6th Circuit Upholds Jury Verdict on Forever Non-Compete Under Ohio Law

FOR-EV-ER.  Remember The Sandlot?  That’s what we’re talking about here.  FOR-EV-ER. A recent decision out of Michigan and the United States Court of Appeals for the Sixth Circuit reminds us that some non-competes can last forever and that jury instructions are incredibly important. Let’s take a look:

In 1947, Fred Barton developed a radiator stop leak product. He then formed a company called Bars to sell that product. Bars held a number of relevant patents and trademarks. Over the years, Bars built up a roster of international distributors. Bars would give these international distributors country-specific licenses and sell them the raw materials for its products. The signature product line was “Bar’s Leaks”.

In 1973, Bars entered a deal with one of its foreign distributors called BPI. Bars, BPI and the related principals executed a series of agreements under which Bars agreed to sell to BPI the exclusive right to its foreign business. The deal covered all countries other than the United States and Canada. It gave BPI exclusive right, title and interest in any foreign inventions, patents, and trademarks as well as all good will associated with the foreign business. The agreements were not the most articulately written.

For the next thirty years, everything was fine. Bars and BPI had a good working relationship. Bars sold its products in the US and Canada and sold BPI the raw materials for its products. BPI then manufactured and sold those products to the rest of the world. For years, the two companies shared a booth at auto expos in Las Vegas and referred business back and forth.   In the early 2000s, things went south.

Bars increased the price of its raw materials. Bars then approached BPI and offered to buy back all of BPI’s assets and goodwill. BPI refused. Bars then demanded two-months advance notice on all raw material orders. BPI balked at this and established its own plant to manufacture the ingredients necessary to produce Bar’s Leaks products. Bars countered by acquiring a rival brand named Rislone. Bars then began selling its products on the international market under the Rislone brand. Some of these Rislone products even referred to Bar’s Leaks or Bar’s Products on their labels. The president of Bars even admitted that certain Rislone products were the exact same thing as what they sold under the Bars brand domestically.

In 2010, after BPI attended a Las Vegas auto expo on its own, Bars filed suit for trademark infringement and unfair competition. BPI counterclaimed for breach of contract and unfair competition. The core of BPI’s claim was that Bars breached the 1973 agreements by selling its products abroad. The court dismissed all of Bars claims. BPI’s counterclaims we tried to a jury. The jury found for BPI on its counterclaims and awarded BPI $1.5 million. This number was based on Bars’ sales of Rislone outside of the United States and Canada.

Bars appealed. Here’s where it gets a bit odd: At trial, BPI argued that Bars breached the agreements by (1) applying for foreign trademarks on the same product (2) selling products with the Bars Leaks trademark outside of the US and Canada and (2) selling competitive products under the Rislone brand to customers outside of the US and Canada. The trial court instructed the jury that it could construe the 1973 agreements as including either an agreement that limits competition or an implied non-solicitation covenant. The verdict form, however, asked only whether Bars had “breached an enforceable contract.” There’s a bit of wrinkle here. It sounds like the court told the jury that it could construe the 1973 agreements as a non-compete and non-solicitation agreement. But (1) the agreements did not contain explicit non-compete and non-solicitation restrictions and (2) the 1973 agreements did not have any temporal limitation – meaning they applied forever in perpetuity.

Consider the following: If we treat the 1973 agreements as granting an exclusive license to sell Bars products outside of the US and Canada, then that’s not really a per se non-compete or non-solicitation provision. There, the operative question is whether Bars breached the 1973 agreements by selling Bars products outside of the US and Canada.   But if we allow the jury to treat the 1973 agreements as an implied non-compete/non-solicitation agreement, then the restriction is much broader: Bars would breach the agreement not only by selling bars products, but by selling any competing product (such as Rislone). The verdict form doesn’t help matters because it doesn’t delve into any of this: It just asks “Did Bars breach an enforceable contract.”

The jury answered that question in the affirmative and awarded damages to BPI in the amount of roughly $1.5 million – a dollar amount based on Bars’ sales of Rislone outside of the US and Canada.

In considering all of this, the Sixth Circuit concluded that (1) Even if the jury construed the agreements as containing implied non-compete/non-solicitation provisions lasting forever in perpetuity, that would be permissible under Michigan law because the jury could have found that duration reasonable. The Court went on to note that it might have disagreed with the jury and found such duration unreasonable, but that it wasn’t going to second guess the jury. In fact, to upset the jury’s finding of reasonableness, the court would have to use a “no reasonable juror” standard, and Bars couldn’t meet that high standard (2) The jury could have construed the contract as Bars transferring all of its foreign business in the relevant product line, whether done under its brand or another brand it later acquired.

Another interesting note: Bars did not object to the jury instruction saying the jury could find the 1973 agreements contained implied non-compete and non-solicitation provisions. Bars filed motions in the trial court arguing that there no implied restrictive covenants in the agreements. But at trial they did not object to that particular instruction.

In the end, the Sixth Circuit affirmed the $1.5 million breach of contract claim, vacated a separate damages award against Bars for unfair competition as duplicative, and reversed the trial court’s order dismissing Bars’ trademark infringement claims. The case is headed back down for more proceedings.

The takeaway:

Jury instructions matter. I cannot stress that enough. There was a strange jury instruction about the implied non-compete/non-solicitation. Bars’ counsel should have objected. They did not.  The appellate court ultimately glossed over this, finding that even if the jury instruction was in error, it was harmless. But was it really?

Let’s say Bars’ counsel objects this particular instruction and the court says, “You know what, that is kind of odd. So we’re not going to instruct them that they can construe it as a non-compete or non-solicitation. We’re going to say they have to go based on the plain language of the 1973 agreements: Did Bars breach the agreements by selling Bars’ Leaks products abroad?” In that alternate universe, it’s plausible that the jury comes back and says no, no they did not breach the contract.

But once you let that instruction in about construing the 1973 agreements as containing implied non-compete and non-solicitation restrictions, it’s a whole different ballgame. And that was the ballgame in this case. The jury got that instruction and returned its verdict finding a breach of contract. That’s all she wrote. Courts are loath to upset jury verdicts. Once there’s a jury verdict, the reviewing court is basically working backwards from the verdict and asking, “Is there any possible way they could have reached this verdict? Is this verdict or this finding on a particular fact so outside of the bounds of what is possible that we can set it aside and say that no reasonable juror would have reached this conclusion based on the evidence presented? Good luck meeting that standard.

The point: If there’s a jury instruction that strikes you as the least bit odd, then you’d better object. You’d better object on the record, in open court and make your objection clear.

Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida.  He has extensive experience litigating non-compete, trade secret, trademark and antitrust claims. For more information, call his office at 954-332-2380.