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Dos and Dont’s of Non-Compete Enforcement

January 9, 2014

Non-competition covenants (“non-competes”) are now a business fact of life. Once limited to the CEO and his or her neighbors in the executive suite, they now are found at all business levels. Virtually every sales and marketing employee in mid-size and larger companies has one. Surprisingly, they are not yet as prevalent at start-ups (where they just might be the most necessary), but that is likely to change. Most business people understand the need for them – no business wants its sales force running off with its customers and sales and marketing material after having invested long hours and big dollars to obtain them. Most non-competes have one or more of the following attributes: a non-compete agreement (the employee cannot work for a competitor), a non-solicit agreement (cannot solicit customers, prospects or employees) and a non-disclosure agreement (cannot use or disclose company trade secrets or confidential information). Simply getting your employees to sign such an agreement doesn’t give you much protection. To get a non-compete enforced, a business has to go to court and convince a judge to issue an injunction enforcing the agreement. That often is easier said than done.

Many judges don’t like non-compete cases. In other types of cases, the judge simply referees the parties’ dispute and allows the jury to decide the winner and the amount of damages. In injunction cases, the judge has to review all the underlying facts and law and then evaluate the relative fairness of granting an injunction and the likely impact on the parties and even the public. To make it even worse, court rules require injunction matters to go to the head of the line on the judge’s case list, whether he or she wants it to or not. Against this backdrop, there are several “do’s and don’ts” that can help you get the agreement enforced.

First, do have a tightly drafted agreement. Sure, you can cut and paste one off the Internet, but that will soon become apparent to a judge and opposing counsel. Work with your counsel to identify precisely what your business wants to protect from departing employees and how the loss of it hurts you. Do make sure the restrictive covenant fully and accurately details the activities that are proscribed. If there are loopholes in the agreement, the employee and his lawyer will find them and exploit them.

Do stake out a reasonable litigation position. Pennsylvania law allows judges to “blue-pencil” or edit a non-compete agreement to make it reasonable, so figure out before filing suit whether you really need your sales person “on the beach” for the three years contained in the agreement, or whether 18 months will do the trick. Many judges think non-competes are used punitively and to keep other employees from leaving. Often they are. If a judge suspects you are hammering a former employee for vindictive or strategic reasons, your credibility and chances of success will plummet.

Do act quickly in getting the facts together once you suspect an employee is breaching or may begin breaching his or her agreement. Conduct an exit interview, review the employee’s desktop for suspicious downloads, and carefully communicate the news of the employee’s departure to clients (but don’t badmouth him because that will be counter-productive). Keep your lawyers in the loop on this so they can be in Court at the earliest possible moment. If you don’t move quickly, your argument that this is an “emergency” will fall on deaf judicial ears. Do figure out what relief you want from the Court, whether it is a prohibition on the employee working for a competitor (the typical non-compete) or simply not soliciting your customers or employees, or the taking of customer lists and sales records.

Don’t be unrealistic, or act out of anger or a feeling your former employee has betrayed you.

The "non-compete” aspect is the hardest and most expensive to win. In a down economy like the one we’re in, putting someone out of work for an extended period of time will be a judge’s last resort and will occur, if at all, only after one or more evidentiary hearings. On the other hand, most judges have no problem telling an ex-employee to return any purloined customer list and records, and can decide that issue based upon the parties’ affidavits. The big battle usually is over the non-solicitation of customers, and that will require an analysis of how they came to be customers and who introduced them to the company. Figure out what relief you really want and need, and then go after it.

A non-competition agreement can help safeguard a company’s customers, trade secrets and confidential business information. But until a judge enters an injunction enforcing the non-compete (and can incarcerate anyone violating the injunction for contempt of court), it’s just a piece of paper.

For questions about your non-competition issues or needs, whether you are an employer or an employee, please feel free to contact David McComb in Zarwin Baum’s Employment Law Group at 215-569-2800, dfmccomb@zarwin.com.


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