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Employee-driven Non-compete Litigation: A New Hook on an Old Line

by Jul 4, 2014, 12:26 am ET

Screen Shot 2014-06-20 at 1.18.28 PMHypothetical situation:

John Smith, an employee with Fast and Speedy Cab Co., a taxi company, leaves his position as a dispatcher. Smith and Fast and Speedy entered into a noncompete at the beginning of Smith’s employment. Upon his departure, Smith seeks and is offered a position with a competing taxi company, also as a dispatcher. The competing taxi company, Faster and Speedier Cab Co., knows about the noncompete, but has serious questions about its enforceability. It decides to hire Smith nonetheless. What happens next?

Most often, the parties follow a standard path from here. Fast and Speedy, sooner or later, finds out about Smith’s new position and sends a demand letter to insist that Smith not compete with it. It may file suit and seek an injunction, or it could try to resolve the dispute outside the courtroom. If the parties do not work it out pre-suit, Smith defends against the claims by arguing the agreement is unenforceable, and a decision on the motion for a temporary injunction provides a sufficient roadmap to the parties that they settle the matter before further litigation.

An alternative, but less common approach, would be for Smith and Faster and Speedier to decide they would like more clarity on enforceability before proceeding with the employment relationship. In this case, Smith may seek a declaratory judgment to have the agreement declared unenforceable, which is likely to draw a motion for a temporary restraining order by Fast and Speedy. This strategy leads to the same roadmap identified above, but quickens the resolution without having to wait for Fast and Speedy to decide to enforce. In rare instances, the case will go to trial on the merits.

Generally speaking, noncompetition disputes are on the rise. Enforcement of restrictive covenants is not an area of the law that experiences a great deal of change from year to year, but as the economy recovers, employers are in a better financial position to enforce their agreements and employees experience greater mobility. Employees’ desire to accept those opportunities has led to a growing trend to make the less-common approach described above more common. Departing employees are proactively challenging the enforceability of their restrictive covenants with greater frequency than previously seen. And although employers are enforcing their own agreements, they are also more comfortable challenging their competitor’s agreements when they have an applicant they want to hire.

Not only are disputes on the rise, but a unique procedural mechanism is gaining steam. In the less-common approach described above, the employee files the declaratory judgment action to bait the former employer into filing a motion for a temporary injunction. But recently, employees (and their new employers, often behind the scenes) have started winning the race to the courthouse steps not just through the filing of declaratory judgments, but by combining the declaratory judgment actions with their own motions for temporary injunctions. This second step — seeking preliminary injunctive relief to prevent the former employers from enforcing their agreements — is a divergence from the procedure of the past and becoming more and more common.

In Gavaras v. Greenspring Media, LLC, for example, the plaintiff was a former long-time employee of the defendant publishing company when he sought and received a conditional offer for a position with a competing entity. The new employer would not hire the plaintiff if he was bound by a noncompetition agreement. In hopes of removing the contingency, the plaintiff filed a declaratory judgment action to declare the agreement unenforceable, contemporaneously filing a motion for a temporary restraining order to prevent the defendant from enforcing the agreement.

In a surprising decision, Judge Ann Montgomery of the Federal District of Minnesota forewent the usual application of the multi-factor test on a temporary restraining order and went straight to the merits, issuing a declaratory judgment in the plaintiff’s favor. Although there were many interesting aspects of the judge’s decision, for purposes of this article, one takeaway is that Gavaras paves the way for employees and new employers to essentially seek a final determination on the merits of a claim far earlier than they previously have been able to.

It is unclear whether other courts would be amenable to issuing a declaratory judgment without at least allowing the parties to engage in discovery, but Gavaras implicitly supports the position that employees can seek injunctive relief that would allow them to accept a competing position. What Gavaras does not answer is how an employee and/or the new employer should style the request for injunctive relief.

In the hypothetical above, some lawyers would argue that the request for relief should be an injunction to prevent enforcement of the agreement during the pendency of the declaratory action. Others would assert that a prohibition on allowing enforcement would lock the courthouse doors to the former employers; they argue that the only injunction an employee could seek would be one that prohibits former employers from threatening new employers who want to hire the employee.

Regardless of the proper procedure, employers should be aware that employees are less likely to leave the decision to engage in litigation up to the employer. They can no longer wait for the bait and then decide whether to bite, because they might get hooked before they know it.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • Jim Butler

    Non-competes are probably the most irrationally conceived and onerous contracts to which most people will ever attach their name.

    Wonderful legal article, the logic and process is all laid out. However, beyond an ‘academic’ approach to non-competes, this doesn’t seem to be a viable path for the vast majority of candidates. Most employees, and specifically those most intimidated by unenforceable non-competes, don’t want to advertise the fact they are leaving – or even looking, until they have accepted an offer (which is free of conditions.)

    Filing an action against their current employer, of course, is not a great option. If the New Employer is that much in doubt about a clear hire, how should the candidate feel?

    Employed candidates want to be able to maintain their current position and income in case the interview process does not yield a new job. It’s fine if you’re a former employee – like Gavaras.

    A more workable solution is required to protect people who are employed and wish to continue their profession in another environment.

    Happy hunting,

    Jim

  • Douglas Friedman

    Thank you for a well written and interesting article. I didn’t realize that the more “employee proactive” type of process that you detail was becoming so popular. I’ve been involved in several non-compete disputes on behalf of clients and I’ve found that outcomes seem to vary quite a bit depending on which state the claim is adjudicated. My impression is that state law and precedent generally determine the breadth and enforceability of non-compete contracts. In cases where arbitration is used, the makeup of the panel seems to play an important role as I’ve seen different outcomes for very similar cases. The U.S. is widely acknowledged as having one of the most dynamic labor markets in the world, but this would seem to be one area where there is room for improvement by clearly setting a nationwide precedent for the scope of non-compete contracts and the factors that go into determining enforceability.

    Doug