Motorola v. Nortel

23 Oct ’05

The Motorola lawsuit against new Nortel CEO Mike Zafirovski is turning out to be fascinating tale – for lawyers, at any rate. But it must be painfully frustrating for employees of Nortel, who have suffered through round after round of disappointment. The constant drum beat of corporate missteps is a black hole into which all good news of product development and customer deals seems to disappear.

The press coverage is starting to dig deeper into the legal background, now that all have begun to recover from the early shock of this development. I was interviewed on day 2 by Mark Evans at the Financial Post, who as one of the more visible Nortel watchers in the press will no doubt be providing constant coverage as this develops (note his interesting speculation that Zafirovski was the real reason for Daichendt’s departure).

James Bagnall at the Citizen also had a great article on Friday, detailing some of the steps that preceded the announcement. It notes a comment by the recruiter, Egon Zehnder, to the effect that the Zafirovski / Nortel side was “stunned” by the lawsuit, which is itself surprising. Given the terminability of certain of Zafirovski’s Motorola options and his obligation to return certain monies and stock on a breach of his separation agreement (according to press reports of his severance agreement), the expectation that he would have obtained an indemnity from Nortel before agreeing to the new job (but even without an indemnity one would expect the move as an effort to exploit Nortel’s known need to get its house in order), and the view that at some level Motorola and Nortel are competitors (“fierce” competitors in the wireless business, according to some press reports), I would have thought one would expect the lawsuit as an almost certain attempt by Motorola to put at least some of those costs to Nortel. A chance at free money, as it were, quite apart from the PR benefit of portraying a competitor in a poor light, and quite a good return on the legal fees of having counsel stay late for a few nights to prepare the claim.

Side note: there is no mention of an indemnity in any of the press reports of Zafirovski’s new comp package that I’ve read, though an early report quoted the Egon Zehnder firm as saying words to the effect that a Motorola lawsuit was accounted for in Zafirovski’s agreement. Mark Evans speculates in his blog that there will be what amounts to a countervailing bonus for Zafirovski if his Motorola severance take a hit.

Another interesting side note: Egon Zehnder statements are making their way into the press – I’m a little surprised to see this, given that litigation is pending. In the recent Microsoft / Google case, for example, Microsoft tried to make hay out of Kai Fu-Lee’s indemnity from Google (as indicating that Google and Lee knew in advance that his move would be offside his Microsoft employment agreement). In contrast, Motorola comments seem to be limited to those issued by its press relations people.

I’m hoping to see some coverage concerning how Illinois law treats the enforceability of non-competes, and how the Motorola lawyers are going to pursue an injunction. One interesting question is whether an Illinois court will issue an injunction to enjoin conduct that occurs in Ontario. Zafirovski is, or until recently was, a resident of Illinois, so perhaps this will not be an issue. But the job is of course in Ontario. Canadian courts will generally not issue an injunction to restrain conduct outside their territorial jurisdiction – will an Illinois court issue it, or will the plaintiff have to take its case to Ontario?

The larger point in the case, of course, is the enforceability of non-competes. Two aspects of this case raise issues that will become increasingly important. First, the modern IT CEO holds much more of the company’s fate in his head than has ever been the case, and the damage that can be done by departing for the competition is more significant. Second, the IT business is increasingly international, and the territorial constraints that have to some extent insulated non-competes from attacks on enforceability seem less relevant now. Zafirovski went so far as to leave the country to pursue his livelihood. Should that matter? Given the size and market reach of some of the market leaders in IT and telecom, competition can come from anywhere. Will current legal tests for the enforceability of non-competition covenants evolve, or will judges take these factors into account when applying the tests, to address these realities?

It could very well be that in this case, the cross-border aspect is what will make the difference on the enforceability of the non-compete, and that without that, if a court also does not accept Motorola’s inevitable disclosure argument relating to breach of non-disclosure covenants, there could ultimately be little impact, other than delay and bad press, on Zafirovski and Nortel.

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