Section Review

Keeping Your Clients Competitive: Practice Points for Breaking Noncompetes

Jay Shepherd Martin Ebel
Jay Shepherd, left, and Martin S. Ebel, right, are partners at Shepherd & Ebel, a Boston employment-litigation defense firm. They frequently work with in-house counsel to protect companies' trade secrets and defend against noncompete lawsuits. They can be reached on the Web at www.shepebel.com.

Say you represent a company that's about to hire a new employee. The resume is rock solid, with plenty of experience within the same industry. The interviews go well. The references check out. It's time to make the offer. And then it happens: there's a noncompete agreement. And it looks enforceable. The company changes its mind. Doesn't make the offer. Not worth the risk. The company - your client - has been beaten by its competitor.

In the current "down" economy, more companies are turning to noncompete agreements to gain an edge over their competitors. Leading the way are the tech companies. In a recent survey conducted by Monster.com, 78 percent of high-tech companies reported using noncompete agreements to keep their employees away from their competitors. Eighty-six percent of professional-services firms use them. And they're proving effective: 44 percent of the companies surveyed reported that a noncompete was a major obstacle to at least one hire in the previous 12 months. In other words, these firms are being beaten by their competitors, who are preventing them from hiring the employees they desire.

Noncompete and trade-secret litigation is the fastest-growing area of employment law. If you represent employers, you need to know how to keep your clients competitive in the face of the aggressive litigation tactics that dominate these cases. Likewise, if you represent an employee subject to a noncompete, you must be able to advise your client on how to change jobs or rejoin the workforce without getting sued. And lastly, if you represent companies seeking to enforce noncompetes, the advice that follows will help you avoid some common mistakes.

Assess the lawsuit risk

Your employer-client calls you up and says, "We want to hire this person but she's got a noncompete from our biggest competitor. What do we do?" Naturally, this is a better call to receive than, "We've just been served." In fact, you should encourage your clients to ask their job candidates about noncompetes so that they don't learn of the potential lawsuit problem until it's too late. But that doesn't mean your clients should rule out candidates with noncompetes; it just means that they (and you) have some analysis to do.

One of the first things you need to do is work with your client to assess the real risk of a lawsuit. To do this, you need to know about the candidate's former employer. What are they like? Who runs the show over there? What are their motivating factors? Many companies have legitimate reasons for having their employees sign noncompetes. Their business may involve bona-fide trade secrets - information that they keep truly hidden from the outside world and that would cripple the company if given to their competitors. (Note that most drafters of noncompetes vastly overreach when defining trade secrets, often including things like client lists that can be found on their corporate Web site.) Other companies have a genuine need to keep certain key employees from taking their special knowledge and customer goodwill over to their competitors.

Unfortunately, many companies use noncompetes for less-defensible reasons. Some use them to cow their employees from jumping ship, often when the company is faltering (not the brightest way to foster employee loyalty). Other employers simply want to insulate themselves from ordinary competition (something that does not impress Massachusetts courts). Lastly, some companies of questionable ethics use noncompete litigation to conduct corporate espionage, using the former employee's noncompete violation as a pretext for discovering their rivals' trade secrets ("We can't know if she's stolen our secrets unless we look at theirs").

Having a sense of the former employer's motivations will help you and your client assess the likelihood of an enforcement action. So will their past track record. Between the candidate's own recollection and your own searches of court records, you should be able to find out if the former employer typically sues to enforce its noncompetes. Knowing this propensity will help you determine the risks.

Determine the noncompete's enforceability

Of course you also will need to consider the enforceability of the particular noncompete. Most commercial lawyers are familiar with the basic principles: that the agreement must be reasonable in scope, duration and geography. It must be supported by consideration. It must be designed to protect a legitimate business interest, such as trade secrets or customer goodwill. And it can't be contrary to public policy or statute (such as the Massachusetts prohibitions against noncompetes for doctors, nurses, lawyers and - go figure - radio and TV broadcasters).

There are other nuances to consider when gauging the enforceability of a particular noncompete. For example, did the employee's job change significantly after the noncompete was signed? If so, and if there was no other consideration for the noncompete beyond continued employment (as is usually the case), the noncompete may have been invalidated by the job change. Both the Supreme Judicial Court and the Massachusetts federal district court have ruled that way. Another factor may be the provenance of the candidate's customers. If a stockbroker brought with him an established book of business when he joined his former employer, he may be able to take his book with him when he leaves, regardless of the noncompete. These are the kind of factors you need to consider in advising your employer-client about the risks of noncompete litigation.

Decide whom to represent

Another thing you need to go over with your client is exactly who the client is. In other words, if your client-employer hires a candidate and the former employer sues the candidate and your client, whom are you going to represent? Oftentimes, the client-employer will want you to represent both it and the candidate, saving money and duplication of effort. This is often a mistake. Conflicts between the employee and the new employer are much more common in noncompete cases than in traditional employment lawsuits. Maybe the candidate did misappropriate her former employer's trade secrets, unbeknownst to you. Or maybe the candidate doesn't work out and the client-employer wants to fire her; how can you still represent both if the litigation continues? Even though it might seem more expensive, your client is usually better off hiring (and paying for) separate counsel for the candidate.

Understand the injunctive process

There are a number of things you should know about how a noncompete case unfolds. First, they move very quickly. Often a noncompete case will begin when the former employer files suit and seeks an ex-parte temporary-restraining order against the employee and the new employer. In fact, your client may not learn about the noncompete problem until the TRO is served. Expect that the other side will ask for and get expedited discovery and that a preliminary-injunction hearing will be scheduled within 10 days.

But there is some good news. When the former employer argues for a preliminary injunction, it will have a difficult burden to sustain. The standard requires the moving party to show: (1) that it's likely to succeed on the merits, (2) that it will suffer immediate, irreparable harm if the injunctive relief is denied and (3) that this harm outweighs any harm to the nonmoving party if the preliminary injunction is granted. This usually means that the fact pattern becomes more important than the legal issues. Often, judges decide to grant or deny a preliminary injunction on what they perceive as the equities (or inequities) of the case.

Consider early summary judgment

Noncompete cases also can move quickly through summary disposition. These cases often turn on the language of the noncompete. Questions such as whether the contract is infirm, who the party actually prevented from competing is, and other contract-interpretation matters can often be framed as issues of law. In these instances, early summary judgment may be warranted, with no need to conduct discovery to decide issues based purely on the law.

Consider filing a declaratory action

When you are convinced that the former employer will sue, you may want to make a preemptive strike by seeking a declaratory judgment. There are several advantages to this tactic, as well as some risks.

The first advantage to filing a declaratory action is that you get to frame the issues. This is important because how the judge first perceives the "story" of the case can greatly influence the outcome. Consider which description of the candidate is preferable: a money-grubbing opportunist who is attempting to steal the customers, secrets and goodwill of his former employer, or a hardworking salesperson merely trying to continue his career after being laid off by his former company. And remember: the first description is often used in an ex-parte setting, meaning that it will more likely stick with the judge and color subsequent rulings.

Choose the right state

Filing the declaratory action also may allow you to select where the case will be heard. In noncompete cases, much more so than in other employment-law cases, the state you litigate in could change the outcome of the case. For example, if you can get the case heard by a California court (and many high-tech companies here have offices and employees in California), you are almost certain to win. In California, noncompetes are rarely enforceable. This also may be the way to defeat a choice-of-law provision. A California court would probably not enforce a noncompete with a Massachusetts choice-of-law provision, given California's notoriously strong policy against noncompetes.

Try to get into the Business Litigation Session

Typically, though, you will file suit in Massachusetts. You should then consider filing in Suffolk Superior Court's Business Litigation Session (BLS). If you do, you will appear before one of two judges who are exceptionally well versed in the law of noncompetes. And the BLS truly has a "rocket docket." We recently had a case at the BLS where the time from filing to trial was less than four months.

What if neither party resides or has a principal place of business in Suffolk County? Keep in mind that the Massachusetts Trade Secrets Act ("the Act") provides for venue in Suffolk County if you're seeking injunctive relief. If trade secrets are an issue in your case (and a noncompete almost always includes provisions about trade secrets), you can use the Act to bring your claim before the BLS.

Shift the burden

The last benefit conferred by filing a declaratory action is burden shifting. The former employer is now the defendant. The judge may ask them to explain why they did not move to protect their interests by filing suit themselves. There may be a sense that they have slept on their rights. Also, the defendant may forget to immediately move for injunctive relief, since it's usually the role of the plaintiff. The more time between notice to the former employer and its request for injunctive relief, the better your client's position. The court might conclude that the former employer would have acted much sooner if their interests had truly been at risk.

Consider the risks of a declaratory action

Sometimes it is better to let sleeping dogs lie. You may file suit in a matter that would otherwise never have been litigated. You also may choose a particular venue (like the BLS) hoping to get better results for your client and end up on a track so fast that it costs your client money it otherwise would not need to spend. Beware of asking for a speedy trial, as provided for in the declaratory-judgment statute. You may become handcuffed by this request: even if the situation later warrants slowing the process down, opposing counsel may use the request to continue at breakneck speed.

Approach settlement creatively

At some point in the litigation - perhaps even before filing - you will probably discuss settlement. Being creative with your approach to settlement can pay dividends. For example, you might file your action but hold off on serving it until you've engaged in settlement negotiations. If the talks break down, you can then serve the complaint, ensuring that you still get to frame the issues and choose the venue. (In superior court, you have 90 days to serve the complaint.)

You can often obtain a favorable settlement by finding out which customers are really important to your client and to the former employer. In our experience, once the players have identified who they really care about, settlement is either impossible or fairly easy.

Another settlement tactic is to identify a claim against the former employer to trade for a release from the noncompete. This often comes up where the former employee is an inside salesperson. These salespeople are nonexempt under the Fair Labor Standards Act, even if they're salaried, but many employers fail to pay them overtime. In such cases, the leverage gained by the specter of an overtime claim (with the prospect of triple damages and attorneys' fees) can be enough to stop a noncompete lawsuit.

Conclusion

When your client-employer is prevented from hiring the candidate it wants because of a noncompete agreement, your client's competitor has beaten them. Similarly, if your individual client loses a job opportunity because of a noncompete, the client can't compete in the marketplace. But with some aggressive and creative litigation strategies, you can help your clients break their noncompetes and keep these clients competitive.

©2014 Massachusetts Bar Association