What Centuries Old Real Estate Transactions Law Has to Offer Technology

July 23, 2013

Why combine a technology hobby, with a real estate transactions practice, to form a technology transactions practice? A recent case, Deman Data Systems, LLC v. Schessel [1], shows why. There, a tech company (DDS) tried to enforce a Non-Competition, Non-Solicitation, and Non-Disclosure Agreement (which the Court called a “Restrictive Covenants Agreement”) against a former employee (Schessel). Schessel was allegedly trying to start his own competing company by contacting DDS’s customers and using DDS’s confidential/trade secret data enrichment process. [2]
The Restrictive Covenants Agreement contained the following clauses relevant to this analysis:

(a) “neither [Schessel] or any affiliate of [Schessel] . . . will not . . . directly or indirectly, own, manage, operate, control, invest or acquire an interest in, or otherwise engage or participate in . . . any business which competes with [DDS's business].” (hereinafter, the “Non-Compete Clause”).

(b) Schessel “will not directly or indirectly . . . solicit or divert [this first instance of the word 'divert' was later changed to 'direct'] or attempt to solicit or divert the Business of any clients or customers or accounts, or potential clients, customers or accounts, of [DDS].” (hereinafter, the “Non- Solicitation Clause”).

(c) DDS “is engaged in the marketing, sale and support of certain proprietary software for supply chain management and optimization in the medical and hospital industry[,] hereinafter referred to as the ‘Business.’” (hereinafter, the “Definition of Business Clause”).

Obviously, the only purpose of the Non-Compete Clause and the Non-Solicitation Clause was to restrict Schessel as a condition of his employment by DDS (and the Court seems to acknowledge that at least as to the Non-Compete Clause). Nevertheless, the Court dismissed DDS’s claims under those Clauses on the basis of the strict language of those Clauses, i.e. the Court found that those Clauses were poorly drafted. Specifically, the Court held:

(a) The double negative, in the Non-Compete Clause, negated the effect of that Clause. The Court so held despite the fact that even Schessel did not interpret that Clause that way.

(b) The Definition of Business Clause describes the business of DDS, not the business of its customers. Thus, tracing the language of the Non-Solicitation Clause, according to the Court, “this restrictive covenant provides that Schessel will not attempt to solicit or divert the ‘marketing, sale and support of certain proprietary software’ of any of DDS’s customers. Since there is no allegation that DDS’s customers engage in the ‘marketing, sale and support of certain proprietary software,” Schessel could not violate this restrictive covenant.” The Court apparently put aside the fact that the licenses granted, by DDS to its customers, were “non-transferable”; and there was no indication that DDS would need to access, or care about, its customers’ own separate proprietary software.

Once the Court called the subject Agreement a “Restrictive Covenant Agreement”, any real estate attorney would have known that DDS was in trouble. In real estate cases, courts used to hold that restrictive covenants were restraints upon alienation and, as such, were to be strictly construed. That rule has now largely given way to more normal rules of contract construction. [3] However, the language of restrictive covenants is still read very closely by the courts. [4] Thus, in Deman, the specific language in the Clauses, not the apparent intent of the parties, governed the Court’s decision.

The lesson of the story and the reason for my interest: In drafting non-competes and confidentiality clauses in tech employment, joint development, licensing and outsourcing agreements, the parties need to keep in mind the rules of contract interpretation that have developed over centuries of real estate experience.

[1] Deman Data Systems, LLC v. Schessel, 2013 U.S. Dist. LEXIS 81851 (M.D. FL, Tampa Division, June 11, 2013).

[2] Note that DDS also asserted various statutory and common law remedies that I hope to discuss in future articles.

[3] Restatement of the Law, Third, Property (Servitudes), §4.1.

[4] See, for example, the depth of the Court’s analysis in Markey v. Wolf, 92 Md. App. 137; 607 A.2d 82; 1992 Md. App. LEXIS 127 (1992).