and attend a preliminary injunction hearing where Plaintiff presented no evidence of any kind against her. Plaintiff and its counsel, based on the failure to secure or talk to witnesses and the one sided settlement offer to Icenhour, knew that they were not going to proceed against [the employee].

“[T]he frivolousness of appellants' conduct lies not in filing the original complaint, but rather in declining to timely dismiss it after failing to prosecute the action.”

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Divided Ohio Supreme Court Addresses Unfair Competition Battle Brought Against Former Employees

Last week, a divided Ohio Supreme Court issued a decision in a well-publicized case initially brought by a large non-profit employer against a small company started by former employees.  American Chemical Society. v. Leadscope, Inc., Slip Opinion No. 2012-Ohio-4193.   The initial lawsuit was brought in 2002 and involved claims for breach of employment agreements, misappropriation of trade secrets, unfair competition, breach of fiduciary duty and the duty of loyalty, and conversion, etc.    The defendant company brought counter-claims for unfair competition, tortious interference and defamation on the grounds that the lawsuit was unfounded and brought solely to drive it out of business and because of statements made to the plaintiff employer’s employees and the media.  After an eight-week trial in 2008, the jury awarded the defendant company $26.5M on its claims for unfair competition and defamation. The Franklin County Court of Appeals affirmed the verdict.   The Supreme Court held that before an unfair competition claim can be based on the filing of a lawsuit, the lawsuit must be objectively baseless – which is a higher standard than the lack of good faith.  Although the plaintiff’s claims survived a directed verdict motion, the Court’s majority nonetheless found that the plaintiff failed to produce any evidence to support its claims and, thus, the claims were objectively baseless.   More surprisingly, a majority of the Court (almost all of the justices) supported the dismissal of the defamation claim even though the jury had found that the plaintiff had abused its privilege to report the status of the litigation.  The Court found the statements in context only repeated the company’s position and that the company could not be held liable for the statements of its attorney unless it affirmatively ratified them.

With respect to the unfair competition claim, the trial court had borrowed the standard from the law of malicious prosecution and instructed the jury that they could find for the defendant company if the plaintiff’s lawsuit was not brought in good faith, but was brought with the intention of injuring the defendant.   The Supreme Court held that this standard was too low (in light of a citizen’s First Amendment right to petition government for redress) and instead, adopted the following standard:

To successfully establish an unfair competition claim based upon legal action, a party must show that the legal action is objectively baseless and that the opposing party had the subjective intent to injure the party’s ability to be competitive.

Several of the dissenting/concurring justices would have remanded the case for another trial under the new standard. (After all, the plaintiff had survived a directed verdict motion, which indicates that the trial court found some objective basis to exist).   However, the majority concluded that the plaintiff had failed to introduce any evidence to support its claims and, therefore, a new trial – more than 10 years after the facts at issue – was unnecessary and burdensome.    In short, the Court found the plaintiff company’s concerns that the defendant employees had misappropriated a software program had not been proven when the defendants’ competing program was written in a different language and, according to expert opinions, did not share any code.  That the competing software accomplished the same objective was not actionable.  (The Court’s discussion of the plaintiff company’s evidentiary objections was interesting in that the plaintiff company objected to the introduction of evidence that may have actually supported its decision to bring the lawsuit).

The defamation claim was based on a memorandum written to the plaintiff’s employees about the lawsuit and directing them not to comment on it.   The jury found that the plaintiff had abused its qualified privilege by indicating that the defendant employees had misappropriated intellectual property.  The Court found that, in context, the memorandum was nothing than the typical directive for employees to not comment on a lawsuit (which, coincidentally, the NLRB has indicated would be inappropriate).  The syllabus holding on this is stated as follows:

In determining whether a statement is defamatory as a matter of law, a court must review the totality of the circumstances and read the statement in the context of the entire publication to determine whether a reasonable reader would interpret it as defamatory.

The second allegedly defamation statement was contained in a news article about the litigation and quoted the plaintiff’s attorney discussing the claims made.  Again, the jury found the attorney to be speaking as an agent of the plaintiff and that the statements exceeded the applicable qualified privilege.  Nonetheless, the Court again found the statements were appropriate in context.  More importantly, the Court found that the plaintiff client could not be held vicariously liable for statements made by its attorney unless it authorized or ratified them.

 The Court was unusually divided on this case.  Three justices joined the majority opinion.   One justice would have affirmed the trial court on all claims, but joined the majority to affirm the unfair competition judgment.   Two other justices concurred with all of the syllabus paragraphs (i.e., the rules of law) and the reversal of the defamation claim, but dissented on the failure to remand the unfair competition claim.   Finally, one justice agreed with the higher standard for unfair competition, but would have affirmed the defamation claim and remanded the unfair competition claim.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Cuyahoga Court of Appeals Limits Unfair Competition and Inevitable Disclosure Claims to Duration of Non-Competition Agreement.

In October, the Cuyahoga Court of Appeals ruled on a dispute between coffee barons which arose out of the division of a coffee business in a divorce (in which the wife’s attorney ended up with the business) after the husband began a new coffee venture (at the urgings of his disinherited children) following the expiration of his non-compete agreement. Berardi's Fresh Roast, Inc. v. PMD Enterprises, Inc., 2008-Ohio-5470 (8th Dist. 10/23/08). The courts agreed with the husband that his preparations to begin his new coffee business did not violate the non-competition agreement and he was entitled to engage in fair competition with his former business by promoting his “better” and “less expensive” coffee. The court also ruled that the inevitable disclosure doctrine did not justify relief for the plaintiff company because the confidentiality obligation did not survive the expiration of the non-compete.

Like most businesses, the Company started in happier days when the Executive and his wife began with a small retail store in Cleveland and the Executive’s talent with coffee blends grew the business to a nationwide scope. Fourteen years later, the Executive sold his share in the Company to his wife in a divorce, agreed to a three-year non-competition agreement (containing a perpetual confidentiality clause) and accepted a deferred compensation arrangement. However, after the wife sold the business to her attorney (thus disinheriting their children), the Executive’s sons asked him to re-enter the coffee business, which the Executive agreed to do following the expiration of his non-compete agreement. In the meantime, he lined up the financing and suppliers for his new business, investigated prices and blends, purchased the necessary equipment and signed an office lease. The day after the non-compete agreement expired, the Executive opened his new coffee business and he hired three former employees (who then worked for the Company). One of the Company’s major grocer clients then began buying its coffee from the Executive based on his reputation, his lower price and the taste of his coffee. The Company then filed suit against the Executive, his new company and its former employees.

“In its complaint, [the Company] alleged tortious interference with business, breach of the noncompetition agreement, theft of trade secrets, deceptive trade practices, civil conspiracy, and destruction or conversion of [the Company’s] personal property. The Executive counterclaimed for failure to pay the remainder of his deferred compensation. The trial court granted summary judgment to the Executive on all claims and the Court of Appeals affirmed that judgment, except that it reversed summary judgment on the conspiracy and on one of the trade secret claims.

Trade Secrets Claim. The Company’s trade secrets consisted of the coffee blend formulas the Executive developed when he owned the Company. “The formulas consist of both the origin of the beans (i.e. Africa, Columbia, Brazil) and percentage used of each type of bean.” Although the Executive’s new company created a sales cheat sheet to indicate which of its blends most closely approximated the Company’s coffee blends, a comparison of the formulas showed that the Executive’s coffee blends used different beans and percentages than the Company’s blends – with one exception. In that case, the Executive admitted that the formulas were identical, although he used a different roasting method which changed the taste. In addition, the Executive claimed that the formula for that blend actually belonged – in whole or in part – to the client who helped develop the blend and was its exclusive buyer. The client supported this contention. However, because the Company pointed out that the client was not even aware of the blend’s formula and had asked for a copy of the formula only a few months before the Executive opened his new coffee business, there was a disputed issue of material fact as to whether the Executive misappropriated this particular trade secret formula.

The courts rejected the remaining trade secret claims involving the confidential client list because the Executive showed that he created his new client list (of names and telephone numbers) from researching the yellow pages, the internet and client referrals and making cold calls, etc. There was no evidence that the Executive’s new client list overlapped identically with the Company’s client list or contained other information unique to the Company’s clients (such as buying habits, prices, etc.).

Conspiracy. Because the court of appeals resurrected this trade secret claim, it felt compelled to resurrect the civil conspiracy claim based on the alleged misappropriation of trade secret. “The elements of civil conspiracy are: (1) a malicious combination of two or more persons, (2) resulting in injury to person or property, and (3) existence of an unlawful act independent of the conspiracy.” In that the Executive is alleged to have conspired with his new employees to misappropriate the single coffee blend, that claim would be sent to a jury to decide its merits.

Inevitable Disclosure. The Company argued that the doctrine of inevitable disclosure should bar the Executive from hiring its former employees since those employees possessed trade secret information and could use it to compete against the Company. The courts indicated that this doctrine is limited to when “a threat of harm warranting injunctive relief exists when an employee with specialized knowledge commences employment with a competitor.” Because those employees were apparently not subject to a non-compete agreement and the Executive’s non-compete agreement had expired, the courts held that the doctrine was inapplicable to this situation.

Unfair Competition. The court rejected the Company’s arguments that the Executive’s preparations in forming his new business constituted a violation of the non-compete and unfair competition because there was no evidence that he was competing, was soliciting customers, was hiring or recruiting employees or advertising before the expiration of the non-compete agreement. The fact that the Executive’s son mentioned his father’s future venture to a Company employee a few months before the business opened was irrelevant.

Similarly, the court rejected the Company’s arguments that the Executive and its former employees tortiously interfered with its contracts with its customers by persuading them to switch suppliers (i.e., to buy from the Executive instead of the Company). Under Ohio law, competitors are permitted to engage in fair competition without actual malice. There was no evidence that any of the customers breached any contracts with the Company when they switched coffee suppliers. Rather, their contracts were terminable at will. Moreover, “informing potential clients that its coffee tastes better and was less expensive, does not constitute ‘actual malice.’"

The courts also rejected for lack of evidence claims that the Executive was providing customers with “cheat sheets” indicating that his coffee was the same as the Company’s or was placing his coffee in grocery bins identified for the Company’s coffee.

Deferred Compensation. The Company argued that it was not required to make the remaining payments of deferred compensation to the Executive because he allegedly breached the non-compete agreement. However, as discussed above, the court rejected all arguments that he breached the non-compete agreement. In any event, the courts found this to be irrelevant because, pursuant to the contractual terms, the deferred compensation obligation was independent of the non-compete obligation. The compensation was due because of past services rendered, not because of the non-compete provision.

Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-5470.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Ohio Appeals Court: Employers Should Sometimes Leave Competing Former Employees Well Enough Alone.

In early July, the Ohio Court of Appeals in Stark County not only affirmed the trial court’s refusal to enforce the plaintiff-employer’s non-competition agreement against a competing, former employee, but the court also affirmed a significant damage award of $180,000 against the employer and in favor of the former employee on the employee’s unfair competition claim. United Studios of America v. Laman, No. 2007CA00277, 2008-Ohio-3497 (7/7/08). The basis for the employee’s successful counter-claim was that the employer only brought the non-competition lawsuit to cause the employee to incur legal fees.

In Laman, the employer operated a mobile photography studio which provided portraits at grocery stores and shopping malls, etc. in several states. Since at least 2000, the employer required all employees to sign an employment agreement which contained the following non-competition clause:

“Employee acknowledges that Company will expend considerable time, effort and expense in the training of employee and the methods used by Company; that Employee will acquire confidential and valuable knowledge and information as to Company's accounts, customers and business patrons, as well as confidential and valuable knowledge and information concerning the methods and forms developed and used by Company; and that Employee will acquire such knowledge and experience that upon leaving Company's employment for any reason, his engaging directly or indirectly, either alone or in association with any other person or firm, in the family portrait photography business will cause unfair disclosure of such valuable knowledge and information, irreparable harm and financial loss to Company."

The defendant employee signed such a clause when he was hired and he was later promoted to Vice President of the Company. Nonetheless, he eventually resigned from the plaintiff employer and formed his own photography business in Colorado. He then obtained a contract to provide portraits to customers of Safeway of Colorado. There is no discussion in the court’s opinion whether the plaintiff employer operated in Colorado or whether the employee competed against the employer in other states.

The court explains that the plaintiff employer filed suit against the former employee for breach of his non-competition agreement. The lawsuit apparently only sought monetary damages and did not seek equitable relief. When the employee failed to respond to the complaint, the employer moved for default judgment. However, on the same date, the employee requested and later obtained permission to not only file an answer to the complaint, but to file counter claims against the plaintiff employer for, among other things, unfair competition. The trial court granted summary judgment to the employee on the non-competition claims and on his counterclaims. Following a damages hearing, the court awarded damages to the employee in the amount of $180,260.39, including $116,468 in punitive damages and $58,234 in attorney fees.

The employer argued on appeal that the trial court erred in dismissing its non-competition claim on the grounds that the employer failed to prove that it suffered any damage from the breach of the non-competition clause. After all, according to the employer, the contract itself acknowledged that the employer would suffer harm from any breach of the non-competition provision. The court was unmoved:

“A contractual provision acknowledging harm will occur in the event of a breach, without more, is insufficient to withstand summary judgment. Where, as here, a party makes a claim for money damages, the party must demonstrate actual damages. [The employer] filed the within action alleging claims for breach of contract, breach of fiduciary duty, breach of Ohio Trade Secrets Act and intentional interference with contractual relationships. [The employee] moved the trial court for summary judgment on all of the above claims alleged in the complaint, and for summary judgment as to its counterclaim for unfair competition. [The employee’s] motion for summary judgment raises the issue that [the employer’s] claims must fail because Appellant has no evidence demonstrating damage or injury resulting from [the employee’s] actions. In response, [the employer] merely cites the contract provision stipulating damage to[the employer]. The contract did not include a provision for liquidated damages. While the contract provision stipulating to damages and irreparable harm may well provide grounds for an equitable injunction, we find [the employer’s] claims require proof of actual damages, and [the employer] failed to meet the burden.”

In contrast, the court affirmed the employee’s damage award because the employee “presented admissible evidence establishing [the employer’s] motives in filing the instant action were to cause [the employee] to incur legal fees and costs. Accordingly, the trial court properly granted summary judgment in favor of” the employee on his counterclaim for unfair competition against the plaintiff employer.

Insomniacs can read the court’s decision in full at http://www.sconet.state.oh.us/rod/docs/pdf/5/2008/2008-ohio-3497.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.