How likely is it that IBM Corp. (NYSE:IBM) can block -- or at least delay -- its former vice president of corporate development from decamping to rival Dell Inc. (NASDAQ:DELL)? As we reported on Wednesday,
IBM has sued its longtime dealmaker David Johnson claiming the noncompete agreement he signed in 2005 prevents him from working for the competition. For perspective, we checked in with Sullivan & Cromwell LLP partner Theodore Rogers, who coordinates the firm's
labor and employment law group.
First, a closer look at the noncompete. Under the agreement, which begins on his final day of IBM employment, Johnson is barred from working for a competitor or soliciting IBM customers for one year, and from recruiting IBM employees for two years.
The odds of the U.S. District Court of Southern New York, where the suit was filed, upholding that agreement, are well, pretty even, says Rogers. As a rule, he says, New York courts dislike noncompetes because they prevent people from earning a living. But the contracts are recognized under state law -- unlike California, for instance, which doesn't recognize them in most cases -- and the New York court is more likely to uphold a noncompete if it is short in duration and the former employer has reasonable cause for concern.
Johnson's one-year noncompete is on the "outer limit" of what New York courts consider acceptable, says Rogers, but it's by no means excessive. And "IBM's agreement is not unreasonable on its face," but the court needs to be convinced there's a strong legitimate case that IBM could be harmed if Johnson takes what he knows to Dell.
IBM believes that's the case, stating in its court filing that "the actual and potential corporate transactions to which Mr. Johnson has knowledge span the entire range of IBM businesses and product lines ... and [he] is in possession of IBM's most highly sensitive confidential strategic information." The fact that Johnson, a 27-year IBM veteran who has led M&A and divestiture activity for the past nine years, will fill an M&A role at Dell bolster that concern.
Still, a majority of noncompete cases are settled, says Rogers. "Often the new employer will limit the activities of the new employee for a time to address the previous employer's concern that sensitive information might be used." For example, IBM and Dell could agree that Johnson will work at Dell for six months in an area unrelated to M&A before taking on the lead dealmaking role.
Much about how quickly this case is resolved hinges on whether IBM is successful in preventing Johnson from working at Dell as the case is being heard. If the court rules in favor of IBM's preliminary injunction, "the leverage shifts to IBM," says Rogers. And, if Johnson is allowed to work at Dell, IBM may be motivated to settle more quickly, and perhaps on terms more favorable to Dell.
It's worth noting that IBM chose not to name Dell in the suit. Nothing in the court documents hints at why, but it' is unusual. "The new employer is almost always sued as well," says Rogers. Now Dell could be added at any time, he adds, but the further along the case moves, the less likely it is a court would approve that measure. - Suzanne Stevens
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