Reprinted with permission from the July 15, 2016 edition of the The Legal Intelligencer.

When a key employee leaves a company, it can be traumatic for all concerned – the employer, the employee and even the new employer.  These days, such an employee is often subject to restrictive covenants that are designed to protect the prior employer.  Such covenants typically prohibit competition, solicitation and the disclosure of confidential information.  In considering litigation relating to such agreements – whether from the perspective of the employer or the employee – the following five tips may help guide your analysis.

It’s not (only) about the agreement

Unlike vanilla contract cases, noncompete agreements are never governed by the four corners of the document alone.  Instead, they represent restraints of trade that are viewed as inimical to our free market economy and, as such, must pass antitrust scrutiny.  That is, a court will not impose greater restraints than the agreement provides, but it may well trim back even restraints that are clearly spelled out in the contract.  So it is critical for both employers and employees to appreciate that, for policy reasons, these agreements may not be enforced as written.

A court’s essential inquiry 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 yourself these questions:

• Are the restrictions reasonable in duration (typically 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?

• Will the public be harmed if it loses the employee’s services (especially as to doctors and dentists)?

• Is the employee a long-term senior executive who was privy to critical information, or a low-level employee of short tenure?

Shoot Fast

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 the employer will 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 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 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.

But Aim First

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.

Such hearings are generally expensive, as well, because of the substantial amount of legal activity that gets crammed into a short period of time.  Moreover, a successful employer will generally have to post a bond to compensate other parties for potential damages that may arise from enjoined activities.

And finally, 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?

Whether or not injunctive relief is sought, sending a cease-and-desist letter is often advisable for the employer.  Such a letter can serve multiple purposes: reminding the employee of his or her 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.

Consider Your Potential Claims

A breach of contract claim will obviously be central.

Depending on the circumstances, some other possible common-law claims may include tortious interference, breach of fiduciary duty, defamation, conversion, unfair competition, conspiracy, fraud and usurpation of corporate opportunities.

A further question is whether to raise statutory claims for misappropriation of trade secrets.  Claims under both the Pennsylvania Uniform Trade Secret Act and 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’s 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 your contract.  Importantly, the federal statute also provides for exclusive jurisdiction in federal court.

Finally, a claim under the federal Computer Fraud and Abuse Act may be warranted in cases where employees copy or destroy an employer’s computerized data.

Pin Down Loose Ends

These next factors may just seem like “loose ends,” but they can nonetheless have a potent influence on the outcome of litigation:

• Did the employee receive consideration? Pennsylvania’s courts have emphasized the need for consideration in connection with noncompete 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.

Litigation over restrictive covenants comes in a rainbow of colors.  These five tips may help you decide which ones will go best with your case.

http://www.thelegalintelligencer.com/id=1202762810925/Top-Five-Tips-for-Litigating-Noncompete-Agreements?mcode=1395262324557&curindex=52&curpage=ALL

Reprinted with permission from the July 15, 2016 edition of the The Legal Intelligencer. Copyright 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For further information, contact 877-257-3382 – [email protected] or visit www.almreprints.com.