Question

Case Study Scenario: Vertical Net

Vertical Net is a public company that operates content specific websites and business-to-business procurement portals. Vertical Net’s business model is to generate revenue by providing the interested organization’s advertising platform for its products and services where the interested organization can advertise its services or products over many related websites. Currently, Vertical Net has 43 of these industry-specific content websites and business-to-business procurement portals.

For example, Vertical Net owns the rights to the following websites: Water-on-line, Public-Utility-on-Line, and Hydroelectric-Power-on-Line. All of these websites are related to water usage. Vertical Net’s business model is to reach out to organizations interested in water and water usage and (a) sell advertising space to them, and (b) provide a readily accessible way for their customers to buy their products and services.

At this time, Vertical Net is the only company that provides this service to these organizations. However, it has recently become known to the management team of Vertical Net that a former employee of the company, Michael Smith, has decided to compete with Vertical Net in the electricity power production space. Currently, Vertical Net has two websites specific to electricity: Electricity-on-Line and Public-Utility-on-Line. Smith has a strong scientific background and vast experience in the combining of electricity and atoms. Based on this experience, he has decided to create a content specific website and business-to-business procurement portal for organizations that are involved in researching the advantages of combining electricity with atoms.

While employed by Vertical Net, Smith was involved in writing content on the latest developments in the electricity power production industry and offering his professional opinion on these developments. Smith did not write any content for Vertical Net on the combining of electricity and atoms.

Smith signed a covenant not to compete agreement with Vertical Net that specifically covered the latest developments in the electricity power production industry.

On January 4, 2018, the Chief Executive Officer of Vertical Net, Nathen Lenz, traveled to Smith’s office and offered $800,000 for Smith’s business. Smith countered Lenz’s offer by suggesting that Vertical Net could obtain his company and his expertise for $5,000,000 plus substantial stock ownership in Vertical Net. Lenz told Smith he though his counteroffer was rejected. Afterward, Vertical Net created a website named combining electricity and atoms and introduced it as their 44th website.

Smith believes that in creating this website Vertical Net is trying to monopolize the industry content specific industry and essentially curtail competition.

      

Write a 1-page paper discussing the following items.

• Discuss the legal aspects of a covenant not to compete.
• Discuss the key legal aspects of the Sherman Act.

Answer 1

• A covenant not to compete is an agreement between two parties which prohibits them to enter into competition in a specified area for certain amount of time. It can also be defined as non-compete clause. Such agreement can be mostly seen in employment contracts which contains covenants not to compete. Nature of these agreements is anti-competitive due to which courts are not in favor of such agreements. The main objective of covenant not to compete is to reduce the competition so as to protect business. For an example when a business hires a professional it can use such agreement to limit the competitors from hiring the professional in case he decides to change job or leave the company.

The legal aspects of covenant not to compete: Due to its non-competitive nature courts can be usually seen to not be in favor of these agreements. Some states takes it as fully legal while few states apart from some specific circumstances prohibits it. To determine whether it is enforceable usually the scope and objectives of the agreements are looked into. In case it comes into notice that such clause are necessary to protect the interest of the business or trade secrets such agreements are considered legal and thus becomes enforceable.

• Sherman Act was approved on July 2,1890. This act prohibits activities which restricts interstate competition. This act specifically prohibits (a) anti-competitive agreements and (b) unilateral conduct which try to mobilize the relevant market. This act prevents unnecessary inflation in prices by restricting trade and supply. The main objective of this law was to create a competitive market place, where interest of consumers were safe. This act outlaws all the contracts for monopolization. This act prevents companies from mobilizing markets.This act is divided in different parts.These parts are (1) this defines and bans different anti competitive conduct.(2) This states the conclusion. This act was approved by public immediately. This act paved the road for specific laws like Clayton Act.