Tuesday, March 15, 2011

One-Way Fee Shifting Clauses and Public Policy

Fee-shifting clauses are fairly common in non-compete agreements.

While most fee-shifting provisions in negotiated commercial contracts are mutual, employment non-compete agreements frequently contain one-way clauses. Under this scheme, employers often retain the right to obtain fees if they prevail in a dispute against an ex-employee. (Not suprisingly, I have yet to see a clause that allows only the employee to obtain his or her fees in a successful defense.)

One question I often hear from my employee clients is whether such a one-way provision is even enforceable.

At least a couple of theories are available.

First, some states may have statutes of general applicability that automatically construe one-way fee shifting provisions into mutual ones. California, Montana, and Washington are examples.

Second, a judge may be receptive to an unconscionability defense. For prevailing employees, this argument doesn't appear to give them a right to recover their fees. However, it may be a viable route to avoid fee-shifting in the event of a loss. An appellate court judge in Ohio in 1992 was open to this unconscionability defense, but since the parties did not raise it before the court, the issue was never decided.

Third, the rule of equitable modification may give a prevailing employee grounds to seek fees under a one-way fee-shifting clause. In those states that adopt equitable modification, rather than a strict blue-pencil rule, courts retain the ability to modify overbroad covenants to make them reasonable.

Can this rule be extended to allow a court to modify a fee-shifting clause? I don't know if there is any case that has ever ruled on this issue, but I think the argument has some intuitive appeal. In my mind, a lot would depend on the breadth of the restrictions, the parties' bargaining power, and the governing state's policy on reformation of covenants.

Because non-compete agreements implicate public policy unlike other commercial contracts, a higher degree of scrutiny of one-way fee provisions logically should apply. Whether a court actually will be open to this argument is something I have not yet seen.

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