- Noncompete litigation involving preliminary injunctions often contains important nuances.
- A rote rush to filing can mean missed opportunities.
- At some junctures in the case, speed may actually kill.
Ah, the adrenaline rush of a noncompete preliminary injunction. The panicked client phone call, the hand-wringing over what the employee departure means for the business, the rapid preparation of a complaint and a motion.
There is no doubting the relative speed with which a party must move to obtain preliminary injunctive relief. To preserve the status quo, briskness is required. The same fear of irreparable harm that drives the preliminary injunction analysis also drives the business. The potential loss of a trade secret or key customers often spurs an inexorable push for extraordinary haste from the employer seeking to avoid harm.
These generalities gloss over important nuances in how noncompete litigation involving preliminary injunctions can actually play out. A rote rush to filing can mean missed opportunities. At other junctures in the case, speed may actually kill.
Noncompete agreements between an employer and employee seek to restrain the employee’s job options after the employee leaves the company. The focus here excludes noncompetes involved in a sale of business or kindred covenants such as non-solicitation agreements, both of which generally are more easily enforced than post-employment noncompetes. While noncompetes are used in a variety of contexts, they most often exist and are enforced when they support a legitimate business interest such as the protection of confidential information (including trade secrets) or the goodwill of the company. While much has been documented regarding the abuse of noncompetes, they clearly have a proper place and are regularly enforced by courts, except in those few jurisdictions that prohibit them altogether.
In many cases, the noncompete dispute lives or dies on the preliminary injunction motion, with the employer seeking to prevent employment (or halt it) prior to the employee’s improper use of information or pilfering of customers—in other words, shutting the barn door before all the horses escape. If the early injunction is granted, it often resolves the case altogether as the plaintiff has no damages and the defendant has to look outside the protected area for employment. Even when the injunction is denied, the parties often resolve the case by negotiating a more narrow agreement, such as a limited non-solicitation of key customers, to spare both sides the expense and disruption of continued litigation.
In most jurisdictions, it is axiomatic that a party seeking a preliminary injunction—the party faced with the threat of immediate irreparable harm—must expeditiously seek relief from the court. Delay implies a lack of urgency and harm that can be remedied. Moreover, employers often have a resource advantage over the employee, which aids the aggressive pursuit of a temporary restraining order or preliminary injunction in an expedited fashion.
These combined pressures sometimes lead an employer to shoot first and aim second. Even when it is entirely necessary, haste ought not replace diligence. In the crucible of a noncompete preliminary injunction motion, the plaintiff effectively gets one chance to make a favorable impression on the court and convince the judge that relief is justified and should be granted. If that opportunity is blown, not only does this particular employee get to keep doing what the employee shouldn’t be doing, but all of the other noncompetes that employer uses across its workforce might be put in jeopardy. The moving party carries a heavy burden in these motions and must anticipate arguments and plan for rebuttals.
Some judges are sensitive about noncompetes to the point of skepticism. After all, a party seeking to enforce a noncompete is seeking to prevent an ex-employee from obtaining employment, something normally viewed as a sacrosanct American right. Add this to the fact that some employers have tried to enforce noncompetes in inappropriate circumstances (the infamous Jimmy John’s suit against sandwich makers comes to mind). This can provoke a knee-jerk hostility to noncompetes from judges sensitive to anti-competitive intents or impacts and to the need for people to support themselves and their families. If you rush to court with a boilerplate pleading, you might just run into a buzz saw.
In the early days of a noncompete matter, several aspects of the dispute demand the attention of the employer’s counsel. Developing a clear description of and evidentiary support for the legitimate competitive business interest is paramount. In addition, you must understand the context of how the noncompete arose and how the employee’s employment ended. These things matter legally because in some jurisdictions, inadequate consideration or other circumstances surrounding the execution of the noncompete can nullify the agreement altogether.
They also matter thematically. The employee will be highlighting any adverse facts, and you need to analyze and appreciate them before filing suit. An injunction is a creature of equity, and the court has broad discretion. You need to prove not only that you are legally right but also that you are ethically right in seeking the requested relief. If the employee was discharged by the company, you have to prepare for the rhetoric that will flow from that circumstance. There might also be legal ramifications, such as an argument of first breach by the employee. A discharge also raises the issue of whether your client took adequate measures to remind the employee of the noncompete and the employee’s confidentiality obligations.
Similarly, if the employee left of his or her own accord, was there any bad behavior on the way out the door? Is a review of the employee’s computer for last-minute data downloads or customer solicitations justified and permitted by company policy and applicable law? Noncompete violations often go hand in hand with trade secret misappropriation or other contract or tort claims, so evaluating those claims on an expedited basis and understanding how they might fit together with your noncompete claim are critical.
How do you balance the exigencies of the situation with the desire to perform adequate due diligence? The client pushback can be particularly acute in these situations because there will be a desire to avoid expense and “just go get ’em.” You must help the client understand that failure to build the foundation of the case can cause it to collapse once the battle is joined. Employers sometimes underestimate ex-employees’ ability or desire to fight. But fight they often do. Perhaps they know a lawyer who is working for free or at a reduced fee. Or perhaps the new employer is chipping in on the initial injunction defense costs. A plan built around an assumption that the employee can be bulldozed is not a plan; it is a hope. Nor can it be assumed that the court will simply rubber-stamp your motion. Independent scrutiny should be assumed. Indeed, the real “opposition” in these cases is often not opposing counsel but a reticent judge.
Demonstrating that the employer is entitled to the noncompete injunction should not, in the most basic of situations, be that time-consuming. By understanding the essential issues, you can also evaluate whether jumping to a motion is, in fact, in your client’s best interests. What is the underlying reason for the noncompete? If it is trade secrets, is it a good time to put the existence of those trade secrets to the test by filing a public lawsuit? If the claim to trade secrets or confidential information is strong, then setting forth the evidentiary support in an affidavit or verified pleading will require some care but should not cause significant delay. But if now is not the time to test the issue in court either from a substantive or strategic standpoint, perhaps another course of action is best. Apprehension of potential harm needs to be considered in light of the likelihood of harm actually occurring and whether other efforts to mitigate that harm might be more effective (and less expensive). Your job is to help the client carefully and calmly make the evaluation. If the decision is to jump in, then you already have marshaled the evidence necessary to support the most basic aspects of your case.
The dynamics of the preliminary injunction noncompete—the rushing, the expense, and the risk of an adverse ruling—sometimes militate toward either trying a cease-and-desist letter first or forgoing the injunction remedy and just pursuing a run-of-the-mill breach of contract action. The client might need help in understanding why you are slowing down the motion train, if stuck in the mindset that it will inexorably lead to an employer win.
If the legitimate business interest is customer goodwill, does your client need to secure the customer relationship first before jumping into the deep end of a lawsuit? When key salespeople who have tight relationships with customers are involved, the customers sometimes take umbrage at being treated like an “asset” of the corporation. The company may be better off throwing resources at shoring up that relationship, rather than (or at least prior to) attempting to block the salesperson from taking new employment.
Imagine a situation where the employee—a key salesman—moves to a competitor in violation of the agreement. The customer just loves that guy and is going to move its business if it possibly can. If you obtain an injunction, is the customer going to happily keep its business with your client, or look for an exit no matter what? Under this scenario, the knee-jerk reaction of filing the preliminary injunction might be an inferior option compared with just suing for breach of contract and pursuing damages. Or perhaps you can obtain other concessions through a cease-and-desist letter without actually filing suit.
Whether to send a letter prior to filing suit is always a dilemma. On the one hand, sending a letter provides the employee the last chance to “do the right thing” before litigation commences. The response to the letter can reveal valuable aspects of the employee’s defense, should litigation ensue. Customarily, the cease-and-desist letter is also sent to the new employer, who is warned against tortious interference and conspiracy to misappropriate trade secrets. The new employer might not know that the employee had a noncompete and, once put on notice, might put a quick end to the employment. On the other hand, the cease-and-desist letter gives the other side warning that you are on to them, allowing time to destroy evidence or smear your client to customers before a lawsuit is even filed, if so inclined. The client should evaluate the sort of people it is dealing with and weigh the odds. A letter stating incorrect facts might also open the client to a defamation or tortious interference claim. If the decision is made to send the letter, that does not necessarily lead to a lengthy delay in filing and can help to show diligence in protecting the client’s interests. You can simultaneously toil away on the complaint and injunction motion.
While the noncompete scenario usually involves the employer suing the employee, this is not always the case. Sometimes an employee takes the initiative and files a declaratory judgment action seeking a judicial blessing to take a job that arguably violates a noncompete. This is not normal for good reason. Most employees would rather ask for forgiveness than permission (especially given the potential cost of litigation). There is always the chance that the employer will not actually commit the resources to file suit once it finds out the employee is in violation of the agreement. But the strategy can work when a particularly good defense exists such that there is reason to think the employer, faced with an actual suit, will back down.
I experienced such a scenario several years ago. My client signed a noncompete with the company many years before, but in the intervening years, the company changed from a limited liability company to a corporation. The new entity never got the client’s signature on a new agreement. When the client resigned his employment, there was no mention of a noncompete in the exit interview. After he took another job, he came across the old noncompete and disclosed it to the new employer. The new employer would not bring him on board until his old employer said there was no issue under the noncompete. The old employer took the position that the old noncompete precluded any employment with the new employer and also refused to hire him back. The employee was stuck, but he had a good legal argument that the old noncompete did not apply after the change in corporate form, as well as good equitable arguments. It worked. Once the declaratory judgment action was filed, the old employer backed down and agreed to allow the employee to work for the new employer so long as he did not serve particular customers for a reasonable time.
Knowing what relief to request and when are important aspects of noncompete litigation. There is often a gulf between the remedy specified in the noncompete and what the company actually needs to protect its legitimate business interests. In some jurisdictions, courts are empowered to “blue-pencil” or modify an overly broad noncompete by enforcing it within reasonable bounds. Other state laws do not allow that flexibility. Even in liberal blue-pencil jurisdictions, a noncompete drafted too broadly still may face challenges when it comes to enforcement. If the plain language of the noncompete provides unsuitable remedies, this may be a case in which sending a cease-and-desist letter would provide the opportunity first to negotiate something the employer can live with without having the as-written contractual remedy tested in court.
Noncompete litigation can turn sour when the employer asks for too much or insists on strict enforcement of the written noncompete notwithstanding pushback from the employee or the court. There can be a perilously thin line between diligently protecting the employer’s interests and coming off like a bully ready to scorch the employee with heavy-handed litigation tactics. Whether it is fair or not, you must be sensitive to this dynamic and modulate the strategy accordingly. Sometimes, in the face of initial skepticism from the court, a strategic retreat can prove useful. In one case, I had a strong argument for an injunction, but the court was not entirely convinced. We agreed to some expedited discovery of the employer, employee, and new employer. The emails between the employee and the new employer proved so damaging that when we returned to court, the judge granted the injunction.
Rushing also exponentially increases the odds of counsel’s accidentally shooting themselves in the foot. I have defended noncompete matters in which plaintiff’s counsel sued in the wrong forum, losing valuable time and credibility. Or they sued without a copy of the agreement signed by the employee or without an important amendment.
Once the suit is filed, a fixation on speed can be dangerous. Perhaps the court rejected your ex parte motion for a temporary restraining order and set a status conference to discuss how the preliminary injunction motion will be heard. Do you need discovery? Will the court push for early resolution, assuming the status quo can be protected in the interim? Do you want to push for adjudication on the briefs, or do you need an evidentiary hearing?
The circumstances of each case should control this decision-making; sometimes what is best is not necessarily what is fastest. When you receive judicial input, you have an opportunity to read the room. If the judge is signaling an unwillingness to rule, you have to adjust accordingly. I once obtained an injunction for a client, but the court ordered that the parties participate in mediation, with a continued hearing several weeks later. The message was that the judge wanted the parties to resolve the matter, and she could always revisit her decision to grant the injunction. Fist pounding in that situation would have been counterproductive; we had to take the judge’s lead and participate in those discussions. Ultimately, we did not reach agreement and the injunction stayed in place, but trying to push the judge before engaging in the process she ordered might have been disastrous.
Other aspects of the case might greatly affect the outcome and militate toward a more measured approach. Imagine a situation in which the employee has gone to a new employer in a position that arguably violates the noncompete but is not one that causes the client extreme heartburn. The real issue is that the employee downloaded terabytes of data on the way out the door, and there are grave concerns about misuse. The employee professes that while she admittedly downloaded the data, it was impulsive, the data have not been accessed or shared with anyone, and she would return the data and commit going forward to not using any information from her old employer. In that situation, your client might be satisfied with a forensic review of the employee’s computers to verify her statements, along with significant protective covenants and warranties of both the employee and new employer.
You won the preliminary injunction! Now what? If ever there was a moment for thoughtful reflection, it is after winning the noncompete preliminary injunction motion. The employee is securely cabined. Your client is ecstatic and firmly focused on “moving on.” In a vanilla noncompete case, the employer and employee can agree to dismiss the remaining litigation with prejudice, thus forgoing the hassle of ongoing litigation. The employer gives up any claim for damages, and the employee avoids facing an attorney fee award pursuant to a fee-shifting provision in the noncompete, which might not be collectible. All told, the employer notches a win.
But every case is not vanilla, and even when this result is achievable, it ought not be accepted without at least considering the alternatives. Sometimes the injunction comes only after the employee has done some damage, some of which—sharing information, stealing a key customer—cannot in fact be undone by the injunction. The employer might want to pursue at least a round of forensic discovery to assure itself that trade secrets are secure or to itemize a damages claim for a lost customer, to be used in trying to reach a quick settlement. The more you press on, the more fees it will cost and the greater chance of somehow snatching defeat from the jaws of victory. The injunction is, after all, preliminary. The presentation of proofs may have been cursory. Whether, in the end, you can prove that legitimate business interest remains expensive and perhaps uncertain.
You lost the preliminary injunction motion! Now what? If ever there was a moment for thoughtful reflection, it is after losing the noncompete preliminary injunction motion. The smart employee (and the new employer) will recognize that the employer, if put in a corner, may keep the litigation fires burning and therefore may offer a reasonable face-saving out—a limited non-solicitation agreement, for example, allowing the employer to protect a key customer. But if real damages might be established, pressing on is always an option, even when the employee is chortling over the embers of your loss. If the defendant bamboozled the court or went too far out on a limb, discovery can show the court that, in fact, the employer wears the white hat. That may open a pathway to a money damages award or even a revisitation of whether an injunction should be imposed once the facts are decided. Making decisions too quickly on post-motion strategy can shortchange your client.
At the end of any noncompete litigation, I suggest a bit of time travel, assuming you have a willing client. Given what you have been through—the testing of the contractual language, the analysis of new developments in the case law since the agreement was drafted, the exploration and explication of the bases for the noncompete—what can your client do to make the process better, faster, and easier the next time around? Rolling out new agreements across a mammoth workforce can be daunting, but it is equally perilous for the company to wrongly rely on an existing contract that, when push comes to shove, might not be enforceable. Or perhaps the experience suggests better protections for the company’s trade secrets or making sure key customers have salesperson redundancy. Maybe the employment contract should contain a liquidated damages provision instead of a noncompete. Clients sometimes bypass this important stage in favor of stopping the bills from coming, but the smart client seizes control and better girds itself for the inevitable next fight.