Ky. Ct. App. Adopts New Test for Validity of Non-Compete Agmt

Kentucky Court of Appeals Adopts New Test

For Validity of Non-Competition Agreements

      In a recent decision, the Kentucky Court of Appeals at minimum clarified, although it may be fairly said they have rewritten, the law to be applied in determining whether a non-competition agreement between an employee and an employer will be enforced.  Charles T. Creech, Inc. v. Brown, No. 2011-CA-000629-MR, __ S.W.3d __, 2012 WL 3538351 (Ky. App. Aug. 17, 2012). 

      Donald Brown was an employee, sometimes as a sales person and ultimately working as a dispatcher, for Charles T. Creech, Inc., which was involved in the business of growing and selling hay and straw.  Standlee Hay Company, Inc. was involved in the same industry.  After many years of employment with Creech, Brown was presented with a “conflicts of interest” document containing a non-compete agreement precluding, for three years after termination of service, the employee from working for any direct or indirect competitor of Creech.  Brown continued to be an employee of Creech for two years thereafter.

      In 2008, Brown left his employment with Creech to take a sales position with Standlee.  Creech, in connection therewith, executed a limited waiver of the non-competition clause, although the scope and extent of that waiver is in dispute, and on that basis the Court of Appeals would ultimately remand it for consideration by the fact finder.

      In response to a claim that the non-competition agreement was not supported by consideration, the Court noted that, notwithstanding certain academic condemnation, it is the law of Kentucky (Higdon Food Servs., Inc. v. Walker, 641 S.W.2d 750 (Ky. 1982)) that continued employment itself serves as sufficient consideration.  On that basis, the challenge based upon failure of consideration failed.

      As an aside, it is not clear whether the Court of Appeals is suggesting that the Higdon Food decision should be reversed.  While stating that the decision has been “strongly criticized,” the Court cites only a single law review article from 1987.  Were the Court of Appeals convinced of the invalidity of Higdon Food, it would seem there would be a more expansive recitation of its condemnation.

      Returning to the topic of the non-compete agreement, while it did impose a three-year term, it contained no geographic scope.  Rather, its scope was descriptive in nature, being those companies that competed directly or indirectly with Creech.  Initially, the Court cautioned that the assessment of non-compete agreements is a particularized fact-based issue for which clear rules do not exist:

Both parties point to certain of their factual circumstances they believe are dispositive of the question of whether the covenant not to compete is valid and enforceable because its terms are reasonable.  The proper inquiry, however, is more complex than either party would have us believe.

It is tempting in disputes concerning non-competition agreements to turn to existing case law in search of a single guiding principle or perhaps a collection of hard-and-fast rules which determine the validity of any given covenant not to compete.  In fact, very few bright-line rules govern the inquiry now before us.  2012 WL 3538351, *3.

      Noting the ability of the Court to apply a blue pencil “to modify unreasonable provisions of covenants not to compete, and doing so will save an agreement which might itself otherwise be enforceable” (citing Kegel v. Tillotson, 297 S.W.3d 908, 913 (Ky. App. 2009) and Hammons v. Big Sandy Claims Serv., Inc., 567 S.W.2d 313, 315 (Ky. App. 1978)), it went on to state that “the reasonableness of a covenant not to compete is guided by the following principles:”

An agreement in restraint of trade is reasonable if, on consideration of the subject, nature of the business, situation of the parties[,] and circumstances of the particular case, the restriction is such only as to afford fair protection to the interests of the [employer] and is not so large as to interfere with the public interest or impose undue hardship on the party restricted [the employee].  2012 WL 5358351, *4 ([bracketed material in original]).

      The Court then discussed each of these factors, explaining the source and import of each.  Ultimately, summary judgment was reversed and the case remanded “to give the parties the opportunity to put forth sufficient proof for proper resolution of the case under this analysis.”  2012 WL 3538351, *7. 

      It bears noting that the Court did not provide any sort of weighting analysis vis-à-vis these various factors.

Sohal Properties Ordered Not To Be Published

Kentucky Supreme Court Directs That Sohal Properties

Decision on Excess Liquidated Damages Not be Published

      Previously reviewed in this blog (October 25, 2011), was the holding of the Kentucky Court of Appeals in Sohal Properties, LLC v. MOA Properties, LLC, it addressing whether a non-refundable deposit/liquidated damage provision would be enforceable under Kentucky law.  The Court of Appeals found it was not enforceable.

      Discretionary review was sought to the Kentucky Supreme Court.  On August 15, 2012, the Supreme Court denied discretionary review, but at the same time ordered that the opinion of the Court of Appeals not be published.  2011 SC-000711-D.

Agreement to Arbitrate Enforceable As To Claims Against Affilaites and Their Employees

Agreement to Arbitrate Enforceable as to Claims Against

Affiliates of Named Party and Their Employees

 

       In a recent decision of the Kentucky Court of Appeals, it was held that an agreement to arbitrate would extend to disputes with the affiliates of the named counterparty and as well its employees.  Palazzo v. Fifth Third Bank, 2012 WL 3552633 (Ky. App. Aug. 17, 2012) (Not To Be Published).

       Rhonda Palazzo appealed the dismissal of her complaint against “Fifth Third Bank” and Catherine Mitchell, a Fifth Third employee, in favor of an agreement to arbitrate.  Mitchell had, on behalf of Fifth Third Bank and/or Fifth Third Securities (the Plaintiff in her complaint, loosely referred to Fifth Third Bank and Fifth Third Securities as “Fifth Third,” a decision that would ultimately be much to her detriment) recruited Palazzo as a securities representative.  In that position, albeit on terms not clear the Court of Appeals, she was jointly employed by Fifth Third Securities and Fifth Third Bank.  In connection with joining the firm, Palazzo had signed a Form U-4, it containing an agreement to arbitrate disputes with her firm.  Palazzo filed suit against both Fifth Third Bank/Securities and Mitchell, alleging that certain promises made in the course of her recruitment were not satisfied, and as well that she was subjected to gender-based discrimination.  In response to the complaint, Fifth Third sought dismissal in favor of arbitration, that request being ultimately granted by the trial court.

       Acknowledging that she had, with Fifth Third Securities, signed the Form U-4 and the arbitration agreement, Palazzo sought to avoid arbitration of her dispute with Fifth Third Bank, noting that it was not a party to the agreement.

      Initially, the Court noted that Palazzo had treated Fifth Third Securities and Fifth Third Bank as one entity asserting, for example, that “Fifth Third ‘breached its contracts with’ her in that she had relied, to her detriment, on the agreements she had with Fifth Third.”  2012 WL 3552633, *2.  Relying upon North Fork Collieries, LLC v. Hall, 322 S.W.3d 989 (Ky. 2010), the Court held Palazzo to a consistent theory, noting that:

Palazzo cannot, on the one hand, seek the benefit of those alleged contracts between her and Fifth Third Securities and the Bank, and on the other hand, disavow the arbitration provision that is part of those alleged contracts.

      In addition, being persuaded by the decision of the Federal District Court in Kruse v. AFLAC Intern., Inc., 548 F.Supp.2d 375, 383 (E.D. Ky. 2006), the Court found that all of the related party entities stood “in the shoes of the entity that signed the agreement” who could therefore enforce it.  2012 WL 3552633, *3.

      Responding to the assertion that the claims against Mitchell as an individual, would not be subject to arbitration, the Court found, in reliance upon Arnold v. Arnold Corp.-Printed Communications for Business, 920 F.2d 1269 (6^th Cir. 1990), that the arbitration agreement embodied a intent to resolve all disputes in a single arbitration forum and that Palazzo’s claims against Mitchell should be there resolved.

Failure to Disclose LLC Precludes Claim for Limited Liability

Member Who Does Not Disclose That They Are Acting

on Behalf of an LLC Does Not Benefit From Limited Liability

      A recent decision of the North Dakota Supreme Court has again confirmed the rule that, inter alia, if you do not tell people you are acting on behalf of an LLC, you cannot subsequently claim the benefit of the LLC’s liability shield.  Bakke v. D&A Landscaping Company, LLC, __ N.W.2d __, 2012 WL 3516859 (N.D. Aug. 16, 2012).

      Randall and Shannon Bakke (“Bakke”) visited a landscape supply company, Rocks and Blocks, Inc., who in turn recommended Andrew Thomas of D&A Landscaping for certain work to be done at their home.  The Rocks and Blocks representative gave the Bakkes Andrew’s business card, it reciting “D&A Landscaping” and as well including e-mail and website addresses.  Ultimately, Andrew provided the Bakkes with an estimate and a drawing “[r]espectfully submitted D&A Landscaping, 426-4982 Per Andy Thomas.”  Several months later, a second proposal was submitted, this one by “D&A Landscaping Per Andy Thomas.”  The work was subsequently performed, but in a manner not satisfactory to the Bakkes.  Thereafter, they received an invoice from “D&A Landscaping, Inc.”; in fact, the proper legal name was “D&A Landscaping Company, LLC.”

      Not being satisfied with the work performed, the Bakkes filed suit against numerous business organizations including D&A Landscaping, LLC, and against Andrew Thomas individually.  Ultimately, a jury would hold Thomas, individually, liable on the claim to the Bakkes.  On appeal, he asserted that there were insufficient facts to justify piercing the veil of D&A Landscaping, LLC.  In response, the Bakkes noted that they were not attempting to pierce the LLC’s veil, but rather seeking to enforce the jury’s determination that Andrew Thomas “was personally liable for transacting business in his individual capacity.”   2012 WL 3516859, *2.

      In considering this position, the North Dakota Supreme Court recognized that while members of an LLC enjoy limited liability:

The Bakkes’ theory of Thomas’ liability was that he acted individually and that Thomas never disclosed he was acting as an agent for D&A Landscaping, LLC.

Upholding the jury’s determination, the Court noted that:

The evidence includes a business card, an estimate, a drawing and proposals, none of which indicated that D&A Landscaping Company, LLC was a limited liability company or that Thomas was acting as an agent for the company.

      Under the rules of agency, an agent acting on behalf of a disclosed principal is not a party to the agreement and is not liable for its performance.  Where, in contrast, the agent does not disclosure the existence of the principal, the agent is himself a party to the agreement, subject to liability for its breach.  See Restatement (Third) of Agency §§ 6.02, 6.03 (2006).  Having not made clear that he was acting on behalf of his LLC, Andrew Thomas, the individual, was properly held liable to the Bakkes.

      Cases of this nature are, somewhat curiously, not rare.  In the Colorado decision Water, Waste & Land, Inc. v. Lanham, 1998 WL 1112869 (Co. March 9, 1998), the Colorado Supreme Court held Lanham, a member and manager of the LLC, personally liable for work done on behalf of the undisclosed LLC.  In Perry v. Ernest R. Hamilton Associates, Inc., 485 S.W.2d 505 (Ky. 1972), an individual retained an engineering firm to lay out a proposed subdivision but without disclosing that the proposed subdivision was owned by a corporation.  Ultimately, fees due the engineering firm were not paid, and they brought suit to collect.  In response, the individual with whom they had dealt cited the existence of the corporation as a defense to his personal liability.  Rejecting that notion, the then Kentucky Court of Appeals held the individual personally liable for the fees as he had failed to disclose the existence of the corporation or otherwise put the engineering firm on notice that it was dealing with other than him.

The Distinction Between Direct and Derivative Claims

Appellate Decision in Partnership Dispute Clarifies Distinction Between Direct and Derivative Claims

Here is a link to the discussion of a recent New York consideration of the direct versus derivative distinction.

Principal's Agent Not the Agent of the Principal's Constituent

The Buck Stops Here:  Vicarious Liability for

Actions of Agent Limited to Actual Principal

      In a recent decision, the Kentucky Court of Appeals made clear that the vicarious liability of a principal for the actions of the agent are restricted to the actual principal.  James v. James, No. 2007-CA-001837-MR, 2012 WL 2945518 (Ky. App. July 20, 2012). 

      Donald James (“Donald”) established an irrevocable trust for the purpose of owning James Medical Equipment, Ltd. (“JME”).  This separation of ownership was necessary in order to satisfy certain requirements of the Medicare law, they otherwise being violated by cross-referral between commonly owned entities.  Ultimately, Thomas James, nephew to Donald (“Thomas”), a healthcare attorney practicing in Washington, D.C., was appointed the trustee of that irrevocable trust.  It later came to pass that Donald, still exercising operational control over JME, proposed to transfer its clients to another entity he owned for the purpose of rendering JME judgment proof against claims from Medicare for improperly paid benefits.  In response, Thomas, as trustee of the irrevocable trust controlling JME, terminated Donald’s authority to act on its behalf.  Thomas in turn hired new management for JME, Copeland, who effected a financial turn-around for JME.

      Ultimately, pursuant to other litigation, it was determined that Donald had the authority to terminate the irrevocable trust that controlled JME.  After doing so, he discovered that Copeland and another JME employee had themselves started a competing business, Breathe Easy, to which they had transferred numerous of JME’s customers.  In response, Donald filed suit against Thomas asserting a breach of fiduciary duty.  Ultimately, the jury found in favor of Thomas, the Court having rejected a proposed instruction, namely:

For purposes of this instruction, if you find that Sharon Morrison Copeland was acting within the scope of her apparent authority as an agent of the Defendant, James, then the Defendant would be liable for the fraudulent acts of his agent even if he did not know of the agent’s wrongful acts.

      The Court of Appeals, upholding the rejection of the proposed instruction, wrote:

There is no question that Thomas, as a trustee, owed Donald a duty to exercise such care and skill in administering the trust as a man of ordinary prudence would exercise in dealing with his property, or to exercise such skill as a trustee has, if greater than a man of ordinary prudence.  Bryan v. Security Trust Co., 176 S.W.2d 104 (Ky. 1943).  Further, “a [t]rustee is personally liable for torts committed by an agent or employee in the course of the administration of the trust.  The principle of respondeat superior is applied to the trustee just as though he were the owner of the trust property free of the trustee.  His liability is the same as it would be if he were not a trustee.  It is immaterial that the trustee receives no benefit from the trust.”  Cook [v. Holland], 578 S.W.2d [648] at 742 [Ky. App. 1978].

The flaw in Donald’s argument, however, is that Copeland was not an agent or employee of Thomas in his capacity as trustee.  Rather, Copeland was an employee of JME, whose stock was owned by the trust.  Copeland never worked for Thomas personally, nor was she paid by Thomas or trust proceeds.  In fact, under Donald’s interpretation of the law, every employee of JME would be Thomas’s agent, making him vicariously liable for every alleged act of every employee.  Clearly, the law as established in Cook did not expand the scope of vicarious liability to such an extreme position.

      The Court went on to explain that even were Copeland Thomas’s agent, no liability would attach.

      Ultimately, the agent of a principal is not, in turn, the agent of the principal’s constituents.

Claim for Securities Fraud Against Law Firm

Courthouse News Service

Here is a link t an interesting story about a suit filed against the attorneys to what was ultimately a fraudulent real estate venture.  The defrauded investors are asserting that the firm is liable for their losses.

Recovery in Quantum Meruit Denied Contingency Fee Attorney

Attorney Lacked “Good Cause” to Withdraw from Representation

and Recover Fee In Quantum Meruit

      A recent decision of the Kentucky Supreme Court addressed when an attorney may withdraw from a representation and thereafter recover in quantum meruit.  Lofton v. Fairmont Specialty Insurance Managers, Inc., 2010-SC-000749-OG (June 21, 2012).

      Lofton entered into a contingency fee arrangement with his client, Maxey, in connection with an automobile accident.  On behalf of the plaintiff, the insurer offered $25,000 in settlement.  While Lofton thought that settlement should be accepted, Maxey did not; she valued her claim at at least $1.2 million.  On the basis that the client was not following the attorney’s advice, Lofton withdrew from the representation.  Thereafter, after having acquired new counsel, the insurer again offered $25,000, which amount was accepted by Maxey.  Lofton sought to recover in quantum meruit for the time and effort he had expended in the matter, it having been substantially all the work that was done in connection with the plaintiff’s $25,000 recovery.

      The Supreme Court reviewed both the requirements for bringing a claim in quantum meruit and as well the ethical rules applicable to an attorney withdrawing from a representation, determining that “good cause” for withdrawing from the representation must exist in order for there to be a viable claim in quantum meruit.  On the facts, however, the Court found that no claim was possible.  Had Lofton and Maxey entered into an agreement specifying an acceptable settlement range that Maxey sought to repudiate after a settlement in that range was offered, there would have existed good cause.  However, where, as here, there had been no such agreement, and as well where the attorney had not otherwise protected himself in the engagement agreement, good cause did not exist.  Ergo, the fact that withdrawal under the ethical rules is permissible should not be equated with a determination that withdrawal has good cause to give rise to a claim in quantum meruit.

      In certain respects, this decision seems harsh to Lofton.  There seemed to be no question that the replacement attorney did not expend any significant effort on the case prior to the plaintiff’s acceptance of the simply repeated settlement offer of $25,000.  This decision should prompt plaintiff’s attorneys to carefully scrutinize their engagement agreements to protect a possible claim when the client changes attorneys.

Cannae

Cannae

      Today is the anniversary of the Battle of Cannae, fought in 216 BC as part of the Second Punic War.  Hannibal, the great general of Carthage, had invaded Italy after marching his army from Spain (and yes, he did bring with him war elephants).  The Romans dispatched an army under the joint command of the two consuls, and they met at Cannae in southwest Italy near the coast. 

      The Roman forces outnumbered those of Hannibal, and as the forces met the Carthagenian line began to give way.  Sensing victory the Roman forces pushed forward and into their doom.  Even as the center of the line withdrew the wings advanced forward; the Roman forces were not breaking the enemy line but gradually enabling their own encirclement.  Eventually the entire Roman army would be encircled; those at the front were crushed by those around them and left unable to fight.  Ancient casualty figures are often inaccurate and unreliable, but it is reported by Livy that the Roman forces, some 86,000 at the start of the day, suffered 70,000 killed, 10,000 captured and 3,000 survivers.

      None of Hannibal’s elephants fought at Cannae – by then all had died or been killed.