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California Non-Compete Agreements, Lanham Act, Non-Compete Agreements, Technology

Temporary Software Engineers in California Non-Compete Dispute

A strange case out of California:   A company called Zora Analytics contracted with a company called AnanSys Software for the placement of temporary software engineers.  AnanSys then subcontracted out the job to a company called Cigniti.  AnanSys made Cigniti sign a software consulting agreement, which contained a non-compete/non-disclosure agreement.  Cigniti then assigned one of its engineers, Sakhamuri, to the Zora project.  It’s already getting complicated.

In April of 2009, Zora landed a contract to provide certain data warehouse services to Oregon’s Business Development Department (“the Department”).   Sakhamuri provided these services to the Department under the Zora banner.    Apparently, things went well.  Over the next two years, Zora won a number of additional contracts to continue performing this work for the Department.  Then in May 2011, Sakhamuri, the contractor, suddenly disappeared and ceased working on Zora projects.

More than a year later, the Department sent a work order, ostensibly intended for Zora, to Sakhamuri at his email address, which was attached to the domain of a company called Nivas Technologies.  The work order indicated that Sakhamuri was a key person assigned to perform the work under the contract.  The work order did not contain any indication that it was intended for Zora.  But this could be inferred based on the history between the parties.  Nonetheless, the order went to Sakhamuri.  Apparently, seizing on the opportunity, Sakhamuri did the work and he, Nivas and Cigniti got paid for it.  When Zora found out about the situation, the company sued.

Zora brought basically every claim imaginable.  First, Zora sued both Sakhamuri and Cigniti for breach of contract.  Remember, there are two contracts at issue:  The original Zora/AnanSys contract for procuring the software engineers and then the AnanSys/Cigniti contract, which subcontracted out that task and which contained a non-compete provision.  The obvious problem here is that Zora did not have a contract with Cigniti or Sakhamuri.  Nonetheless, Zora argued (1) that it was a third party beneficiary of the non-compete provision contained in the one contract and could enforce that provision and (2) that defendants had breached one of the contracts because their work performance was unsatisfactory.  As a rule, breach of contract claims are hard to knock out on a motion to dismiss.  But here, that’s exactly what happened.  First, the court threw out the non-compete claim because that simply does not fly under California law.  Then, the court threw out the other “unsatisfactory performance” contract claim because Zora – who was not a party to any contract with Cigniti  or Sakhamuri– could not even make out the basic elements of a breach of contract claim.

Zora also pursued a number of other claims, including a rather speculative Lanham Act claim.  According to Zoro, Sakhamuri and Cigniti were somehow passing themselves off as Zora or Zora agents/employees when they independently performed work for the Department’s.  The court rejected this theory, noting that nothing in the record suggested either Sakhamuri or Cigniti had made any misrepresentations.

Zora also brought claims for tortious interference, unfair competition and negligent hiring.  These claims fared no better.  In the end, the court also dismissed all counts.  The takeaway:  As many practitioners know, non-compete agreements in the employment context are illegal in California.Putting that fact aside, the case raises an interesting issue about non-compete agreements and third party beneficiaries.  Recall that Zora contracted with AnanSys to procure temporary software engineers.  Then AnanSys contracted with Cigniti to procure those engineers.  The Court held that Zora was a third party beneficiary of the software consulting agreement between AnanSys and Cigniti.  But the way the non-compete provision was written, the intent of that provision was clear.  We are dealing with temporary staffing.  The non-compete provision was written to prevent temporary employees from cutting out the middle man (AnanSys) and going to work directly for the company’s clients (Zora).  In some instances a third party beneficiary to a contract can enforce a non-compete agreement, but not in a situation like this one.  The case is Ritani, LLC v. Aghjayan, 11 CIV. 8928, 2013 WL 4856160 (S.D.N.Y. Sept. 9, 2013).

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida.  He focuses his practice on competition, particularly cases involving non-compete, trade secret and antitrust disputes and represents clients in Florida and throughout the country.  He is licensed in all Florida federal and state courts and routinely represents clients in Fort Lauderdale, Miami, West Palm Beach, Boca Raton, Fort Myers, Tampa, Orlando, Jacksonville, and Sarasota.

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