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ANALYSIS: 5 Things to Consider Before Suing Over a Noncompete

Aug. 19, 2021, 9:00 AM

Imagine you work as in-house counsel at a booming technology company. As you sip your morning coffee, a high-priority email from HR pops into your inbox. It contains a screenshot from LinkedIn and an alarming update: a former employee just joined a new tech startup down the road. The email includes a copy of the employee’s noncompete agreement and a request that you take immediate action to stop the employee from violating the agreement.

You know noncompete litigation can be high-stakes, and you know it can move fast. But before you rush to the courthouse, consider the following five questions to help shape your strategy.

1. What’s the risk?

Litigation can be time-consuming and expensive, and not all noncompete violations warrant a trip to court. Make a realistic assessment of the business risks associated with the particular violation. How similar are the employee’s old and new positions? How much access to confidential information did the employee actually have? What were the circumstances of the employee’s departure? How much of a competitor is the new employer? These questions will help you determine whether, and to what extent, the employee’s move is a threat to your business.

Consider the reputational risks, too. If the case is high profile, how will the media respond? What kind of message will suing—or not—send to other employees about future violations? How will litigation affect employee morale or future recruiting efforts? Reputational questions are an important part of any litigation risk assessment, but particularly so in the noncompete space where cases can grab headlines and many employees may be bound by similar agreements.

2. Is your agreement valid?

Make sure your covenant not to compete complies with state law. This requires staying on top of state legislative changes, as well as key case law developments. Set up docket searches and alerts to help you track new cases. Also confirm that your noncompete complies with general contract requirements like adequate consideration. Don’t assume that a court will blue pencil, or modify, an overly broad agreement instead of invalidating it altogether; a court’s willingness to do that varies by jurisdiction.

Employers should regularly review their noncompetes and tailor them to particular employees to ensure they are reasonable in time, breadth, and geographic scope. This is not the area for a one-size-fits-all approach. Employers should also think creatively about whether relying on a nonsolicitation or confidential information agreement instead would provide sufficient protection, because they are generally less scrutinized than traditional noncompetes. Smart and tight drafting on the front end is essential.

3. Should you send a cease and desist letter?

Consider writing a cease and desist letter to the employee and/or new employer, either in lieu of filing a lawsuit or as the first step in your litigation plan.

By sending a letter, you may be able to reach an acceptable agreement that will stop the unlawful behavior without the time, expense, and publicity of litigation, especially if the new employer is concerned about its own potential liability for claims like tortious interference with a contract or tortious interference with a prospective business relationship. Even if you think litigation is likely, a letter can serve a strategic purpose; for example, it can be evidence that the employee and/or new employer were on notice of the violation.

However, sending a letter will also tip off the employee and/or new employer to the dispute, and they may decide to file a declaratory judgment action to invalidate the noncompete. Time is often of the essence when noncompetes are at issue, so also consider whether you have time to engage in discussions. And don’t open yourself up to potential liability: only include allegations that are rooted in the facts.

Remember that anything you send will likely end up as an exhibit in litigation. So create a strategic paper trail, and be clear, professional, and as reasonable as possible in all communications.

4. Where should you file?

If litigation is your next stop, carefully consider where to file your lawsuit.

First, check the agreement. A noncompete should contain a choice-of-law provision, as well as a forum selection clause, to avoid forum-shopping by employees. But there may still be disputes about what law applies, and where to file, even if the noncompete contains those provisions. Consider the risks associated with various state laws and forums, and stay on top of related case law developments, which make a big difference in where and how you litigate your case. Noncompete cases are often brought in state court, but think about whether filing in (or removing to) federal court is a possibility, particularly in states that have strong public policies against restrictive covenants.

Also think creatively about whether you can bring other claims, like misappropriation of trade secrets or breach of fiduciary duty, in addition to breach of contract.

5. What relief do you need, and how do you get it?

Do you need a temporary restraining order, a preliminary injunction, and/or damages? Should you file a declaratory judgment action before you have been harmed? Should you request expedited discovery? These kinds of questions are key to determining your litigation strategy. Also think about what evidence may already be in your possession. Signed employment and separation agreements, HR policies, and the employee’s electronic communications can help prove you’re entitled to the relief you need to protect your business.

Legislative Landmines

No matter how you answer these questions, staying on top of changes in state and federal laws is crucial—even if you decide not to litigate. Employers should proactively monitor legislative changes and update their agreements accordingly.

In the past five years, almost a dozen states and the District of Columbia have taken steps to rein in noncompetes, particularly for lower-wage workers, and changes may be coming at the federal level too.

In his July 9th executive order, President Biden encouraged the Federal Trade Commission Chair to exercise the agency’s rulemaking authority “to curtail the unfair use of non-compete clauses. . .” And two senators recently re-introduced the Freedom to Compete Act, which would amend the Fair Labor Standards Act to ban noncompetes for most nonexempt workers.

As of now, there are no federal updates to noncompete law, but that may change under the Biden administration. In the meantime, employers should keep an eye on rapidly changing state laws, which may threaten the enforceability of their agreements.

Bloomberg Law subscribers can find related content on our Restrictive Covenant Agreements page.

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