Tuesday, March 6, 2012

Declaratory Judgment Actions: Ensuring the Dispute Is Ripe for Decision

Clients and colleagues of mine will tell you that I am a big fan of resolving non-compete disputes in the quickest, most efficient manner possible. By definition, these disputes are time-sensitive because eventually the covenant will lapse - and usually the lapse period is a matter of months. Plus, from experience, the discovery process is completely overdone in non-compete disputes, with document production becoming more of a lawyer, than truth-finding, exercise.

For the employee who may be left twisting in the wind, the best way to resolve a non-compete dispute is through a declaratory judgment action. For those unfamiliar with the concept, both federal and state law allow a court to decide a case or controversy and declare the rights of the parties under a contract.

Non-compete disputes are generally ripe for resolution this way, because an employee and an ex-employer often have divergent views about what an employee is permitted to do following termination. From an employee's perspective, here are the benefits of going on offense and pursuing a declaratory judgment claim.

1. Cost. Non-compete litigation is incredibly and unavoidably expensive. An employee can reduce expense by suing in advance of competing, or "breaching." If the employee sues to have an agreement declared unenforceable, or inapplicable perhaps, then she has eliminated one of the biggest costs in litigation: discovery about what she has done in her new job. She won't have to produce client records, invoices, and e-mails. Handled correctly, an employee can get a final resolution of the covenant's enforceability for a fraction of the cost incurred in a defending a breach of contract case.

2. Perception. Don't underestimate how some judges view a party defending a breach of the non-compete agreement. The judge may decide early on the employee acted recklessly, flaunted her contractual obligations, or competed in a manner that just doesn't seem fair. By suing to have a court declare the agreement unenforceable, a judge is likely to look more skeptically at the employer, particularly if the pre-litigation letter writing campaign demonstrates the employer has taken an unreasonable position. One judge has told me that he viewed a declaratory action by the employee as the "honorable" way to get the case decided. That's powerful stuff to hear.

3. Certainty. If an employee decides to make a frontal assault on the covenant and "breach" it, she may be distracted and worried about what to do in the new position. She may not know what to say to potential clients. She may not even be contacting some blue-chip clients, and may try to decide for herself what clients are immaterial. None of this is good. Her supervisors or co-workers also may be trying to carefully avoid stepping on potential land mines. A judicial resolution before the employee breaches the contract can remove this uncertainty and get people refocused on growing sales and cultivating clients.

4. Risk Mitigation. If the employee loses (which does happen quite a bit), then a declaratory judgment before breach occurs will have avoided potentially significant liability.

So what does an employee need to do to ensure that a declaratory judgment claim will be heard and adjudicated?

Well, first, there needs to be a controversy. If an employee has no future job prospect in the industry (and therefore no present intent or ability to compete), a declaratory judgment claim does no one any good. Second, the employer must demonstrate some intent to enforce.

An employee has to set up the case or controversy correctly, so she can plead the required elements of a declaratory claim. She can accomplish this by requesting a release from the non-compete obligation and pointing out a concrete opportunity that awaits her upon the grant of such a release.

Ordinarily, the employer will write back a threatening letter, indicating its clear intent not to honor the request and stating that it intends to sue upon breach. This, alone, should be enough to establish a case ripe for decision by a court. (On the flip side, such a request may be granted! This has happened to me more than once, to my client's sheer delight.)

If an employee announces no plans to compete, then it becomes more likely that a court will decline jurisdiction. Without something concrete to decide, a court won't get involved.

Here is a list of non-compete cases that discuss this issue, with the recent New Jersey decision from last week being of particular interest.

Stryker v. Hi-Temp Specialty Metals, Inc., 11-cv-6384 (D.N.J. Mar. 2, 2012).

Arakelian v. Omnicare, Inc., 2010 U.S. Dist. LEXIS 84828 (S.D.N.Y. Aug. 18, 2010).

McKenna v. PSS World Medical, Inc., 2009 U.S. Dist. LEXIS 58292 (W.D. Pa. July 9, 2009).

Bruehn v. STP Corp., 312 F. Supp. 903 (D. Colo. 1970).

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