HP STEALING EMPLOYEES FROM LEXMARK !
HP STEALING EMPLOYEES FROM LEXMARK !
2006-04-05 at 11:53:00 am #15274
Lexmark non-compete clause contested by HP
In the fierce printer industry, Lexmark International has always taken aim at behemoth Hewlett-Packard.
But during the past three months, the war has been waged in courtrooms as much as in the marketplace.
A Lexmark manager, considered by the company to be among its top 20 executives, left in January for HP. Lexmark alleges Bruce Dahlgren, in doing so, violated a non-compete clause he signed after he joined the Lexington company in 2000.
A Lexington judge ruled Dahlgren must abide by the agreement, prohibiting him from working in his new job at HP for one year and from luring away Lexmark’s employees or certain customers for three years.
But two weeks later, a judge in California, where non-compete clauses are generally prohibited, said Lexmark could not enforce that ruling.Also at issue is a part of Dahlgren’s Lexmark contract that requires employees to pay back gains from stock incentives if they violate the non-compete clause. Lexmark is seeking to attach a lien to Dahlgren’s Lexington home, which is on the market, to ensure it is repaid almost $600,000.While both companies and their attorneys have declined to comment, the case continues to move forward in Lexington and California.
A silent departure
Dahlgren left Lexmark on Jan. 9 after nearly six years as a vice president and general manager. He oversaw North American sales and marketing for Lexmark’s Printing Solutions and Services Division, where he earned about $400,000 to $500,000 annually in base salary and bonuses, according to the court testimony of his supervisor, Executive Vice President Paul Rooke. With stock compensation added, he came close to earning $750,000 a year.
In later court filings, Lexmark said Dahlgren “refused to reveal the reason for his resignation or whether he had accepted employment elsewhere.”
Three days before his departure, Dahlgren had accepted the new position of senior vice president of Worldwide Enterprise Sales for HP’s Imaging and Printing Group.
Four days after leaving Lexmark, Dahlgren and HP filed suit in Santa Clara County, Calif., arguing that Lexmark’s contract restrictions are void under California law. Lexmark filed suit in Fayette Circuit Court less than a week later to enforce the agreement.
Lexmark says Kentucky or Delaware law, which allow non-competes, should be enforced because the agreement was signed in Kentucky and Lexmark is incorporated in Delaware.
If Dahlgren were allowed to immediately work for HP, Lexmark alleges, he could reveal proprietary information.
“Dahlgren will have a critical role in competing directly with Lexmark products and printer solution services in the same markets, through the same marketing channels and interfacing with the same customers of Lexmark that just over one week ago he served for Lexmark,” Lexmark attorneys wrote in a Jan. 19 filing.
HP disputes the claim, emphasizing that customers buy from both companies and that Dahlgren’s knowledge was limited almost exclusively to already released products. HP also argued that Lexmark’s agreements were overly broad and restrictive.
“As Lexmark applies the contract,” HP’s attorneys wrote, “Mr. Dahlgren could work for no technology company that sells a printing solution that competes with Lexmark anywhere in the world.”
Plus, HP said that during his employment at Lexmark, Dahlgren was told on at least two occasions that “the only penalty (he) might face if he went to work for a competitor was a financial one,” referring to the provision that requires a forfeiture of stock gains.
It also pointed out that Dahlgren’s work would include geographic areas including “Asia and the Pacific, Europe and Africa, geographic areas over which he had no involvement while with Lexmark.”
Reached this week by phone, a person in Dahlgren’s office at HP said he was in a series of meetings. He did not return the reporter’s call.
Victories at home
On Feb. 14, Fayette Circuit Judge Thomas Clark ruled in favor of Lexmark, issuing a restraining order enforcing the majority of the agreement.
Clark ruled that for one year, Dahlgren could not work for a Lexmark competitor, but he tailored his ruling only to North America, the area of responsibility Dahlgren had at Lexmark.
He also ruled Dahlgren must refrain from recruiting Lexmark employees for three years.
Dahlgren also would be restrained from soliciting Lexmark customers in North America from the past three years.
Clark did not specifically address the financial penalty section of the agreement.
Two weeks later, California Superior Court Judge Kevin McKenney issued a temporary restraining order barring Lexmark from enforcing its employee agreement, specifically mentioning Clark’s ruling.
Back in Lexington, Lexmark filed a motion to attach a lien to Dahlgren’s property in the Hartland Estates neighborhood, which is on the market with an asking price of $779,000.
Non-compete agreements and subsequent litigation are becoming typical in high-tech industries.
Microsoft and Google became embroiled in a similar dispute last year after Google hired Microsoft employee Kai-Fu Lee to lead its Chinese expansion.
The companies settled in December.
Settlements are typical because of the high costs of litigation and because non-competes can expire within six months or a year, said Daniel McCoy, a partner in the employment practices group at the Fenwick and West legal services firm.
“And it is so disruptive to the businesses of both companies involved, not withstanding the actual employee who’s at the center of it,” McCoy said.
The costs, McCoy said, can easily range in the six figures and rise even higher.
“Ultimately, you’ve got to say, is this guy worth a million bucks?” McCoy said.
“For big companies like Microsoft and HP, who are going after serious, serious talent, it’s likely going to be worth it. But for the average high-tech company … they can’t afford that in terms of just dollars and in terms of the disruption to the business.”
One man’s value
Dahlgren’s perceived importance to HP is his experience in selling printing solutions, which involves helping companies improve workflow and printing needs.
In a research report, Moors and Cabot analyst Cindy Shaw said it appears HP is “beginning to step up its efforts in what we think is Lexmark’s most profitable division.”
During an investor conference call in January, Lexmark’s chief financial officer, John Gamble, said the company has a competitive advantage in managing large accounts, known as the enterprise market.
“Our ability to service the enterprise market with very high-end market products and extremely good solutions offerings is very, very good,” said Gamble.
That same area is one that HP hopes to grow.
“We really need to get after the enterprise,” said HP’s CEO, Mark Hurd, in a late February investment symposium.
“The enterprise segment, the top 2,000 accounts on the planet, when you go out into ’08, ’09, will probably be $750 billion worth of revenue,” Hurd said. “We certainly don’t have anything like commanding share of that market.”
While the two companies battle over market share, their battle in the courtroom continues. A hearing about the temporary restraining order in California is set for this month. In Lexington, where attorneys are in the discovery stage, HP’s attorneys have requested a hearing about the proposed lien.