By Natalie White

A remarkable $43 million jury verdict against First American Title Insurance earlier this year shows that juries take non-compete agreements seriously, and in an increasingly aggressive business recruitment climate it tells a cautionary tale.

The jury in the Ohio case apparently believed Chicago Title Insurance Company’s claims that First American’s hyper-aggressive recruiting campaign siphoned off dozens of key employees and millions of dollars in profits in the central Ohio title insurance market.

The non-compete verdict, which included over $32 million in punitive damages, is “shocking,” according to Stephen Fox of Fish & Richardson in Dallas. “It’s clear that someone made the jury mad.”

Fox, who specializes in employment litigation, said, “What the verdict says is that you have to take care not to thumb your nose at your former employer or rub your former employer’s nose in it when you have a non-compete agreement. And the same goes for the new employer. If you’re doing the hiring, then you need to face the reality that you could end up in a lawsuit.”

According to non-compete expert Jay Shepherd, “The most important factor is the ‘story’ of the case itself. The more outrageous your conduct is, the more likely you will lose, even if you think you have clever legal arguments to get out of it. If the jury sees you as the wrongdoers, you’re done.”

The lessons for in-house counsel to be drawn from the Ohio case are applicable across the country, said Shepherd, who devotes about 70 percent of his practice to trade secret and non-compete cases.

“Before your company hires someone despite a non-compete, make sure your ‘story’ is going to play well in front of a judge and jury,” he advised. In fact, a good ‘story’ may be more important even than good law, observed Shepherd, who is based in Boston.

“We lawyers tend to fall in love with our clever legal arguments,” he said. “We go out and find some obscure case to base it on. But if you can’t sell it to the jury that you were righteous and justified, then it’s going to look like nothing more than an attack on another business. I think that’s what happened in this case. [First American] didn’t have a very good ‘story’.”

He said part of the reason this case hit such a high sum is that it involved both non-compete issues and the sale of business.

“This case has a long non-compete – five years – and normally that wouldn’t be enforced. But it also involved the sale of a business, and courts are much more willing to uphold non-competes in this kind of business context,” said Shepherd.

The January verdict in Chicago Title Insurance Corp. et al. vs. James Magnuson et al., Docket No. C2-03-368, included $10.8 million in compensatory damages, and was tried before Judge Gregory L. Frost in the U.S. District Court for the Southern District of Ohio.

Echo Effect

While extraordinary in size and unique in its facts, the case echoes other jury verdicts in similar cases across the country, said Steven A. Goldfarb, lead attorney for the plaintiff, Chicago Title Insurance Company.

“There are a lot of cases like this out there,” said Goldfarb, a partner at Hahn, Loeser & Parks in Cleveland. “Maybe they don’t involve significant compensatory and punitive damages because they don’t involve defendants this size, but juries are coming out with verdicts supporting non-competes, and with punitives. If non-competes are reasonable, especially non-competes for the sale of a business, the law is pretty clear. If you can prove your case, you’re going to win.”

Ann Knuth, who focuses on employment law, said Chicago Title’s pricey verdict against its archrival First American highlights how high the stakes can climb.

“One of the biggest lessons to be learned here is that non-compete cases do go to trial and the risks can be great,” said Knuth, who practices with Benesch, Friedlander, Coplan & Aronoff in Cleveland.

She added that in some circles non-compete issues are not treated seriously enough because the general thinking is that they never make it to a jury.

“Most cases reach resolution before they get to this stage. But for those who say they’ll never [go to trial], they need to think about each case as if they might be before a judge and jury,” Knuth suggested.

Minefield Maneuvering

Maneuvering through the minefields of non-compete and non-disclosure agreements has become more challenging than ever for corporate counsel, legal employment experts said. At stake are top executives, trade secrets, customer bases, intellectual property – and sometimes, as in the Chicago Title case, multi-million dollar verdicts.

“Most in-house counsel find themselves on both sides of the issue if they’re in a competitive industry,” said Goldfarb, who represented Chicago Title along with Mark A. Watkins and Ross M. Babbit.

“It’s a difficult spot for in-house counsel because their companies are after top business recruits and at the same time their own people are also being recruited by others,” said Goldfarb.

“In-house counsel have to give advice with the idea that what’s good for the goose is good for the gander,” he said. “They need to view it with a consistent eye and this can be a difficult chore. They need to recognize that they must seriously protect their company’s contractual rights or they are of no value. But if they are saying that it’s important to have standards and efforts to control aggressive recruitment from their own company, they need to think seriously about that when they go recruiting.”

First American, he said, apparently did not.

Employment attorneys said courts are more likely to support strict non-competes when an individual receives substantial compensation such as from the sale of a business, but are more reluctant to enforce far-reaching restrictions when an employee simply receives his or her employment as part of the agreement.

These agreements are not considered enforceable if they unreasonably restrict a person’s ability to make a living, such as keeping a person out of an industry long after his or her knowledge is valuable in the marketplace.

Aggressive Campaign

In 1991, as part of the sale of the business from Chicago Title Agency of Central Ohio to Chicago Title Insurance Corporation, Magnuson sold his interest in Chicago Title Agency of Central Ohio, the legal predecessor to Chicago Title.

Magnuson received more than $2 million in connection with this sale, and as part of the purchasing agreement Magnuson was required to enter into an employment agreement that contained a non-compete agreement, which prohibited Magnuson – for a period of five years after the ending term of the agreement – to “engage in any business, including that of a title insurance agency…whether as an owner…officer, investor, employee or otherwise which is in competition with [Chicago Title] or its affiliates..”

Chicago Title has its main headquarters in Chicago while First American has its main headquarters in California. Both are national companies, dealing in the lucrative field of title insurance, each employing about 30,000.

Magnuson continued to work for Chicago Title until the end of 2002, when he resigned and immediately went to work for Talon Group, a newly created division of First American, which was trying to break into the title insurance market in the central Ohio region.

Chicago Title claimed that First American intentionally lured former Chicago Title executive James Magnuson to leave Chicago Title and violate his non-compete agreement.

After Magnuson was hired to head up Talon, 30 of Chicago Title’s approximately 100 employees left to join Talon. Nearly all of Talon’s employees came from Chicago Title. Magnuson had access to customer lists and computer programs that were developed by Chicago Title.

Goldfarb said his client was able to show that the title insurance market in Ohio is worth about $3 to $4 million a year, giving the jury something to sink its teeth into when considering compensatory damages.

When it came to punitive damages, Goldfarb said the plaintiff argued that First American and Magnuson, who was indemnified by First American when he came aboard, intentionally set up Talon and Magnuson in central Ohio despite the non-compete agreement. They also deliberately tried to decimate Chicago Title’s workforce in the region, and targeted Chicago Title’s customers.

The defendants used a computer program almost identical to one developed by Chicago Title during Magnuson’s tenure there, according to Goldfarb.

“Part of our argument to the jurors was that if you just award compensatory damages, then the defendants will see this simply as the cost of doing business. They would have paid $10.8 million for starting up a business in this area. Why wouldn’t they do that to get a business with $4 million in annual revenues?” Goldfarb said. “The object of punitive damages is to deter future misconduct and in order to do that the punitive damages had to be great in this case.”

He said First American’s defense did not sway the jury.

“Their defense was basically that they didn’t think they violated the non-compete, and, even if they did, that’s not what caused the harm. The other 30 employees that left did not have non-competes. They pointed out that they were free to leave whenever they wanted and work wherever they wanted and that Magnuson wasn’t directly involved in their recruitment,” Goldfarb said.

Talon’s employment agreement with Magnuson spelled out his duties in such a way as to not seem to violate the non-compete, according to Goldfarb, but then they indemnified him and set him up for business in Cleveland.

“The jury just didn’t buy it,” Goldfarb said.

First American has said in a regulatory filing that it plans to appeal the verdict. Defense counsel did not return requests for comment.

Taking Stock

The title industry is still talking about Chicago Title’s win against First American Title Insurance Company, sending many companies back to take stock of their own non-compete contracts, Goldfarb said.

Corporate counsel in other industries should do the same, said Ronald W. Peppe II, a vice president of the Association of Corporate Counsel who advises in-house counsel on such issues.

“Non-competes are becoming a much more serious issue. Companies are relying on intellectual property and trade secrets now more than ever, and now more than ever people are more mobile than they ever were, said Peppe, who served eight years as general counsel for Canam Steel Corp. “It used to be non-competes were just about the sales guy and a customer list, but it’s about so much more now when secrets can go with the person.”

Surprisingly, Peppe said, many in-house counsel are left out of the loop when it comes to non-compete agreements. Often these agreements are part of hiring packages and paperwork handled by human resources departments and are not reviewed by in-house counsel.

“In many cases, in-house counsel are not very well integrated into the human resources end. They may not even know what documents are being used,” Peppe said.

Many disputes regarding non-compete agreements stem from misinformation and misunderstandings.

“Sometimes a new employer doesn’t realize a new employee is bound by some sort of restrictions or agreement until they get that cease and desist letter. Then you’re caught in a tough situation,” Knuth said. “The questions should be asked early, and the job tailored before the person walks in the door.”

Peppe said in-house counsel should be advising their companies to ask up front whether a potential employee has signed a non-compete contract with his or her current or former employee. If so, that contract should be taken into consideration before any hiring is done.

He said companies may want to ask for a new employee to sign a release saying he or she is not bound by a non-compete agreement.

“From a hiring perspective, in-house counsel should advise companies to make sure they ask about non-competes as part of the hiring process, right up front. A company is less likely to be hit with a large judgment if the company is unaware of the non-compete and did ask about it,” Peppe said. “It is clear that a company faces large exposure if it is aware of, and then ignores a non-compete.”

Fox of Fish & Richardson agreed.

“It’s very important, especially when an executive is being hired, that the in house lawyer sit down with the prospective employee and ask, ‘do you have an employment agreement, and if so, let’s see what the restrictions are and what kind of confidentiality is involved,'” Fox said. “The lawyer needs to ask the employer, ‘what kind of job do you intend to have this person do? Is there a crossover that might conflict with the restrictions.’?”

Fox also suggested that the hiring company should “say to the potential employee both orally and in writing, ‘we don’t want you to bring anything with you, no electronic files, no paper files, etc. Nothing but what’s in your head.’ This will make it harder for the employer to be held liable.”

He also cautioned against indemnifying a new employee if he or she is sued for violating a non-compete agreement.

“Although it is not unusual for top executives, this is very dangerous, very problematic, for the new employer to do,” Fox said. “It makes it appear that the employer is anticipating litigation. The message the jury gets is that the new employer is willing to take the old employer on, and they’re expecting the employee to be sued. If you do it, you better be sure that person is very valuable because it’s hard to argue later that you weren’t encouraging it.”

Admittedly, it can be hard to enforce many types of non-compete agreements, especially if they are not reasonable – including time frames that are excessive or covering too wide a geographic area. And in some states, such as California, typical non-competes are almost never upheld.

But done properly they can provide some protection for companies.

Knuth recommended exit interviews with outgoing employees, during which the former employer should remind the employee of any non-compete agreements and provide them with a copy. She said some companies also require that the employee provide a copy of such agreement to the new employer, and check to make sure the agreement actually gets there.

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