Wednesday, July 4, 2012

Applying the Logic of Empro to Non-Compete Cases

One of my favorite opinions is Judge Easterbrook's decision in Empro Mfg. Co., Inc. v. Ball-Co Mfg., Inc., 870 F.2d 423 (7th Cir. 1989). It's classic Easterbrook: short, clear, rooted in public policy, and beautifully persuasive in the way it resolves an issue that divided courts. Judge Easterbrook himself has said that he is surprised Empro still has enduring impact more than 20 years after he wrote it.

The case dealt with pre-closing liability, addressing what legal obligations parties to a business transaction have to each other when they reach a preliminary agreement (that is, a letter of intent) with details to be ironed out later. Judge Easterbrook applied an objective theory of contract law, finding that the parties' "intent" is grounded in the contract terms they use, not some ephemeral, or subjective, "meeting of the minds." Written terms are the best expressions of intent; the parties tend to forget, or selectively interpret, what they said leading up to the contract signing.

Okay, so on its face, the case has nothing to do with non-competes. Or does it?

Non-compete agreements are one of main areas of litigation that deal with common-law (not UCC) contract rules. General principles of contract construction often are front-and-center in non-compete litigation. And, from my experience, non-compete cases bear a tang of similarity to the Empro problem. Let me explain three situations in which the parties' subjective expectations - expectations which often are not contained in a contract term or condition and which arise pre-closing - can become an issue in litigation.

Preliminarily, it's important to keep in mind that non-competes usually are standardized agreements that are applied (perhaps slightly modified) throughout an organization. This is a good thing, as form agreements reduce transaction costs - savings that are passed down throughout the company in the form of better bonuses, commissions, and salary increases. But because agreements are standardized, they often are not tweaked when an employee is brought on board. So pre-signing discussions or "terms" may not make their way into a final signed document, even if the new employee and his recruiter (usually a mid-level manager or human resources officer) have some preliminary understanding of what is expected. This is the Empro problem through and through. Here are three paradigms:

  1. The scope of restricted customers. This problem creeps up often. A sales employee who accepts a job may have a garden-variety customer non-solicitation covenant. He or she may think that any customer brought to the new company should be exempted from the restriction. After all, the employer may do nothing to facilitate the relationship. But unless something is written in the contract to express this intent objectively, the employee will have to defend on reasonableness - a much more arduous task than defending on breach.
  2. Policy on enforcement. I've had many employee clients come to me after a lawsuit has been filed and who have said something along these lines: "When I was hired, I was told as long as I avoid my top accounts, the company wouldn't come after me." This may persuade an employee to join, but it's certainly not a binding statement and shouldn't even be admitted into evidence. Still, it is an unfortunate reality of non-compete cases when an employee seeks broad, irrelevant discovery into the company's "policy" of enforcement, either in whole or in part.
  3. Indemnification. What happens when an employer tells an employee that it will "cover" any litigation costs incurred as a result of hiring him or her away? The best protection for an employee is to make sure the indemnity is contained in some agreement - usually the new employment agreement or a separate indemnity contract. Often, though, employers won't write in such an obligation. If litigation ensues, the employer may feel differently about spending money on lawyers. For starters, the employee may not perform up to anticipated standards, so the marginal cost of retaining that employee through a lawsuit is prohibitive. The litigation itself could be expensive. And it could go south quickly, particularly if a restraining order is entered. An employee's expectation to receive a continued defense, or even salary indemnity, may not be binding if a contract does not contain a term confirming this expectation.
These problems may give rise to other defenses. But Empro would seem to significantly undercut alternative theories of recovery or extra-contractual defenses. The beauty of a case like Empro is its certainty and clarity. In a perfect world, parties would set forth all the material terms and conditions rather than rely on pre-contract expectations. The world of non-compete litigation is not perfect, though, and these issues creep up repeatedly. An Empro-like analysis would go a long way towards simplifying litigation. 

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