Non-compete agreements and other restrictive covenants are important tools that many businesses use to protect their most sensitive and irreplaceable assets. But, while these provisions can have an incalculable deterrent effect, attempting to enforce a non-compete or other restrictive covenant in court is often an uncertain prospect.
Unlike most contractual provisions, non-competes are subject to enhanced scrutiny and are typically enforced only to the extent they are “reasonable.” The definition of what is “reasonable” varies – widely at times – based on factors such as the industry involved, the position and responsibilities of the employee in question, the business interests the employer is seeking to protect, the state in which enforcement is sought, and, most unpredictably, the individual judge assigned to the employer’s lawsuit. As a result, even an employer armed with a carefully tailored restriction in a state with favorable laws can be denied enforcement.
Practitioners navigating these uncertain waters need to look for every potential advantage to tip the scales in favor of their clients. Litigation involving non-competes can move quickly, yet decisions made at the outset are often critical to the success of the enforcement effort. With these points in mind, this article discusses five practice tips for employers that are considering going to court to seek enforcement of non-competes.
States also differ as to how their courts will review and enforce a restrictive covenant. Some states permit judicial modification (or “blue-penciling”) of restrictions that are deemed overly broad, while other states refuse to enforce unduly broad restrictive covenants or permit them to be modified and enforced only in narrow circumstances.
To mitigate this uncertainty, employers often include choice-of-law and forum-selection provisions in their non-compete agreements. Unfortunately, those provisions will not always prevent a crafty former employee, or his or her new employer, from preemptively filing suit in a different state (typically, seeking a declaratory judgment invalidating the non-compete) and arguing for application of that state’s laws. Employers with employees who work remotely (such as regional sales representatives) are at particular risk of being forced to litigate non-compete matters in unfavorable state courts.
It is therefore critical that an employer comprehensively evaluate the competing state laws that could apply prior to sending out a cease-and-desist letter, since receiving such a letter may cause the employee and/or his or her new employer to initiate litigation. Typically this list will include the state where the employer is headquartered, the state where the employee lives, the state(s) where the employee works, and, in some instances, the state where the employee’s new employer is headquartered. If any of these state laws are hostile to the enforcement of non-competes, the employer should consider filing suit preemptively in its jurisdiction of choice – most often, the jurisdiction specified in the non-compete agreement’s choice-of-law provision.
Prospective employees often fail to disclose the existence of post-employment restrictions to a new employer, especially when joining a competitor. Some employees simply forget they signed a restrictive covenant; others willfully conceal its existence. Likewise, departing employees are unlikely to tell their new employers that they are stealing confidential information (such as customer lists) during their last days or hours of employment for future use in their new position.
Whether and how to involve the competitor in an enforcement action is a critical strategic issue. If the competitor is unaware of the employee’s restrictions or bad acts, a letter to its General Counsel outlining those violations may cause the employer to reevaluate the wisdom of hiring the employee. Alternatively, such a letter could open a dialogue that results in a favorable resolution. On the other hand, the competitor may respond by bringing in sophisticated legal counsel, which may make enforcement of the restrictive covenant more difficult. Of course, if the competitor is determined to hire the individual, it might decide to pay for top-flight legal counsel for the employee’s defense regardless of whether the competitor is formally brought into the matter.
The wisest approach will depend on a variety of factors, including the seniority and importance of the departing employee, the nature of the trade secrets or confidential information at issue, the employer’s prior relationship with the competitor, and, to the extent known, the manner in which the competitor has responded to prior non-compete actions brought or threatened against it. Trusted counsel can help evaluate the likelihood that involving the competitor will facilitate a favorable outcome.
The cornerstone of obtaining injunctive relief is a showing of irreparable harm – that is, harm that cannot be measured by monetary damages, such as the impact of disclosure of the employer’s trade secrets to a competitor. Courts evaluating irreparable harm in the context of an injunction application consider, among other factors, the employer’s promptness in moving to enforce its rights. An unexplained delay in taking action could lead the court to conclude that the employer is not truly at risk of irreparable injury.
Because time is of the essence, an employer should move quickly to identify a departing employee’s bad acts. Although there are many forms these bad acts can take, technology can provide indisputable evidence of the employee’s efforts to steal confidential information or to unlawfully solicit customers or employees. Emails, instant messages, social media posts, and other electronic records are fertile ground for documentary evidence of a departing employee’s bad acts.
For instance, outgoing email traffic could show a departing employee sending confidential documents to his or her personal email address. Instant messages could reveal that an employee has solicited subordinates to join a competitor. Social media data could prove that an employee communicated confidential information to a recruiter. Computer registry data could show that an employee inserted thumb drives into his or her computer on the day the employee resigned. Sometimes, a computer’s memory can be restored in a manner that recovers whole or partial emails sent from a web-based email provider, like Hotmail or Gmail.
Due to the potential value of this data, it is imperative that an employer immediately secure and preserve any company-issued computers, tablets, smartphones or other devices used by a departing employee. Computer forensics firms can be retained to extract information from these devices to support the employer’s application for injunctive relief.
One possible move is to name the new employer as a co-defendant in the lawsuit. State common law claims such as tortious interference or aiding and abetting breaches of common law duties may provide for direct liability against the employer or its employees. So long as such claims are sufficient to withstand a motion to dismiss, they will permit discovery from the entity and its email systems, which can be very burdensome.
Another potential step is to petition the court for expedited discovery. Often, after a temporary restraining order hearing is held, the court will permit the parties to conduct limited discovery in advance of a preliminary injunction hearing. Typically, each side is permitted to serve a limited number of discovery requests and take a handful of short depositions. Expedited discovery can result in significant cost and disruption to business operations for the new employer.
Finally, consistent with Tip 4, an employer should seek discovery of personal email accounts and electronic devices the employee used during his or her employment. If evidence suggests that certain accounts or devices were used to transmit trade secrets, confidential information or unlawful communications with customers or employees, the employer should petition the court to order the employee to preserve those devices for discovery. This discovery can help to uncover further evidence of bad acts.
The tips discussed above are only a sampling of the strategic considerations at play in an action to enforce a restrictive covenant. To maximize the likelihood of success, an employer should seek the advice of trusted counsel immediately upon learning that a departing employee with a non-compete may be planning to join a competitor.
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Our attorneys have extensive experience in counseling employers and litigating non-compete actions in a wide variety of jurisdictions. We would be pleased to assist your business with any issues in this area.