Our latest non-compete saga begins in far off Calcutta, India. (Yes, “India,” not Indiana.) Kinkar Saha began his company, CodeClouds, in that remote land. He later relocated to New Zealand. Brian Hill began working with Saha on web development. They formed Long Tail Corporation in 2012, and each became shareholders. Their business: “affiliate marketing”—that segment of e-commerce in which interveners generate sales by directing traffic for businesses and people to websites. CodeClouds continued to exist as a separate legal entity and spawned CodeClouds Austria, CodeClouds New Zealand and CodeClouds USA. One computer system serviced all the entities.
In 2014, Hill wanted help increasing sales, and he hired Rex Carroll as an independent contractor to help generate sales. Saha and Hill helped introduce Carroll to the affiliate marketing industry and spent significant time training him.
In 2016, Saha and Hill tried to merge their companies, but failed to consummate the transaction due to the problems created by the foreign origin of the companies. Instead, Long Tail and CodeClouds signed a “non-compete” and non-disclosure agreement, as well as informally agreeing to “dba” status.
In 2017, Carroll was named director of business development for CodeClouds but his job description included helping Long Tail. He also signed a “Non-Solicitation and Confidentiality Agreement” (hereafter the “NSA”) with Long Tail, which was identified as based in Fort Wayne, Indiana.
In 2018, CodeClouds Australia was formed, with Carroll employed first as Director of Business Development and later, Vice-President of Sales. Carroll received significant annual income from this position in the amount of $244,726, which included a salary of $72,500 from Long Tail.
In September of 2019, Carroll resigned. After his departure, Long Tail discovered certain documents were missing: service agreements, phone notes, conversation records. When Carroll returned his computer, it had been wiped to factory reset mode. Carroll also apparently kept/took a contact list of all CodeCloud customers. At some point after September 2019, Carroll formed Sketch Frames, a company which directly competed with CodeClouds.
Unsurprisingly, on January 23, 2020, Long Tail filed suit against Carroll. On March 20, 2020, Long Tail filed an amended complaint seeking a preliminary injunction claiming Carroll had solicited its customers in violation of the NSA and misappropriated trade secrets. Carroll responded that the NSA was unenforceable under Indiana law.
After a preliminary injunction hearing, the trial court enjoined Carroll from basically contacting any customer or prospect or contractor of any Long Tail/ CodeCloud entity. Carroll appealed.
The Indiana Court of Appeals recently issued its opinion on the matter and provides us with excellent illumination of several key points on non-compete law worth more than casual attention.
First, the court highlighted that unlike many other types of reasonableness, the reasonableness of a non-compete remains a question of law for the courts (not a question of fact), with no deference to the trial court’s ruling.
Second, the court will apply a contract’s terms according to their ordinary meeting and, unless truly ambiguous, will not look at evidence outside the document to divine meaning. However, the court remains at liberty to receive such “outside” evidence to show fraud, intentional misrepresentation or mistake in the formation of the contract. It may also be used to “shed light upon the circumstances” of contract formation.
Here, Carroll argued the court cast too wide a net, and none of the CodeCloud entities should have been covered by the injunction. The court disagreed, finding the NSA use of “customer, client or partner” to be sufficiently exact, and appropriately limited, to capture all CodeCloud entities across the globe, using extrinsic evidence (e.g. beyond the contract’s words) to determine the parties’ intent to cover all such entities. The confidentiality provisions likewise reinforced the broad scope of Carroll’s responsibilities. It concluded that all CodeCloud entities did business as part of Long Tail.
As to the status of the information at issue, the court noted that passwords protected the client info, and only five of the 350 employees possessed access to the customer list. The court found the information confidential and protectable under the NSA and affirmed enjoining Carroll on the use of such information.
The court then turned its attention to the solicitation provisions of the NSA and offered perhaps the first appellate court interpretation of the recent Indiana Supreme Court decision of Heraeus Med. LLC v. Zimmer, Inc., 123 N.E.3d 158 (Ind. 2019). In that decision, the court likely made most then current employee non-solicitation provisions in Indiana unenforceable overnight, finding strict requirements must be met before solicitation of employees by a competitor will be enjoined. Just so here, the court ruled that a universal ban on solicitation of “contractors” of the company likewise stood overbroad and unenforceable under Indiana law. The court apparently made no distinction between employees and independent contractors.
Finally, the court looked at Carroll’s argument that the trial court failed to distinguish between past customers and current customers on the non-compete. In doing so, the court made a new and interesting distinction. While current customers, particularly current customers serviced by the employee in question, always possessed protected status, a number of decisions indicated past customers lacked protected status. Here, the court offered a finer point on the question and ruled that past customers also receive protected status if serviced by the employee in question. This final ruling will delight employers and strengthen the non-compete protections available to employers.
Spanning the globe, this recent decision shows that as technology continues to shrink the world, non-compete agreements remain an important part of any business. Failure to give them proper respect continues to be an excellent way to end up in litigation.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.