Jeremy Burkhardt Sues SpeakerCraft, Nortek
Jeremy Burkhardt, former owner and president of SpeakerCraft, a Nortek company.
CE Pro learned of the suit from a Facebook post by Burkhardt today:
Really exciting walking around CES and seeing so many friends. Also heard a lot of noise about Nortek and my non-compete I honored that as promised and it expired long ago. I’ll be back and they can’t stop me. I’m serious enough that Jeff Francisco and I have sued Nortek in Orange County to clear out the nonsense. Details on the CA courts website, case id 30-2012-00610919-CU-NP-CJCnon-compete. We tried to settle but they want to screw off try and out spend us and not do the right thing. I hope to tell you about the company we are buying real soon. Some people think Nortek sucks. We will take market share from them as we’ll as share all their mis doings with the industry and press. I pledge my every last dollar to righting their misdeeds.
Francisco is not named as a plaintiff in the suit, but he was an equity shareholder in SpeakerCraft when the company was acquired by Nortek in 2003. As such, he may also be subject to litigation over non-compete clauses, and damaged financially by the mere threat of legal action. He resigned from SpeakerCraft late in 2012, a few months after Burkhardt resigned.
Reached by phone, Burkhardt chose not to comment on the record about the suit.
Burkhardt, one of CE Pro’s recently announced Top 20 Most Influential People in Custom Electronics, sold his iconic SpeakerCraft speaker manufacturing company to Linear, LLC, a Nortek subsidiary, in July 2003 for $58 million.
The purchase agreement included a non-competition and non-solicitation provision, according to the lawsuit filed on Nov. 9, 2012, in the Superior Court of California, Orange County.
Burkhardt is claiming, first, that the non-compete was unenforceable to begin with and, second, that it has expired in any case.
He says in the lawsuit that Nortek insists the non-compete is legal and still in play, and that the corporation is threatening to sue if Burkhardt indeed competes at this time. Burkhardt says this looming threat has harmed him economically because not only does he fear launching a competitive business, but employers fear hiring him:
The mere existence of a non-competition agreement is enough to persuade many employers not to hire qualified applicants because of the fear that by hiring such an individual, they will be hiring an expensive and disruptive lawsuit.
Burkhardt seeks compensation for this economic loss, and punitive damages because “Defendants’ acts and omissions were intentional, malicious and oppressive, and were done with the intent and design to damage Plaintiff.”
In addition to these claims, Burkhardt charges in the suit that Nortek owes him $1 million – the amount he reinvested into Nortek when SpeakerCraft was acquired, and the amount allegedly promised to him when he lost it all in a 2009 Nortek bankruptcy.
Non-compete is Illegal and Expired
California is a tougher state than most for non-compete clauses, with a “strong fundamental public policy favoring open competition and disfavoring restrictive covenants.” (WSGR)
For example, employees cannot be beholden to non-competes; only equity stakeholders can, and only in limited situations.
Policy on restrictive covenants is governed by the Business & Professions Code Section 16600, which notes, “Every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”
There is a notable exception in Section 16601: When a business owner sells his company, a non-compete may be enforceable to protect the goodwill acquired by the buyer; however, “the contract for sale of the corporate shares may not circumvent California’s deeply rooted public policy favoring open competition.” Hill Med Corp. v. Wycoff, Cal. App. 4th 895, 903 (2001).
Even if Burkhardt’s non-compete were enforceable at some point, the terms of the agreement have expired, he claims in the suit.
The period designated for the non-compete was the longer of five years since signing in 2003, or three years after “the date of the termination of employment of the applicable Management Seller as an employee of the Buyer [Linear Corporation].”
Burkhardt left SpeakerCraft in May 2012, presumably the time when Linear/Nortek wants the three-year non-compete to commence (through May 2015).
But Burkhardt argues that he never actually became an employee of Linear Corp.
“Thus, by its terms, the Non-Compete expired on July 11, 2008, five years after the Closing Date of the sale of SpeakerCraft, Inc. to Linear Corporation.”
Burkhardt worked for SpeakerCraft Inc., until December 2009, according to the lawsuit, “when the corporation ceased to exist as the result of the bankruptcy of Nortek and its subsidiaries.”
At that time, Nortek formed SpeakerCraft LLC, which purchased the assets of SpeakerCraft, Inc., from the bankruptcy estate.
Thereafter, Mr. Burkhardt was employed by SpeakerCraft, LLC as its President. Mr. Burkhardt has never been employed by Linear Corporation, Linear LLC, or Nortek, Inc.”
Second Claim: $1 Million Owed
The non-compete issues are just one claim in Burkhardt’s lawsuit. The second is that Nortek owes him $1 million, allegedly promised to him by former Nortek chairman Richard Bready (not named in the suit except as “Chairman”). That was the amount that Burkhardt was asked or volunteered to reinvest in Nortek after SpeakerCraft was acquired.
Burkhardt alleges he lost that investment when Nortek declared bankruptcy in 2009 but that Bready promised to compensate him for the loss.