Tuesday, October 11, 2016

Non-Competes Gone Wrong: The Unneeded Belt-and-Suspenders Approach

When you have reviewed as many non-competes as I have, it doesn't take long to spot major red flags. They often times arise in the context of at-will employment contracts for regular, average, run-of-the mill employees who do not serve in an executive capacity. Indeed, the oddity is that this group of contracts for people who pose the lowest threat tends to be the most oppressive and poorly drafted.

Here are the 7 most common red flags associated with unreasonable non-compete contracts:

  1. A broad non-compete clause that prohibits work in an entire industry, with no limiting condition narrowing the covenant to a specified group of jobs.
  2. A vague definition of a "competitive business," which is sometimes nominally used to define the scope of the non-compete restriction.
  3. A broad geographic scope that may be commensurate with the employer's line of business, but not with where the employee has developed her sphere of influence.
  4. A non-solicitation covenant that contains a broad, untethered definition of "customer."
  5. A non-solicitation covenant that extends to prospective customers who never developed a relationship with the employer.
  6. A confidentiality clause with no time limit.
  7. A confidentiality clause that contains an overbroad definition of "confidential information," suggesting it can be a backdoor non-compete clause that extends in perpetuity.
These covenants - particularly when applied to mid-tier employees - are frequently not litigated because the cost of doing so is prohibitively high for the employee. To be sure, most employees will make a rational economic choice to incur those costs only if (a) the new employer is willing to subsidize the effort (rare), or (b) the potential long-term gain from invalidating the agreement exceeds the sum of (i) litigation costs and (ii) discounted risk of a non-indemnifiable damages judgment (more rare). Frankly, the economics often just don't work.

When these agreements do make their way into court, judges will notice the seven red flags I identified above. My experience is that they're willing to overlook one or two as the work product of an overzealous attorney. However, when several (or sometimes) all of these factors are present, courts are inclined to strike the agreement and view it as a blatant overreach on the employer's part.

Sometimes this occurs at the earliest stages of litigation before the expensive discovery process begins. This is what occurred in Seneca One Finance, Inc. v. Bloshuk, No. 16-cv-1848, 2016 U.S. Dist. LEXIS 138866 (D. Md. Oct. 6, 2016), a case in which 6 of the 7 red flags were present in an employee's non-compete agreement. The Maryland court had little trouble tossing the case after the employee sought an early dismissal.

One of the structural impediments to non-compete litigation is the relative unwillingness of many judges (the Maryland court being an exception) to dismiss cases early. I have been an advocate of "quick-look" proceedings in non-compete litigation as a means to tease out facially overbroad agreements and those where consideration is sorely lacking. This process cuts against the design of our adversarial system where, for better or worse, the civil discovery process weeds out cases through sheer attrition.

The problem, in my mind, is that discovery attrition can work in cases where the parties are on a level playing field to litigate (many patent cases), or where the party with a relative lack of resources has the ability to recover monetary damages (discrimination or personal injury cases). In a non-compete dispute, neither of those fact patterns is usually present. And if we're to maintain a system where the freedom to compete and the freedom to contract stand in equipoise, then a quick-look system may be the only route to achieve that.

No comments:

Post a Comment