Enforcing a non-competition agreement through litigation can be risky

Your company is a smart employer.

It ensures employees sign non-competition agreements before they commence employment as a way to protect its confidential information and trade secrets.

Then an employee leaves for the proverbial greener pastures of a competitor. The obvious next step is to file a lawsuit against that employee to enforce the non-competition agreement, right? Well, perhaps not.

Before making your foray into litigation, you should take into account not only the potential benefits, but also the costs and risks of litigation. A recent Massachusetts decision, for example, upped the ante of risk exposure to an employer filing suit against a former employee, namely, the possibility of an unfair trade practice claim and punitive damages.

The benefits of suing to enforce non-competition agreements are most obvious where enforcement is necessary to prevent former employees from misappropriating your company’s trade secrets or the goodwill it has built up with its customers.

A court order prohibiting a former employee from working for a competitor or soliciting his or her former clients or requiring the former employee to return company property, including confidential documents, may be vital to protecting your company’s most valued assets. If successful, a suit to enforce a non-competition agreement may protect the company from irreparable harm.

Another benefit is a suit sends a clear message to other employees and ex-employees that your company takes seriously its non-competition agreements. A successful suit may discourage a current or former employee from accepting a job with a competitor, where the employee signed an agreement not to do so.

Of course, not all such suits are successful. Courts will not always enforce non-competition agreements – even where the former employee clearly is working for a direct competitor.

In Massachusetts and many other states, courts will not enforce non-competition agreements that are not “necessary” to protect trade secrets or goodwill, or are unreasonable as to the types of activities prohibited, the geographical scope of the restriction or the length of the restriction.

Suing a former employee for breaching a non-competition agreement means your company will incur attorneys’ fees, which as a general rule are not recoverable even if your company wins the suit.

In addition, suits against former employees often are disruptive and detract management and other employees from more productive (i.e., profit generating) activities.

Employers must also assess the risks of suing former employees, including the risk the former employee will assert counterclaims against the employer for nonpayment or underpayment of wages, unlawful termination, or employment discrimination.

Punitive Ruling

A recent decision of a Massachusetts Superior Court judge reveals yet another risk: punitive damages.

In Brooks Automation, Inc. v. Blueshift Technologies, Inc. et al, filed in September 2005, Brooks Automation sued a former employee and his new company, Blueshift Technologies, alleging he breached a non-competition agreement and that Blueshift unlawfully used Brooks Automation’s trade secrets to obtain business from another company, from which Brooks Automation had failed to get business.

In turn, Blueshift counterclaimed that Brooks Automation unlawfully interfered with Blueshift’s relationship with third company (Applied Materials) by filing a frivolous lawsuit and then informing Applied Materials of the suit.

As a result, Applied Materials refused to pay Blueshift’s invoice of almost $210,000. Blueshift also alleged that filing a frivolous lawsuit and contacting Applied Materials constituted an unfair trade practice under Massachusetts law.

Not only did Brooks Automation lose on all of its claims against its former employee and Blueshift, the jury also found in favor of Blueshift on its tortious interference claim. But the bad news for Brooks Automation did not stop there.

The judge, in deciding Blueshift’s unfair trade practice counterclaim as is required under Massachusetts law, found that Brooks Automation filed its suit with reckless disregard as to whether there was any reasonable factual support for its allegations or arguable basis in law for its claims.

The judge concluded that Brooks Automation had committed an unfair trade practice under Massachusetts law by filing a frivolous lawsuit for the purpose of interfering with Blueshift’s contractual relationship with Applied Materials. The judge awarded Blueshift treble damages and ordered Brooks Automation to pay Blueshift’s reasonable attorneys fees.

Questions to Consider

In light of the risks that Brooks Automation poses, companies considering filing a lawsuit against a former employee for breaching a non-competition agreement should first address the following questions: