Eight ways to lose a noncompete case

You might think that with the economy in the tank, employers would be less worried about enforcing noncompete agreements and more worried about merely staying afloat. Not so. In fact, as the active workforce shrinks — unemployment jumped up to 7.6% today, and 600,000 jobs vaporized since New Year's Day (Reuters story here) — the battle for talent has actually become fiercer. To be sure, the number of reported decisions dropped off a bit in the latter half of 2008 (see chart). But anecdotal evidence suggests that employers' appetites for protecting their stuff and their peeps are still strong.

Over the past 11 years at Shepherd Law Group, we've worked on hundreds of these matters for employers on both sides — the former (enforcing) employers and the new (hiring) employers. We've seen a lot of different ways to lose noncompete cases, if you're the former (enforcing) employer. Here are eight:

1. Put your faith in the language of the noncompete agreement. I can't tell you how many times I've had lawyers for former employers tell me that they were going to win "because he signed the agreement." The court doesn't care what the agreement says if it's not absolutely necessary to protect the company's interests.
2. Try to enforce against any old employee. If the employee is not in a position to give the new employer an unfair advantage by taking confidential information or customer relationships, you can forget about enforcing it.
3. Make sure the noncompete is broadly drafted. Too many lawyers think that drafting an agreement is about trying to think up every metaphysical possibility and then drafting around it. They also think that it's OK to draft broadly if you include a provision that "allows" the court to scale back the scope of the agreement. That's mighty kind of you, but the court doesn't care about those provisions (often mistakenly called "blue pencil" clauses). More often than not, a court will toss the whole agreement if it decides it's too broad. And in some states, the court will automatically 86 the noncompete if it's even a little too broad.
4. Focus on geography, duration, and scope. Most lawyers remember from law school that you need this particular trifecta to enforce a noncompete, and they think the analysis ends there. While it is true that noncompetes that are overbroad in these categories will fail, that's only a table stake. What's more important is the necessity of enforcing the agreement to protect secrets or relationships.
5. Wait a while to file. The key to winning a preliminary injunction (which is the usual goal in a noncompete lawsuit) is to convince the judge that without it, your company will suffer immediate, irreparable harm. Waiting around to file makes that argument less persuasive. On the other hand ...
6. Ask for the injunction before you've developed enough evidence. Sometimes you can win based solely on the affidavits you supply, which you got from your internal investigation. But if your evidence isn't strong enough, it's better to take some expedited discovery (depositions, documents, computer and email records) before you ask for the injunction. You usually only get one shot at the prize.
7. Don't worry about which state to file in. I don't mean state of mind; I mean jurisdiction. Sometimes which state you file in can make a crucial difference in whether the agreement will be enforced. In California, as most lawyers know, you haven't got a prayer, while in Florida, noncompetes are presumptively enforceable.
8. Focus on the law instead of on the story. This is the most important lesson. Lawyers often fall in love with their legal arguments. But noncompete cases are equity cases, not law cases. To be sure, that distinction means less than it did a hundred years ago. But if you have a brilliant, clever, technical legal argument and an unsympathetic story, you are way more likely to lose.

Bottom line: If your client's wearing the white hat, and your agreement is narrowly drafted, and your secrets or customer relationships are in imminent peril, then you've got a fighting chance of winning. Otherwise, wave goodbye to the former employee and get back to work.

Comments

[Evil HR Lady]

Excellent points. I, myself, am in favor of very narrow non-competes.

My husband had a non-compete presented to him that stated he couldn't work for anyone that was involved in anyway with medicine or pharmaceuticals. It was so broad that according to the terms, being a janitor at a hospital would violate it. He didn't sign, but even if he would have, it would have been unenforceable.

[Jay Shepherd]

Thanks, Evil. Your husband's story is a common one. It's good that he didn't sign it. Although you're probably right that it wouldn't have been enforceable, the reality is that the transaction cost of having to defend (and ultimately defeat) the enforcement action could have been prohibitive. Some employers — the ones we don't like — knowingly do this, realizing that they can get away with bad noncompetes. — Jay

[Christopher McKinney]

You are absolutely right Jay. I often tell clients that in the world of noncompetes, the medium is the message. Many companies frankly don't care if their noncompete is enforceable or not. The threat of an enforcement action acts as a poison pill to potential employers of the employee in question and the employee is fearful of having to defend herself/himself in such an action.

Loved the article by the way.
Chris

[Christine]

This was an excellent article. I am curious how the state of MA handles noncompetes. My old company was located in MN, and I am in MA. I think I am just going to 'roll the dice'. I would never try to solicit my old clients, and I certainly have a right to support myself and my child. Plus in the past my company has only sent 'nasty-grams' and not proceeded with legal action...

[Brian Murphy]

Excellent points. I am in South Carolina and these really apply here as well. Very practical advice.

[[email protected]]

Georgia noncompetes are these case won if so how much and/or how is it figured. I thought I was out of the contract by 2 yrs but apparently not. I work in one state and live in another.Any words of wisdom to handle this? I have not a clue.

[Manoj]

I have on situation where I am working as a software developer. I got a nice offer from middle vendor and I joined him. Now my previous employer is threatening me of filing breach of contract.
What are the ways that I can protect my self?

-Manoj

[Bobbhaze]

I to have a similar situation where i am a sales rep for a rental company and i was the only employee that to sign a non-compete first he wanted a year and i said absolutely not and i reluctantly signed a three (3) month no compete to get commission owed. i have resigned from this company and started with a new one and had strong relationships with customers and he is trying to nail me to the cross legally breach of contract trade secrets it all way to broad. the bad thing about this whole situation is you have to hire a attorney and plan to spend at least $5,000.00 it really sucks.

[Marie]

Hi,

I don't understand how the current law is functional. The 3 prongs are: 1)You Damage the company 2)It doesn't hurt your employ-ability 3) It doesn't hurt the public.

Every version of the non-compete my company has says nation wide you can not work in this industry for a year.

If the last +5 years of my career has been in this industry, how do I find employment at the same compensation level?

Doesn't this cross #2?

[Todd Elliott]

Excellent post, Jay.

That article was spot-on. I may print out those 8 points to hand to my employer clients. So many of them get obsessed with the language of their compete. They try to put the burden on the lawyer: hey, we have this in writing, can't YOU enforce this? It's tempting for me, the lawyer, to overestimate the non-compete in my file, especially if it has great language, like you said.

Again, great post!