Tips for Litigating Non-Compete Agreements

A court's essential inquiry generally will focus on whether the employer is reasonably seeking to protect legitimate business interests or, instead, merely to squelch competition. It will also weigh the public interest. In analyzing whether a court will likely uphold the agreement, ask these questions:

• Are the restrictions reasonable in duration (e.g., one or two years) and geographic scope (the employer's established market)?
• Has the employer actually maintained the secrecy of any purported trade secrets?
• Do those secrets provide a unique and hard-earned competitive advantage to the employer ' or is the employee really just relying, instead, on generally held industry skills?
• Could a competitor obtain the secrets by legitimate means?
• How will enforcement affect the employee's ability to earn a living?
• Is the employee a long-term senior executive who was privy to critical information, or a low-level employee of short tenure?

Injunctions

Trade secret cases often move much faster than ordinary lawsuits. An employer must promptly consider whether to seek a temporary restraining order or preliminary injunction. The employer cannot credibly ask a court to treat a matter with urgency unless the employer acts with urgency itself; as a result, inordinate delay on the part of an entertainment employer can undercut its claims for such protections.'If it decides to proceed, the employer must meet several elements to obtain injunctive relief, the most crucial of which is to demonstrate the ongoing irreparable harm that could not be adequately remedied, later on, by an award of money damages.

The employee, too, may wish to consider initiating the suit promptly. Bringing an action for a declaratory judgment, and perhaps tortious interference with a new employment relationship, can be advantageous. It can allow employees to select the forum, position them sympathetically as plaintiffs and resolve uncertainty that may be clouding their employment prospects.

For employers, the stakes are high when seeking a preliminary injunction. These cases rarely go to a full trial. As a result, the outcome of an injunction hearing can have an enormous impact on the ultimate resolution of the matter ' either by driving a favorable settlement or by stigmatizing the movant's case irretrievably.

And even success at an injunction hearing may be less concrete than the employer had hoped. That is, instead of a knockout order barring the ex-employee from working for a competitor, the outcome can sometimes be less gratifying ' say, an order requiring document preservation, or generically prohibiting the former employee from using confidential information in service of the new employer. For the employer, will the risk and expense be justified if the result is a paper victory?

Cease-and-Desist Letter

Whether or not injunctive relief is sought, sending a cease-and-desist letter is often advisable for the entertainment employer. Such a letter can serve multiple purposes: reminding the employee of his obligations and the consequences of breaching them; notifying the new employer of the covenants; inviting a constructive exchange and possible resolution; and helping to demonstrate to a court that injunctive relief is needed, if the letter is ignored or met with intransigence. Obviously, the letter should be factually accurate and legally sound, or it may give rise to claims for tortious interference or defamation by the former employee or new employer.'Upon receiving such a letter, the employee should promptly write back explaining, in detail, why he or she believes the former employer's claims are groundless and will fail.

For the employee, the risks are similarly high in deciding whether to pursue a declaratory judgment suit. Such a suit is expensive, obviously, and may generate litigation that would not otherwise have been pursued. But these risks are sometimes worth running, especially where the employee can gain a forum advantage by being the first filer.

A breach of contract claim will obviously be central to the employer. Depending on the circumstances, some other possible common-law claims may include conversion, unfair competition, conspiracy, fraud and usurpation of corporate opportunities.

Statutory Claims

A further question is whether to raise statutory claims for misappropriation of trade secrets. Claims under the newly enacted federal Defend Trade Secrets Act of 2016 provide clear definitions of trade secrets, which may (or may not) be preferable to how they are defined in the agreement. The statutes also allow for attorney fee shifting to the prevailing party, but that statutory fee shifting could cut either way and, again, may be no better than what is already provided for in the original employment contract. Importantly, the federal statute also provides for exclusive jurisdiction in federal court.

Finally, a claim under the federal Computer Fraud and Abuse Act (CFAA), 18 U.S.C. '1030, may be warranted in cases where employees copy or destroy an employer's computerized data.

Loose Ends

The next factors that follow here may just seem like loose ends, but they can nonetheless have a potent influence on the outcome of litigation:

• Did the employee receive consideration? Some courts emphasize the need for consideration in connection with non-compete agreements. Yet it is not uncommon to learn that an employer had existing employees sign such agreements without providing any obvious additional consideration upon execution. Such agreements may not be enforceable.
• Does the employer have clean hands? If the employer has not properly complied with its own obligations ' whether by improper termination, harassment or discrimination, failure to make payments owed, changes in employment conditions, disparagement or otherwise ' then the employee may successfully challenge an enforcement action by raising affirmative defenses and counterclaims.
• Assuming the agreement has a choice-of-law provision, is it even enforceable? Because non-compete agreements represent restraints of trade, they implicate policy interests that extend beyond the parties alone. So even if the agreement calls for litigation in a distant forum, or under a distant state's law, a more local forum may disagree. Applying its own choice-of-law analysis, it may instead conclude there is not an adequate relationship to the selected forum or that local law governs anyway because of an overriding societal interest in the agreement.

Philadelphia-based Cord Clayton's law practice involves complex commercial litigation, with a particular focus in breach of contract and business tort cases; shareholder, partnership and other internal conflicts among different ownership interests; and class action defense.