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Non-Compete Agreements: A Cautionary Tale

October 1, 2013adminLegal News0

By:  Mike Cavosie

Indiana employers:  Do not assume that your non-compete agreements are enforceable.  The September 30, 2013, Indiana Court of Appeals decision Joseph M. Guinn v. Applied Composites Engineering, Inc. dramatically highlights the perils of doing so.

In that case, Guinn, who held an FAA airframe and powerplant mechanic’s license, worked for Applied Composites as an airline mechanic.  Applied Composites made all of its employees execute non-compete agreements, and Guinn was no exception.

When Guinn tendered his two-week notice to start working for AAR Aircraft Services, a customer and vendor of Applied Composites, Applied Composites repeatedly threatened to sue both Guinn and AAR.  AAR initially hired Guinn but terminated his employment shortly thereafter because of the pressure from Applied Composites.  Nevertheless, Applied Composites filed a lawsuit against Guinn for breach of the non-compete agreement and against AAR for tortiously interfering in the employment relationship between Applied Composites and Guinn.

Guin filed a multiple-count counterclaim against Applied Composites.  Count II of the counterclaim alleged that the non-compete agreement was unenforceable.  Count III of the counterclaim alleged that Applied Composites had tortiously interfered in the employment relationship between Guinn and AAR.

Critically–and unsurprisingly–the trial court held that the non-compete agreement was overbroad and unenforceable.  Indiana courts have long stated that covenants which restrict a person’s employment opportunities are strongly disfavored and will be strictly construed.  Foremost among the requirements for a valid, enforceable non-compete agreement is an employer’s legitimate protectable interest.  A legitimate protectable interest is “an advantage possessed by an employer, the use of which by the employee after the end of the employment relationship would make it unfair to allow the employee to compete with the former employer.”  Proprietary methods, confidential pricing, certain types of customer lists–these are examples of a protectable interest.  General  knowledge,  information  or  skills  gained  by  anemployee  in  the  course  of  employment are not protectable interests.

During a hearing, Applied Composites admitted that the only interest Applied Composites had in Guinn was “investment and costs in the training.”  Such interests are clearly insufficient under Indiana law to support a non-compete agreement.

(As an aside, employers should generally not have all employees sign non-compete agreements.  Instead, non-compete agreements should be reserved for key employees who will, through their course of employment, garner specific information and knowledge that would allow them to unfairly compete after termination of the employment relationship.)

However, the trial court granted Applied Composites’ motion for summary judgment on Count III, Guinn’s tortious interference claim.  One of the elements in a tortious interference claim is whether the interference is justified.  Enforcement of a valid non-compete agreement is justified; enforcing what turns out to be an invalid non-compete may not be justified.  The trial court noted:

In  this  case,  ACE’s  Non-Compete  Agreement  had  legal  defects when it was signed by Guinn; however that fact was unknown to ACE at the time.  The question of whether or not the contract was enforceable had not yet been tested in a court of law. [Applied Composites] had reason to believe that Guinn was, in fact, acting in violation of said non-compete agreement.

Guinn appealed that decision (Applied Composites did not appeal the trial court’s decision that the non-compete agreement was unenforceable), and the Indiana Court of Appeals reversed.  In remanding the case to the trial court for a jury trial, the Court of Appeals noted that Applied Composites’ only asserted interest in Guinn was investment and costs in the training.  It continued:

The  factfinder  may  consider  the  extent  to  which  the  terms,  conditions,  and covenants contained in the Agreement were unreasonable, overly broad, or not narrowly tailored to protect ACE’s legitimate business interests and the extent to which this factor may weigh in favor of a finding that ACE’s conduct was justified or unjustified under the specific circumstances in this case.

And therein is the cautionary tale.  Not only was the non-compete unenforceable, but Applied Composites now finds itself the defendant in a jury trial with the possibility of paying damages to a former employee.

 

Right-To-Work Law: Lake County Superior Court Judge Finds Law Unconstitutional

September 26, 2013adminLegal News0

By:  Mike Cavosie

In a decision that will certainly be appealed, on September 5, 2013, Lake County Superior Court judge John M. Sedia held that Indiana’s Right-to-Work Law violates the Indiana Constitution.  The lawsuit challenging the law was brought by Local 150 of the Operators union.

Local 150  alleged four distinct constitutional violations:

1. violation of Article I, Section 1, which declares that all people are created equal, by compelling Local 150  to bear the entire cost of representing non-members;

2. violation of Article I, Section 9:, which guarantees the right of free speech, by requiring Local 150 to divert resources to represent non-members that it could otherwise use for protected speech.;

3. violation of Article I, Section 24, which generally prohibits laws with certain types of retroactive effect, by applying to existing collective bargaining agreements; and

4. violation of Article I, Section 21, which declares that no person’s services shall be demanded without just compensation, by requiring Local 150 to serve non-members.  

Judge Sedia dismissed the first three alleged violations but held that the law violated Article I, Section 21.  He first noted that, under Federal labor law, Local 150 is required to represent non-members:  Thus:

In the absence of the federal law, a union could, without incurring any criminal liability under [the Right-to-Work Law], refuse to provide services for those employees who chose not to join the union; in the absence of the [Right-to-Work Law], the union could insure that it received compensation in the form of dues for the services the federal law required it to perform from those employees who chose not to join the union though a collective bargaining agreement with the employer that made the payment of dues to the union a condition of employment.

Judge Sedia noted his strong antipathy to declaring any state statute unconstitutional, but he concluded:

However, the effect of [the Right-to-Work Law] under the current, long-standing federal labor law, is to demand particular services without just compensation.  The Court therefore has no choice but to find that [provisions of the Right-to-Work Law] violate Article I, Section 21  of the Indiana Constitution.

 

Note To Employers: Affordable Care Act Notice Deadline Is October 1

September 19, 2013adminLegal News0

By:  Mike Cavosie

Affordable Care Act (“ACA”) amendments to the Fair Labor Standards Act  (“FLSA”) require covered employers to provide each employee a written notice regarding the ACA.  The notice deadline is October 1, 2013, and employees hired after that date must be provided the notice at the time of hiring.

The FLSA generally covers employers  who are engaged in, or produce goods for, interstate commerce, of not less than $500,000.  The Department of Labor explains that the ACA notice must inform the employee:

  1. of the existence of the Marketplace (referred to in the statute as the Exchange) including a description of the services provided by the Marketplace, and the manner in which the employee may contact the Marketplace to request assistance;
  2. if the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code (the Code) if the employee purchases a qualified health plan through the Marketplace; and
  3. if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.

Model notices drafted by the Department of Labor can be found here: Department of Labor ACA Resource Page

 

 

The National Labor Relations Board Now Has Five Senate Confirmed Members

August 19, 2013adminLegal News0

From the NLRB:

For the first time since August 21, 2003, the National Labor Relations Board has a full complement of five Senate confirmed members:

  • Mark Gaston Pearce is currently Chairman of the National Labor Relations Board (NLRB), a position he has held since August 2011. He has served as a Member of the NLRB since March 2010. Mr. Pearce was a founding partner at Creighton, Pearce, Johnsen & Giroux and previously a partner at Lipsitz, Green, Fahringer, Roll, Salisbury & Cambria LLP. From 1979 to 1994, he was a district trial specialist for the NLRB in Buffalo, NY. He has served by appointment of the Governor as a Board Member of the New York State Industrial Board of Appeals, and he has taught labor studies courses at Cornell University’s School of Industrial Labor Relations Extension. Mr. Pearce received a B.A. from Cornell University and a J.D. from State University of New York at Buffalo. Board Chairman Pearce will be sworn in later this month for a term ending August 27, 2018, and the President has designated him to continue to serve as Chairman.
  • Nancy Schiffer was Associate General Counsel to the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) from 2000 to 2012. Previously, she was Deputy General Counsel to the United Auto Workers (UAW) from 1998 to 2000. She also worked as Associate General Counsel for the UAW from 1982 to 1998. Earlier in her career, Ms. Schiffer was a staff attorney in the Detroit Regional Office of the National Labor Relations Board and worked as an attorney in private practice. Ms. Schiffer received her B.A. from Michigan State University and her J.D. from the University of Michigan Law School. Board Member Schiffer was sworn in on August 2, 2013, for a term ending December 16, 2014.
  • Harry I. Johnson, III was a partner with law firm Arent Fox LLP, a position he held since 2010. Previously, Mr. Johnson worked at the Jones Day law firm as a partner from 2006 to 2010 and as an associate from 1994 to 2005. In 2011, he was recognized by The Daily Journal as one of the “Top Labor & Employment Attorneys in California”. Mr. Johnson received a B.A. from Johns Hopkins University, an M.A.L.D. from Tufts University’s Fletcher School of Law and Diplomacy, and a J.D. from Harvard Law School. Board Member Johnson was sworn in on August 12, 2013 for a term that expires on August 27, 2015.
  • Kent Hirozawa was chief counsel to National Labor Relations Board (NLRB) Chairman Mark Pearce. Before joining the NLRB staff in 2010, Mr. Hirozawa was a partner in the New York law firm Gladstein, Reif and Meginniss LLP, where he advised clients on a variety of legal and strategic issues, including Federal and state labor and employment law matters. Mr. Hirozawa previously served as a field attorney for the NLRB from 1984 to 1986. He was a pro se law clerk for the U.S. Court of Appeals for the Second Circuit from 1982 to 1984. He received a B.A. from Yale University and a J.D. from New York University School of Law. Board Member Hirozawa was sworn in on August 5, 2013 for a term that expires on August 27, 2016.
  • Philip A. Miscimarra was a partner in the Labor and Employment Group of Morgan Lewis & Bockius LLP, a position he held since 2005. Since 1997, Mr. Miscimarra has been a senior fellow at the University of Pennsylvania’s Wharton Business School. Mr. Miscimarra worked at Seyfarth Shaw LLP as a partner from 1990 to 2005 and as an associate from 1987 to 1989. Mr. Miscimarra received a B.A. from Duquesne University, an M.B.A. from the University of Pennsylvania’s Wharton School of Business, and a J.D. from the University of Pennsylvania Law School. Board Member Miscimarra was sworn in on August 7, 2013 for a term that expires on December 16, 2017.

By:  Mike Cavosie

Spearin doctrine in Indiana

June 12, 2013adminLegal News0

The Spearin Doctrine (so called because of the United States Supreme Court decision that established it)  holds that when a builder strictly complies with the requirements of the plans and specifications, the builder will not be liable for the consequences of defects in the plans and specifications.   In 1the 1992 case of Millner v Murphy, the Indiana Court of Appeals seemingly adopted Spearin when it noted that “a contractor who builds a structure according to plans and specifications supplied by the building owner is not to be held liable if the plans and specifications prove defective.”

The unpublished decision Swami Inc. v. Franklin Drywall II, LLC, again embraces Spearin as it cites and applies Millner..  Defending against Franklin Drywall’s lien foreclosure action, the building owner, which acted as its own general contractor, tried to reduce the lien amount by claiming a back charge for defective work.  In denying the back charge, the Indiana Court of Appeals noted:  “The specifications used by Swami were incorrect.   The oversight done by Swami on the project as the General Contractor was equally incorrect.  This combined to achieve Swami’s current problems with the drywall.”

By:  Mike Cavosie (mcavosie@easterandcavosie.com) and Roy Rodabaugh (rrodabaugh@easterandcavosie.com)

Indiana Court of Appeals: Unemployment compensation and temporary total disability compensation not mutually exclusive

April 26, 2013adminLegal News0

In Platinum Construction Group, LLC v. Christopher Collingsthe Indiana Court of Appeals determined that an injured employee was not precluded from temporary total disability compensation when he had also sought and received unemployment compensation.

On January 30, 2009, Collings suffered neck, back, and hip injuries when a 20 foot by 14 wall fell on him while he was working as a construction superintendent for Platinum.  The physician selected by Platinum concluded that Collings was temporarily totally disabled, and Collings received temporary total disability (“TTD”) compensation pursuant to Indiana’s Worker’s Compensation Act until March 6, 2009, when he was released to full duty.  In the interim, Platinum had ceased business; consequently, Collings sought and received unemployment compensation.

Collings thereafter attempted to return to construction work but was unable to do so because of ongoing pain from the injury.  In 2012, Collings sought additional TTD compensation, and the Worker’s Compensation Board awarded him an $35,526.  However, the Board credited to Platinum the amount that Collings had received in unemployment compensation.

On appeal, Platinum argued that Collings was ineligible for additional TTD benefits because he had applied for and received unemployment benefits. It noted the apparent contradiction between a TTD compensation claim–in which a claimant asserts an inability to work–and an unemployment compensation claim–in which a claimant asserts that he is able-bodied, available, and making an effort to find work.

The Court of Appeals disagreed:

Simply put, Collings was unable to perform work of the same kind and character due
to the injuries that he suffered while working for Platinum. As a result, he met the statutory
requirements to receive TTD benefits. After Dr. Yergler released him to full duty, he
attempted to perform construction work but was unsuccessful. At the same time, he was
willing, able, and available to work in a capacity that was less physically taxing, as required
by the unemployment compensation statute. Because the Board credited Platinum for the
sums that Collings had received as unemployment benefits, Collings did not receive a
windfall. Thus, his benefits cannot be characterized as duplicative. Under these facts, the
Board did not err in concluding that Collings’s receipt of unemployment benefits did not
preclude him from eligibility for TTD benefits.

By:  Mike Cavosie

 

Seventh Circuit Court of Appeals: Insurer not obligated to reimburse additional insured that settled without consent

April 2, 2013adminLegal News0

The United States Court of Appeals for the Seventh District held that an insurer is not obligated to reimburse an additional insured because it failed to obtain consent prior to making voluntary settlement payments.

In West Bend Mutual Insurance Company v. Arbor Homes LLC, the Court  denied Arbor and the plumbing subcontractor’s claim for damages paid out to a homeowner caused by a sewer leak.

Facts: During construction of a new home, Arbor’s plumbing subcontractor forgot to connect the home’s drainage system to the city sewer main.  Upon moving into the home, the new owners noticed a foul smell and raw sewage backing up into their basement.  Arbor paid $65,000 to remediate the damages.  However, the homeowners wanted a new home.  Arbor and the homeowners entered into a settlement agreement wherein Arbor agreed to buy back the home, build another new home, and pay all expenses.

After incurring the damages, Arbor tendered the claim to its plumber and the plumber’s insurance company, West Bend, to be compensated for the damages as an additional insured.  The insurance company refused to pay for the damages relying on the following provision in the policy:

No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.

Arbor mistakenly thought that its plumber provided adequate notice to West Bend and construed its silence as a lack of objection to the settlement.  However, West Bend was never notified until several months after the settlement was finalized and therefore never consented to any voluntary payments.

Decision: The Court held that although Arbor behaved very admirably in addressing the problem, West Bend had no obligation to reimburse Arbor for the damages incurred.  The Court stated that the voluntary payment provision relieved West Bend of the obligation to pay not because the insured provided late notice but because West Bend did not consent to any voluntary payments or obligations assumed by Arbor.

A note to take from this case is do not rely on others when placing insurance companies on notice.  Make sure before handling any claim to place the insurance company on notice, understand the insurance policy and requirements, keep the insurer up to speed on developments, and obtain consent prior to settling any claims.

By: Roy Rodabaugh is an attorney focusing in the area of construction law

Indiana Court of Appeals holds that a “pay-if-paid” clause in a subcontract will prevent a subcontractor from recovering under a payment bond.

July 17, 2012adminLegal News0

In BMD Contractors Inc. v. Fidelity and Deposit Company of Maryland, the Indiana Court of Appeals denied a subcontractor from recovering for unpaid sums under a payment bond because its subcontract contained a “pay-if-paid” clause.
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Indiana Supreme Court rules that a construction manager may contractually limit or exclude liability for jobsite safety

April 24, 2012adminLegal News0

On March 22, 2012, the Indiana Supreme Court issued its opinion in Hunt Constr. Group, Inc. v. Garrett.  The decision affords good news to construction managers and designers who provide construction management-type services.
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Non-compliance with Home Improvements Contract Act does not necessarily make the contract unenforceable

April 6, 2012adminLegal News0

Contracts used by home improvement contractors must comply with the Indiana Home Improvements Contract Act and must include certain information required by the HICA.  While failure by a contractor to use a proper home improvement contract can expose the contractor to significant liability, a recent Indiana case shows that the contract may still be enforced by the contractor.
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