Friday, August 15, 2014

At a Preliminary Injunction Hearing, How Likely Is an Employer to Win?

There are problems with statistical analyses. One of them is that the data sampling size may not be reliable or that the parameters established tend to skew results.

I am no statistician, but I have enough of a background to be dangerous. I decided to conduct a fairly rudimentary analysis of reported non-compete decisions so that I conclude how likely companies were to obtain a preliminary injunction in non-compete disputes at a contested hearing. This is a very narrow inquiry.

Because I only have so much time (and a trial in 10 days), I tried to obtain the best data I could, realizing full well that it was simply a subset of the actual number of decisions floating somewhere in the public domain. But I believe my data is more reliable than those used to predict a presidential, here goes.

Conclusion: At a contested hearing, employers successfully obtain a preliminary injunction to enforce a non-compete agreement about 60% of the time.

Data Summary: I reviewed a sample of federal district court cases from July 2013 through August 14, 2014. I specifically limited my search to exclude appellate decisions (which would review the grant or denial of an injunction) and to exclude state trial court reports, because only a handful of states publish them online. Since federal courts issue opinions that follow the same general format, I found this to be the most reliable source of information. Finally, I only looked at preliminary injunction decisions after contested hearings, where the matter was fully briefed and the court had to decide issues of fact and law.

During this one-year window, I excluded the following from my analysis:

(1) Controversies between franchisors and franchisees (of which there were a significant number);
(2) TRO rulings, because those often times contain a sparse record for the court to consider and may not really be "contested" in the evidentiary sense;
(3) Non-compete issues arising out of a purchase or sale of a business; and
(4) Decisions that dealt only with trade secret enforcement.

I also took a subjective look at the case if the court was split (or granted the injunction only in part). That is, I made a qualitative assessment as to what kind of relief the moving party obtained and what it actually got after a hearing. If the party successfully enforced a key part of a restrictive covenant, I counted this as a favorable outcome for the employer. If it lost and only was able to enforce a non-disclosure covenant, I determined this to be a favorable outcome for the employee.

Other Observations: The data set was limited to 23 comprehensive decisions. This seems like a small number, but again, the parameters that I chose were very narrow and focused only on contested injunction hearings over a narrow span of time. I assessed what I believed were the court cases that met all the criteria in which I was interested in assessing. Though I expected to see 50 cases, the 23 I selected came from all across the country with both employer-friendly jurisdictions (Florida) and employee-friendly states (California) represented.

The conclusion of a 60% victory rate for employers after an injunction trial is, frankly, a little higher than I expected. This is so for a few reasons: (1) the difficult injunction standard employers must meet; (2) the hesitancy of courts to enforce restraints of trade; and (3) the perception that employees quickly settle obvious cases where the facts are bad. If all these are true, then I would think that contested hearings would skew in favor of employees. Apparently, not so.

Interestingly, I found no real clear pattern from the results. I found cases where courts refused to enforce agreements despite seemingly clear evidence of data theft, and cases where an employer enforced an agreement that appeared overly broad. There was no unifying theme among the decisions. This fits with the highly fact-intensive nature of these disputes.

All this underscores the fact that results are not predictable. I believe it is difficult to benchmark success when parties let a judge decide, and that it would be irresponsible to conclude that a party's chances of success ever are much greater than 50-60% even on the strongest facts.

Wednesday, August 13, 2014

Will the Seventh Circuit Weigh In On the Fifield Rule?

The body of work following the decision in Fifield v. Premier Dealer Services is somewhat scattered at best. Federal courts are divided on whether it represents the law in Illinois, with courts taking divergent views.

As most readers may know by now, Fifield stands for the proposition that a covenant not to compete signed by an at-will employee requires at least two years of continued employment for that to constitute sufficient consideration. The key aspect of Fifield is that this consideration rule applies even when an employee signs a covenant at the start of employment, rather than during the course of employment. An undecided issue is how Fifield applies to lawsuits outside Illinois' First District (that is, Chicago).

The Seventh Circuit, though, is primed to weigh in. The plaintiff in Instant Technology LLC v. DiFazio has appealed its loss to the circuit court, and one of the central features of the district court's holding was that Fifield barred the non-compete claims. The district court judge discussed Fifield at length in his memorandum opinion. My discussion of the district court ruling is here.

The plaintiff in Instant Technology is due to file its appellate brief in a few weeks. I will look forward to reading how much it attacks the reasoning from Fifield and whether the two-year rule is likely to be a central feature of the appeal.

Tuesday, August 12, 2014

In Non-Compete Suits, Is the Employee's Age Relevant?

It's a given that courts consider a wide range of facts - perhaps too wide - when ruling on enforcement actions. Already burdened with figuring out the competitive inflection points between warring companies on a truncated record, courts also must balance a completely unrelated issue. Hardship. As in, how would enforcement of a non-compete through a court order harm an employee?

This inquiry, part of the widely used "rule of reason" test, mandates a look at softer facts that really have nothing to do with the merits of the case. Instead, the collateral inquiry all but invites the court to take into account evidence that is highly personal .

This begs a question that few courts tackle head-on. How relevant is age?

I started thinking about this after I read an article by Josh Zumbrun from the July 14 Wall Street Journal ("Lower Job Churn Hurts Young Workers" at p. A2). The article describes a compelling economic rationale for mobility among younger workers, and consequently could be an endorsement that younger workers should be released from non-compete enforcement. The article discusses Federal Reserve Chairwoman Janet Yellen's concern over the lack of mobility among younger workers. The following passage is particularly illuminating:

By hopping from employer to employer, especially early on, workers find jobs better-suited to their skills, build their resumes, bid up their salaries and boost lifetime earnings prospects. They eventually settle down and change jobs less frequently.

Sounds reasonable.

Is this a consideration, though, for courts? It could be, depending on the strategic direction a defendant wants to take. In the context of non-compete battles, time is of the essence and a defendant spends a lot of time reacting. It's conceivable that a defendant could obtain an opinion from a labor economist on the issue of hardship, although that is a hefty expense few can afford.

I used to think of the age factor from a different perspective. Older workers tend to be less mobile and not as attractive on the open market. That could militate against enforcement, since courts occasionally (perhaps rarely) comment on this when looking at the hardship issue. The Wall Street Journal article sort of flipped my thinking and takes a longer term view of the economic impact of not changing jobs.

The tension is interesting because courts used to confront fact patterns where the older, seasoned worker developed goodwill, sales contacts, and enough embedded knowledge that her move to a competitor seemed most likely to pose a threat. In our more technology-driven economy, though, it often is the younger worker who imparts the most value to a company or who is more likely to innovate by developing a new product or service. The economics of job mobility could be seen as militating against non-compete enforcement for these younger, valuable workers.