Employee non-competes

January 19, 2021

If you’re an employee with a non-compete in your employment agreement, and you’re considering leaving your job and working for a competitor, you may be thinking, “What’s the worst that can happen?” It’s a great question, and it’s exactly what I’m going to talk about today.

Today I want to talk about the mechanics of how an employee enforces a non-compete agreement against an employee. My goal here in presenting the worst-case scenario is not to frighten you but give you a sense of your outside liability so that you can adjust your conduct and make good decisions both at the beginning of employment when you’re presented with a non-compete and also during that transition process when you’re leaving your employer and considering going to work for a new employer.

Let me start by saying that most most non-compete disputes are ultimately resolved through some form of negotiation—your new employer negotiates with your old employer to limit the scope of your non-compete, to keep you from working for certain customers, to keep you working in one division of the new employer rather than others. Sometimes the new employer will open their wallet to resolve the claim, but again that’s a discussion for another day. What we want to talk about today is what happens if there is no negotiation, there’s no resolution, and they’re going to litigate to the mattresses.

The fact pattern here is pretty typical: You are an executive for a company, you have an employment agreement, in that employment agreement contains the typical non-compete language that says you will not work for any competitor of the company for a period of a year, 18 months, or 6 months, whatever it is. You leave your employer, you go work for a new employer that is competitive with the former employer, and the old employer finds out about it. The first thing that typically happens is that you will receive a letter from your old employer that says, “Dear John Smith, we believe you’re violating your non-compete. Stop immediately.” The old employer is also usually going to send the new employer a similar letter: “Dear New Employer, we hear you hired Sally Smith. Here’s a copy of non-compete, she’s violating it. Please terminate her immediately.”

This letter can be very uncomfortable for you if you didn’t disclose to your new employer the existence of your non-compete. If you haven’t disclosed to the new employer the existence of your non-compete, it’s not uncommon that your new employer may terminate you on that basis. It’s perceived as dishonesty, and your new employer simply won’t want to deal with that type of thing. So, the next thing that’s going to happen is your former employer is going to sue you, and they’re going to sue you for breach in your non-compete. They may also assert claims that you’ve stolen trade secrets in some way or there’s also some unfair competition going on.

In addition, they are almost certainly going to sue the new employer as well. They will allege that the newest employers are tortiously interfering with the old employer’s contractual relationship with you. They may allege that the new employer is unfairly competing with the old employer in some way or using trade secrets. The old employer is going to sue the new employer for two reasons, a legal one and a practical one. The legal one is they may genuinely believe that the new employer is gaining some unfair advantage by hiring you and that they are suffering real losses, so they want to try to recover those in court. The practical reason they are going to sue the new employer is because it forces the new employer to make a decision and that decision is what to do with you. The old employer wants to new employer to fire you, and by suing the new employer its forces the new employer to deal with you in some way. Many new employers will simply fire you if they make the decision that there are no bonafide defenses to the old employer’s action or that you’re, frankly, just not a valuable enough employee to induce the new employer to get involved in expensive and distracting litigation; so, they may simply fire you. From your new employer’s perspective, that’s a fairly foolproof way of getting them out of the litigation; if it ever came to it, the new employer could show up in front of the judge and say, “judge, we hired Sally Smith and she didn’t tell us there was a non-compete. We learned that they had a non-compete and we immediately terminated her. What else were we to do?” It’s a fairly persuasive defense for the new employer and many new employers will avail themselves of exactly that. On the other hand, if your new employer has reviewed your non-compete and believes there may be some bonafide defenses and also believes that you’re worth fighting for and if you’re important enough to them they may be willing to pay for your defense and have their attorneys enter an appearance on your behalf if there’s no conflict. They will basically work with you to defend the action that the new employer has filed against you, but sometimes the stars will align, and the new employer will help the employee out. The other options that your new employer can take is a middle ground between helping you out and terminating you, and that is what we call putting you on the bench, it basically means putting your employment status in limbo. You’re not formally terminated but you’re not going to be showing up at work every day, doing client work, or interacting with your new colleagues. They can do that in a couple of way: they can tell you to stay home and put you on paid or unpaid leave, or they can push your start date out until the litigation or the dispute with the former employer is resolved.

When the old employer filed a complaint, they almost certainly also filed a request or a motion for preliminary injunction. A preliminary injunction is, in this context, the old employers request that the court enter an injunction, an order, prohibiting you from working for your new employer. The preliminary injunction and the hearing that’s associated with it, occurs very early in the preceding, often times before you even filed a former formal answer with the court. So as soon as that preliminary injunction motion is filed, the court should schedule a hearing within several weeks, if not sooner, to rule and address the preliminary injunction request. So, at that preliminary injunction hearing you’re going to have an opportunity to set forth your defenses to the non-compete and of course your former employers going to have the opportunity to explain to the court using evidence, testimony, and argument as to why you breached your non-compete and why you should be prevented from working for your new employer.

The preliminary injunction hearing is not the end of the litigation. Once that preliminary injunction hearing is resolved, the litigation is still going to continue through running its normal course over a period of a year or two. During that time, your former employer is going to have an opportunity to show that your conduct resulted in monetary damages. For example, if your breach resulted in the loss of your former employer’s client or the disclosure of a trade secret and your former employer can show that that caused them a monetary loss, they can assess that loss to you and they can hold you liable or hold you responsible for those losses. You of course will also have an opportunity to defend during that period.

In addition to any monetary losses that your former employer may be able to show, many employment agreements contain a fee shifting provision. So, in the United States the default rule is that each party pays their own attorney’s fees, but you can change that rule by agreement. Many non-compete provisions contain such an agreement, so if your non-compete contains a fee shifting provision your new employer will try to assess or hold you responsible for their attorney’s fees, which can be significant. Again, this there’s a lot happening in this litigation very quickly; it is not uncommon for attorney’s fees to quickly get up to 30, 40, 50,000 thousand dollars and you be held responsible for them, in addition to your own attorney’s fees.

To sum that up, what is the worst day for an employee who’s breached their non-compete? Well, first of all they can have an order from a court ordering not to work and that can happen early in the preceding, several weeks into a piece of litigation. Second, if you get that order against you, your new employer is almost certainly going to terminate you, if they’d even waited that long. They may have terminated you earlier if they don’t believe that it’s worth waiting into litigation on your behalf. Third, you can be liable for any actual damages that your prior employer suffered as a result of your breach. Finally, depending on how your non-compete is written, you may be liable for your former employer’s attorney’s fees which again can be a significant number.