New York’s Skeptical Take on Noncompete Clauses

In the first week of April, Judge Elizabeth Wolford of Rochester ruled that the noncompete clause that Joshua Bouk had signed for Veramark Technologies was too broad and did not have to be enforced in this instance.

Bouk had originally worked for Veramark and had signed a non-compete clause. The clause stated that Bouk could not use confidential company information, solicit Veramark customers, or compete with Veramark for 12 months after he left the company. Shortly after, Bouk was hired by Cass Information Systems, Inc. and signed an agreement that he would not use Veramark’s confidential information against them when selling to customers. Regardless of this, Veramark filed a suit to bar Bouk from working for Cass.

Judge Wolford decided that this suit was unnecessary. She used the precedent BDO Seidman v. Hirshberg, 93 NY2d 382 (1999) in her argument that any noncompete that is written too broadly for the general purposes of preventing competition won’t be enforced. In fact, in using that previous appeals case, she went so far as to say that this was New York’s stance on the law.

Veramark believed that having Bouk employed by a competitor would end up hurting its public relations. They tried to paint him as untrustworthy. The plainiffs representing the company used the relatively short amount of time before he started working for Cass (he left Veramark on January 31 and began working for Cass on February 3rd. However, Judge Wolford would not accept that argument without some evidence of misuse of information to back it up.

The noncomplete clause, as an idea, is generally regulated at the state level. For instance, New York’s law does allow for noncompete, but is generally skeptical of claims against it. Other states (like Oklahoma and North Dakota) do not allow these clauses in any form. Meanwhile, a state like Florida allows companies to protect against any privy information or trade secrets, important customer relationships, or any extraordinary training. However, they do not hold the new hiring company liable for any violations of the noncompete form. Florida courts believe that an employee is predisposed to violate the noncompete before the new hiring company chooses to hire them. Therefore the employee is the one liable.

So what happens when this noncompete idea crosses state boundaries? For instance, what if a website based in Wisconsin is trying to sell hiking shoes for women. They have a list of vendors and return customers that are worth a fortune. One of their employees quits, signs a noncompete, and then decides to create his own website based in North Dakota that also sells hiking boots. Inevitably, the original hiking boots company loses a few of its return customers to this new site. Does that original website have any recourse? The answer is muddy at best.

Many court cases try to decide which state has the greatest interest in the case. If a suit is filed in North Dakota, but the courts decide the issue is more related to Wisconsin, the case may not make it far.

California has had a couple of interesting cases dealing with this. For instance, in Advanced Bionics v. Medtronic (2002), the California Supreme Court ruled that it lacked the jurisdiction to enjoin litigation in another state. In this case, a California resident was involved in a noncompete clause based in Minnesota. Because the suit and the noncompete were involved in a different state, California allowed Minnesota to enforce the clause as it saw fit.

It all makes for an interesting decision on whether or not to enforce a noncompete. If you’re an employer and your state allows it, a noncompete clause makes great sense. However, if a former employee decides to breach this clause, the decision on whether to enforce it becomes the more difficult strategic decision.

The Moral Clause in an Athlete’s Shoe Contract

Athletic endorsements are a bigger business than ever before. The Wheaties box used to be the pinnacle of athletic marketing, now it’s an afterthought. Basketball players like Dwayne Wade and Kevin Durant are creating fake feuds to promote their newest basketball shoes on twitter. Aaron Rodgers is a spokesman for everything from pizza to insurance. Subway likes to infer that some of the world’s greatest athletes eat their meals at their restaurant to stay fit. And they keep doing it because people keep responding to it with purchases.

This isn’t an argument as to how influential athletes should be in our lives. Rather, it’s recognition that the influence is greater than anyone wants to admit. If a shoe company can get an all-star to smile while wearing their footwear, it can mean gigantic returns. It’s in the best interest of the company to align their reputation with that of the endorser. So what happens when that image is tarnished?

Let’s say a site that sells cheap basketball shoes like this one wanted to pay Chris Paul an exorbitant sum of money to mention their website in a commercial. The basketball playing public generally respects Chris Paul’s opinion on where to go for good basketball shoes, so the company’s sales would balloon. However, if Chris Paul did something to destroy his good favor, his endorsement could potentially drive customers away from the website. Not only would the basketball shoe website lose out on the huge sum of money they paid him, but they would be losing even more revenue in the customers that refuse to shop there in principle!
Tiger Woods, Kobe Bryant, Lance Armstrong; the list could go on much longer. These are athletes who made multiple fortunes attaching their “brand” to shoes, golf clubs, bracelets, etc. These are also athletes who lost their endorsements due to incidents that severely damaged their reputations. Tiger’s contract with AT&T was terminated when news of his extra marital affairs surfaced. When Kobe was accused of rape, McDonalds voided their contract with him. While Livestrong still “lives on,” it does so without any further affiliation with Lance Armstrong. If these stars signed endorsement contracts for a specific period of time, how are the companies able to get out of them?

While insurance can cover a corporation in the event of injury or death, the language in their contract is the only thing they can use to get out of a bad PR situation. Most companies include what is called a morality clause (or a good-conduct clause). It reserves the right of the endorsee to void the contract in the event that an athlete performs an action which damages their ability to endorse effectively.

While the moral clause itself is standard, the language used to outline it is hardly. Like everything else, the major points in this clause are all negotiable, and can take many different forms depending on what the endorser and endorsee agree upon. Some may only include arrests; others may include “any situation or occurrence including the use of drugs or alcohol or any actions causing the endorser to be in public scandal, contempt, or ridicule.

The judge in such instances can also be negotiated. Generally, corporations like to hold onto the power to decide what is and what is not morally corrupt behavior. But often times, the athlete will have the ability to challenge or bring the dispute to an arbitrator.

Nearly every contract includes a morals clause nowadays, and the future will see a further evolution on the concept. As athlete’s profiles continue to rise, they will require an increasingly large investment from the shoe companies that wish to use their image. It’s up to these companies to protect themselves from getting stuck in a bad investment with an unmarketable player.

The Past, Present, and Future of Internet Sales Tax

The internet has been considered the “Wild West” of our economy for nearly 20 years now. Very little regulation has been able to stick. And as more and more people find shopping online to be as easy as driving out to a brick and mortar location, states find themselves missing out on billions of tax dollars.

New York was the first state to try and do something about this. In 2008, they passed a statute to impose a tax on out of state retailers. Encouraged by their success, states like California, Texas, Illinois, Pennsylvania, and Georgia all passed regulations of their own. These laws often had different caveats for where the product was shipped from and what type of item was purchased. With the “Great Recession” in the first decade of this century, it was an easy target for the government with untapped revenue potential.

Although state supreme courts have taken action (Illinois’ law was struck down in early 2014), federal courts have declined to rule on the topic. Therefore, it becomes increasingly tricky to determine whether a company that may or may not have a physical presence in the state is bound by their laws.

Forty-Five years ago, in 1967, the Supreme Court set somewhat of a precedent. In the case National Bellas Hass vs. the Department of Revenue of Illinois, the court determined that the state can’t claim jurisdiction over a corporation unless that corporation has a physical presence within that state. Bellas Hass was a mail order company just outside of the Illinois borders that sent an annual catalog to its previous customers. Those who lived in Illinois were free to purchase items from the catalog, but the company had no presence in the state outside of those catalogs. The Supreme Court ruled against Illinois, saying that the whole purpose of the Commerce Clause was to eliminate some of the red tape involved with local bureaucracy.

While Illinois’ laws were struck down (and again with the internet version in 2014), New York’s courts have largely supported their law. They argued that while companies like Amazon have not created a literal physical presence in the state, they “employ” an affiliate sales force to drive traffic to their sites. Since many of these affiliates live in New York, the court ruled that this was enough of a physical presence to be subject to taxation. As a reaction, Amazon removed their affiliate program from the State.

To make things more complicated, Amazon also uses 3rd party sellers on its website. In this instance, they act merely as a middle man to bring buyer and seller together. Therefore, the seller still has a presence in the state (and is holding the inventory in that state) and would cause Amazon to be subject to the same taxation laws.

With no clear federal resolution in the near term, it appears as though it will be up to the states to dictate whether an online company needs to pay sales tax within their jurisdiction. Recently, e-commerce companies are raising support to pressure congress to get involved and create a more uniform law for internet capitalism. Until then, it appears that sales tax laws will become more and more entangled.