Monday, July 13, 2009

Employee's Declaratory Judgment Claim on Non-Compete Not Ripe for Decision (McKenna v. PSS World Medical)

It is difficult enough these days for employees to go job-hunting, even in their areas of expertise. But that task becomes more complicated if the employee has a non-compete hanging over his head.

For some employees, pursuing a declaratory judgment action regarding the enforceability of a non-compete is an investment worth making. Though expensive, this type of action, if successful, can help an employee escape the shackles of a non-compete and lead to a prosperous job opportunity. New employers may even be willing to subsidize a lawsuit, particularly if it is successful.

However, there is no guarantee an employee's declaratory judgment claim will ever get heard, particularly if the venue is federal court. And this is exactly what happened to Mark McKenna, a medical equipment salesman, who challenged his non-compete only to have a federal court dismiss it on the grounds there was no ripe dispute.

McKenna's claim resembled one I see frequently. An employee has an agreement which is arguably overbroad in its restrictions, and he has identified potential job opportunities which may be available to him but for his non-compete. McKenna filed suit and alleged that not only was he aware of certain opportunities in the medical supply business, but also that "prospective employers [were] unwilling to hire him as a result of the existence" of his non-compete.

McKenna did not allege that he had an offer or conditional offer from a specific new employer. It was this omission that proved fatal. McKenna's former employer removed the action to federal court and argued that the controversy was not ripe for review under the Declaratory Judgment Act.

That statute permits (but does not require) a court to declare the rights of the parties in the case of an "actual controversy." Under the Third Circuit's interpretation of the Act, this requires a court to focus on three factors when determining whether to issue a declaratory judgment:

(1) the adversity of interest;
(2) the conclusivity that the declaratory judgment would have on the legal relationship between the plaintiff and defendant; and
(3) the practical help of the judgment.

The court held that the "adversity of interest" factor did not favor the exercise of jurisdiction, primarily because McKenna never alleged a specific opportunity being foreclosed by his ex-employer's threatened enforcement of the non-compete. If an employee can locate a job opportunity, secure a commitment of some kind regarding his hiring, and demonstrate an effort by the ex-employer to enforce the covenant, the "adversity of interest" factor likely will favor jurisdiction.

The second factor, "conclusivity", also indicated the court would be issuing an advisory opinion. For starters, the court had no set of facts regarding the employment opportunity. Most likely, the court thought it could not apply a "reasonableness" standard to the covenant without any idea of what job McKenna was seeking. The other unspoken factor was that the covenant at issue was a client non-solicitation clause, a restriction that is inherently fact-specific and less broad than an outright prohibition on work in an industry.

Finally, the court held that the "utility" factor was no help to McKenna. The court's reasoning here was curious - it basically said that it could not consider the impact of a ruling on a third party such as McKenna's prospective employers. Arguably, this makes no sense since a person's ability to become employed is totally dependent on the willingness of someone to hire him or her. The court would have been better off ruling that the client-specific nature of the restraints would require the court to consider very specific facts about McKenna's new employment before determining whether the covenant was valid.

Declaratory judgments may indeed be helpful for employees. When the restraint that is subject to challenge is an activity covenant - a non-solicitation or a non-disclosure clause, for instance - the task of declaring a party's rights becomes complicated. Those covenants are always fact-specific, as solicitation of one client may be permissible but another may be improper even under a well-drafted covenant. For general non-compete clauses, the court may have a basis to rule on an agreement without hearing detailed evidence about a specific job opportunity. The law concerning those restrictions is such that a determination on the face of the document may be proper.


Court: United States District Court for the Western District of Pennsylvania
Opinion Date: 7/9/09
Cite: McKenna v. PSS World Medical, Inc., 2009 U.S. Dist. LEXIS 58292 (W.D. Pa. July 9, 2009)
Favors: Employer
Law: Federal

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