NEW YORK — In a ruling that could have significant implications for industry non-compete provisions in contracts, Limited Brands scored a court victory late last week over May Co. regarding the recruitment of a senior executive.
As reported, May Co. attempted to prevent Mark Weikel, former chairman of its Foley’s division based in Houston, from joining Limited’s Victoria’s Secret Stores division, on the grounds that he was violating a non-compete clause in his contract. But Limited sued May Co. in retaliation.
A two-day court trial was held in October in the Circuit Court of St. Louis County. Last Thursday, the court ruled that VS Stores and May Co. are not competitors and that Weikel didn’t breach his contract, meaning he’s free to join VS Stores. He’s expected to soon be named chief operating officer, a new position at the lingerie chain.
“We’re pleased with the decision and look forward to Mark joining the Victoria’s Secret Stores executive team,” Grace Nichols, president and chief executive officer, said in a statement Friday.
A May Co. spokeswoman said, “We are disappointed with the court’s decision and we are evaluating our options.” It’s possible that May Co. will appeal.
Not only does VS Stores get a seasoned, senior-level executive to support growth plans, but the court also ruled that May Co. must reimburse Limited Brands for costs associated with the case, including travel and hotel expenses. “It’s everything except legal fees,” said a Limited Brands spokesman.
Retail sources said last week that non-compete clauses are often vague and hard to interpret. However, executives are pressured to sign contracts that include the clauses, or else not take the job.
Last week’s decision was particularly important to Limited Brands. For the past few years, the company has been actively recruiting executive talent and wants to continue to beef up the ranks. Also, in about 160 “A” malls, Limited Brands is looking to pump up stores, including VS units, through expansions and renovations, and has boosted its capital expenditure budget.
In its decision, the court wrote: “May and VS Stores do not compete in any material or meaningful way. The targeted customer profiles of the two companies are completely different. They do not compete for suppliers, vendors or other resources. VSS has its own designs manufactured overseas for exclusive sales in its own stores. Intimate apparel is the primary product of VSS, while it comprises only approximately 3 percent of May’s overall company sales.”
The court also wrote that May and VS Stores use two completely different marketing strategies — VS Stores has a vertically integrated strategy totally different from May — and that any confidential information possessed by Weikel is not sought by VS Stores and would not give VS Stores a competitive edge over May.
The court indicated that Weikel’s contract does not prohibit him from voluntarily terminating his employment, and that the non-compete provision of Weikel’s contract is “not per se unreasonable or unenforceable, but it is not implicated under the facts of the case because no material competition exists.”
Hal Reiter, chief executive officer of Herbert Mines Associates executive search, put the court decision into perspective. “Usually, these cases get settled by cash payment from the recruiting company, rather than a trial,” he said. “What we’ve learned now is that with this adjudication, non-competes are going to be narrowly interpreted, because public policy is in favor of allowing people to work where they want to work, providing they don’t reveal trade secrets or work in a directly competitive environment.”
However, Reiter also noted, “This is not an appellate court decision, so it’s not completely determinative. May Co. could still appeal.”
“Just because you sign a non-compete doesn’t mean that it is enforceable,” Reiter added. “These things have to be narrow in scope and in time, because people should be allowed to work where they want. I’ve seen non-competes that say you can’t compete anywhere in the world, and it’s preposterous.”
He’s also seen more carefully worded contracts that are “very narrow, specifying you can’t work for company A or company B or company C, and you need to wait a year before you can go work for company A, B or C,” Reiter said.
One major retailer, Gap Inc., avoids non-competes altogether, since they are not enforceable in California. Kohl’s is also said to have some senior executives who aren’t under contract.
One retail source felt that Limited had a good case against May Co. all along, and said that is further evidenced by the fact that May Co. lost the case even though it was tried in its own backyard. “If Weikel was going to Dillard’s or Federated, May Co. would have had a very strong case,” said the source.
“Any legal decision has ramifications for future court cases,” observed Elaine Hughes of E.A. Hughes executive search. She also said that last week’s ruling will give executives leaving companies more confidence.
“There could also be some reevaluation of the contractual process on both sides,” Hughes said. “As much as companies ask people to sign contracts, candidates look for contractual forms of protection.”
She believes that senior executives are generally privy to confidential information and therefore, “for a period of time they should not be allowed to go to a direct competitor, but that period has to be reasonable and they should be compensated for remaining unemployed.”
In addition to contractual restrictions, some companies have policies that restrict movement to other companies. For example, about seven years ago, Federated decided to prohibit its executives from joining vendors that sell the company.
In another messy contract dispute involving non-compete issues — but without resorting to the courts — American Eagle Outfitters successfully blocked Gregory S. Gemette from becoming the chief merchant at Bebe Stores. Just two business days before Gemette was planning to join Bebe as senior vice president and chief merchandising officer, Bebe announced two weeks ago that he wouldn’t be coming after all, leaving Gemette unemployed.