“Much smoke but little demonstrated fire” – Post-Employment Competition Claims and Ikaria, Inc. v. Montgomery, et al.

In a new opinion from the Wisconsin Court of Appeals, Ikaria, Inc. v. Mongomery, et al., employers are reminded that timing isn’t everything when it comes to supporting post-employment competition claims against former employees. Ikaria, which identified itself as a “biotherapeutics company” brought multiple claims against a number of former employees and a company they established after resigning, called NitricGen, Inc. NitricGen, in only language a scientist could love, “sought to develop a bedside nitric oxide generation device to assist in topical wound healing.” NitricGen subsequently created four inventions that were at issue in the case. Ikaria brought claims that included breach of the implied duty of good faith and fair dealing over invention assignment language between the Ikaria and its former employees, breach of the duty of loyalty, and violation of non-compete agreements.

After trial, the circuit court dismissed all of Ikaria’s claims. The appellate court quoted the circuit court’s reasoning in summary by observing Ikaria’s claims “involved much smoke but little demonstrated fire.” In affirming the circuit court, the appellate court rejected Ikaria’s argument that its breach of the implied duty of good faith claim was supported because the employees were on the “brink-of-invention” at the time of their resignations. In other words, Ikaria argued that the employees timed their resignations to occur just before they invented NitricGen’s assets. The appellate court agreed with the circuit court that the inventions were instead based on substantial work performed after resigning from Ikaria. Similarly, the appellate court found there was no clear error committed by the circuit court in evaluating the evidence to conclude there was not a breach of the duty of loyalty either.

In addition to the appellate court generally finding that timing is not sufficient to support a former employer’s post-employment competition claims, the appellate court also addressed non-compete clause language between the parties. The employees argued that they did not violate the non-compete agreement because they were not providing competitive services – that is, they did not provide products or services that “serve the same function as or are a therapeutic alternative to products or services” offered by Ikaria. The appellate court affirmed the circuit court in finding there was not sufficient evidence to contradict the circuit court’s finding that NitricGen’s inventions did not compete with anything offered by Ikaria. Specifically, even if a product could be used as an alternative to Ikaria’s products, this possibility was not enough to carry the claim.

This case serves as a good reminder to employers that when significant employees leave employment and establish seemingly competitive products or services, timing alone is not enough to support your claims. Depending on the possible causes of action, a plaintiff-employer must carefully evaluate whether there is or it can expect to find evidence that employees were engaged in competition while employed or, in the case of non-compete agreements, they are actually competing with their former employer.