Planning ahead key for both sides of non-competes

Love them or hate them, non-competes are a fact of business in all states but California, Oklahoma and North Dakota.

Whether your employee left and you need to enforce a non-compete, or you are hiring an employee subject to a non-compete, proper advance planning can help prevent a winnable case from turning into a losing case.

In the May issue of New England In-House, you were advised about the need to ensure your agreements are both current and provide the maximum protections available — consistent with your corporate culture (“Taking your non-compete from good to great”). That is just the starting point.

While there are variations on the theme, a typical non-compete dispute has a predictable pattern. An employee leaves and joins a competitor, arguably in violation of a non-compete. The former employer quickly sends a letter demanding that the employee immediately quit his job. Sometimes the letter says that the new employer must terminate the employee.

The employee and/or new employer respond by disputing the violation or by proposing limits to the scope of the employee’s prospective duties.

If the parties are unable to reach an agreement, the former employer files a lawsuit and asks for an immediate injunction prohibiting the employee from moving forward with the job. A hearing is held a few days later. The employee and new employer scramble to file an opposition. The court conducts a hearing and issues its decision.

From start to finish, all that happens in a matter of weeks. And, although the cases generally linger afterward, for all intents and purposes they are won and lost at the injunction stage.
Accordingly, winning at that stage is critically important.

When these issues arise, they are frequently without advance notice and quick action is imperative. Indeed, undue delay on the part of the former employer can kill an otherwise strong case.

Quick action means little time to investigate or prepare — contrary to the type of thorough investigation and preparation that would ordinarily be done in advance of most other lawsuits.

So knowing what to do ahead of time is critically important.

Whether you’re on the side enforcing the agreement or on the other side, there are steps you can take to enhance your chances of success. They are divided below by which side you find yourself on.

Enforcing restrictive covenants

The following steps should be taken (or at least considered) in connection with enforcing restrictive covenants. (Not all steps will apply to all situations.)

Conduct an exit interview.

Remind employee to leave all company property and information.

•        Trade secrets
•        Documents (electronic and physical)
•        Works in progress
•        Nothing on home computer
•        PDA/smart phones/cell phones
•        Laptops
•        Badges/access cards
•        Obtain written certification of
compliance

Confirm compliance with all existing  obligations.

•        Fiduciary duties
•        Invention assignments
•        Confidentiality
•        Non-compete

Remind employee of all agreements and continuing obligations.

•        Invention assignments
•        Confidentiality
•        Non-compete
•        Non-solicitation
•        No-hire/anti-raiding
Provide all reminders and agreements in writing.

•        Written acknowledgement of receipt
•        Written promise to comply

Ask for identity of new employer.

•        If undecided, ask employee for a commitment to provide an update upon a decision being made
•        What is the new title?
•        What does the position entail?
•        Is there overlap with existing
technologies and/or customers?

Turn off all access.

• E-mail
• Voice-mail
• Passwords
• Physical ID/access cards

Review all computers and servers through which trade secrets and other confidential information could be taken. Look for improper use and new or odd patterns of usage. This may require retaining a computer forensics specialist.

•        E-mail
•        Social media
•        USB/thumb drives
•        External hard drives and disk burners
•        Downloaded and uploaded files
•        Deleted/altered/copied files
•        FTP sites
•       Websites

Send a cease and desist letter if there is, or is likely to be, a breach of obligations.

Consider whether to file a lawsuit and possible causes of action (below). If the decision is to sue, the lawsuit should be commenced promptly. Delay can be fatal.

•        Breach of contract
•        Breach of fiduciary duty
•        Misappropriation of trade secrets
•        Inevitable disclosure
•        Conversion
•        Computer Fraud and Abuse Act
•        Corporate raiding
•        Tortious interference
•        Unfair competition (G.L.c. 93A)

Consider whether to sue both the former employee and the new employer, or only the former employee.

Anticipate defenses and counterclaims (see other side) and factor into decision of whether to sue.

•        Marshal evidence to respond
•        Identify witnesses (fact witnesses, expert               witnesses)

Line up a bonding company.

Criminal complaint?

Defending against restrictive covenants

The following steps should be taken (or at least considered) in connection with defending against an action to enforce restrictive covenants.  (Like the steps for enforcing restrictive covenants, some steps may not be applicable in all situations.)

Return all company equipment, documents and information. Take nothing. (See other side.)

Review all restrictive covenants for the nature of obligations.

Review possible defenses.

Basic requirements.

•        Limited in time, space, scope
•        Legitimate business interests:  trade secrets, confidential information, goodwill

Lack of consideration.
•        Timing of when executed
•        Changes in position
•        Duration of employment

Lack of irreparable injury/balancing of harms.
Former and new employer are not competitors.

• Overlap in competition is de minimis

Delay/moot
Equity/fairness.

•        Circumstances at signing
•        Stealth agreement
•        Circumstances at termination
•        Extraordinary hardship
•        Compensation/low-level employee
•        Contract of adhesion
•        Unclean hands

Selective/inconsistent enforcement
Employer breach
Employer change: successor/assign
Ambiguity
Novation
Antitrust
Marshal evidence in support of any potentially-applicable defenses.
Plan how to respond during an exit interview.
•        Acknowledge the enforceability of the agreement?
•        Disclose the identity of the new
employer?
•        Disclose the nature of the new position?

At the earliest possible time — preferably before the new job is accepted — determine how the restrictions will be handled, and if appropriate, document it.
•        What are the implications of the
restrictive covenant?
•        Can the duties of the new job be
narrowed to avoid violating the
restrictions?
•        If not, can the new job duties be narrowed       to limit the harm, or likelihood of harm,                to the former employer?

Who will pay for the defense costs?

•        What if a conflict of interest arises
between employee and new employer?

Wait to be sued or go on offense with a declaratory judgment action?

Potential counterclaims?

•        Invasion of privacy
•        Wage Act
•       Wiretap Act
•       Stored Communications Act
•        Unfair Competition (G.L.c. 93A)

Russell Beck is a commercial and intellectual property litigator, trained mediator and founding partner of Beck, Reed, Riden in Boston. He also teaches trade secrets and restrictive covenants at Boston University School of Law, and wrote a book on non-competition agreements and related restrictive covenants. He can be contacted at [email protected].