Lawyers predict more non-compete litigation in ’09

As the nation’s economy continues its downward spiral, employment lawyers say they expect disputes over the enforceability of non-compete agreements to rise in 2009.
With job layoffs growing in number, practitioners predict an increase in lawsuits filed on grounds that it is unreasonable to prevent a laid-off worker — who goes on to find other employment — from collecting a paycheck.
“My gut reaction is that these difficult economic times will make it more difficult for employers to enforce restrictive covenants,” said John M. McKelway Jr., of McCarter & English in Boston. “In general, if an employee is laid off or loses his job as a result of the current economic conditions, a court is going to closely scrutinize non-compete agreements.”
McKelway speculated that the industries likely to see an upswing in non-compete litigation are those involving brokers and salespeople who have access to a significant book of business.
“In the financial services industry that is in such turmoil right now, employees are going to say that it’s not fair that they can’t earn a living when the companies have created much of this mess themselves,” he said.

But John F. Tocci, a lawyer at Tocci, Goss & Lee in Boston, said that the circumstances surrounding a layoff is only one of many factors a judge considers when making an equitable determination on whether to enforce an agreement.

The mere fact that an employee was laid off for economic reasons would never serve as the sole basis for voiding such a covenant, he said.

In an effort to protect employers from liability, Tocci said attorneys preparing non-competes would be wise to narrowly and explicitly address the issue.

“Any employment lawyer worth his salt should be including language in there [that] says that the nature of the separation of the employee doesn’t affect the restrictive covenant,” he said.

While that language is critical to the court’s determination, Tocci added that if a judge is on the fence in a case involving a laid-off employee who was a good worker and engaged in no wrong-doing, the current economy is a factor that will likely tip the scale in that person’s favor.

“We’re going to see this come up a lot,” he said. “I think the court will find a way to either limit the application of the restrictive covenant or use its equitable powers not to enforce. If all other factors have a court teetering between one outcome and the other, where someone has a prospect of getting a job with a competitor or being out of work for a year because the economy looks so bleak, the court will be hard pressed to say, ‘You’ve got to stay out of work and collect unemployment.’”

Nixon Peabody’s Michael N. Sheetz of Boston agreed that courts are likely to consider the economic environment in assessing the validity of non-competes. But he said the most important consideration remains the nature of the customer relationship and the status of the employee in question.

“The employee’s lawyer may be able to develop some sympathy for a laid-off person, but that doesn’t mean they’re going to be able to go off and solicit his former customers,” he said. “That’s really where the issue lies.”