Friday, January 16, 2015

Non-Compete Disputes and the Mootness Rule on Appeal

One of the reasons non-compete cases generate a lot of appeals is that the law is tense. By that, I mean that non-compete cases present a unique tension between freedom of contract and freedom to compete. And because public policy underlies many non-compete cases, appellate courts often scrutinize trial court rulings more carefully than garden-variety contract disputes or tort judgments.

But taking a non-compete case on appeal presents a unique legal issue: mootness. Most non-compete cases concern an agreement of relatively short duration, say one year or maybe two. Even if litigation is expedited, the non-compete period may run its course if there is an appeal.

How courts treat the issue of mootness on appeal is one of the more interesting procedural questions that non-compete lawyers face. Here are the three possible treatments:

1. Expiration of the covenant renders the appeal moot. Some courts treat expiration of the covenant on appeal as mooting any issue pertaining to injunctive relief. Remember: mootness only affects the injunction request. A damage claim can subsist for years after the defendant is free to work unencumbered. Texas is an example of a jurisdiction that seems to have a fairly strong mootness rule, as reflected in the recent case of Argo Group US, Inc. v. Levinson, 2015 Tex. App. LEXIS 250 (Tex. Ct. App. Jan. 14, 2015).

2. Expiration of the covenant does not impact an appeal. Other courts take the opposite approach, finding in essence that the appeal may not be moot. The doctrine is called "equitable tolling." A line of Ohio cases suggests an appeal from a denial of injunctive relief may not be moot even if the term of the post-termination covenant has run. But as the case of Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2013), illustrates, this doctrine relies heavily on the factual and procedural posture of the case. Generally, a plaintiff must move promptly for injunctive relief to secure the benefit of the equitable tolling doctrine. If it does so, and an appellate court finds the trial court incorrectly denied the injunction, the employer still can gain the benefit of its bargain through a new term of injunctive relief that nominally extends past the expiration date. The Tradesman case dealt with the opposite fact pattern. The employer there did nothing to pursue preliminary injunctive relief and then, after the covenants expired, sought to impose a permanent injunction - effectively restarting the non-compete period against its ex-employees. As the Seventh Circuit's opinion discusses, this type of litigation conduct will not allow a plaintiff to pursue an injunction.

3. Expiration is a function of what the non-compete says. The final approach that some courts have taken is to push the expiration or mootness issue back onto the contract itself. Courts in Illinois seem to have endorsed this approach, though the case law has enough fluidity in it to make it sound like there still are no hard-and-fast rules on mootness. The notable cases are Prairie Eye Center, Ltd. v. Butler, 329 Ill. App. 3d 293 (4th Dist. 2002), and Stenstrom Petroleum Svcs. Group, Inc. v. Mesch, 375 Ill. App. 3d 1077 (2d Dist. 2007). Both look at mootness in the context of whether the parties agreed upon an extender clause within the non-compete itself. As a result, it is fairly common to see sophisticated Illinois-based agreements with robust remedies sections incorporating the holdings in Prairie Eye Center and Stenstrom Petroleum.


I generally don't have much of a problem with options 2 or 3. Option 1 brings squarely into play the law of unintended consequences. In those jurisdictions that endorse a rigid mootness rule, the law encourages employers to adopt longer covenants so as to give them a fair chance of litigating the case, while at the same time preserving appeal rights.

In this respect, a rule that appears employee-friendly at first actually may not be. Employers will tend to compensate for the common law and "bargain" for longer post-termination covenants, knowing the mootness rule reduces the value of litigating a short non-compete in the first place.

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