Non-Compete Disputes – Best Practices for Enforcing Non-Compete Agreements
October 31, 2017
Businesses typically fail in attempting to enforce a non-compete or non-solicit agreement for one of two reasons: (i) on the front end, the agreement was poorly drafted; or (ii) on the backend, the business did not take the proper steps to enforce the agreement when it learned of potentially unlawful behavior. This article, Part II in a three-part series, focuses on best practices with respect to the steps to take to enforce non-compete and non-solicit agreements (often referred to generically as “restrictive covenants”). The first reason, poor drafting, was discussed in a prior article. Part III will discuss available defenses and strategies to prevent enforcement of such agreements.
Regardless of whether a business immediately ropes in a non-compete attorney or first attempts negotiations without counsel, consider these practices.
1. After separation of employment, always remind former employees of post-employment obligations.
Some employees honestly forget they signed any restrictive covenants or, just as likely, don’t realize that the myriad of documents they signed when onboarding included restrictive covenants.
Regardless, it is a prudent business practice to always send any former employee who signed any restrictive covenants a letter after their separation to remind them of their post-employment obligations. The letter can be stand-alone or part of a more comprehensive separation letter that addresses other off-boarding issues.
2. When first learning of a potential breach, look for “smoking gun” evidence.
Whenever a client asks what they should do when they first learn of a potential non-compete or non-solicit problem, one recommendation is always to look for evidence to help confirm whether the former employee likely breached the agreement. Where to look for evidence? The usual suspects include:
- Analyze the former employee’s work email and computer to determine if he or she took confidential information on the way out the door.
- Search online public corporate records to determine whether the former employee formed a new company that appears competitive. If nothing is found under the name of the former employee, also check to see if a new company was formed under the name of their spouse. That happens surprisingly often and is a red flag that the former employee wanted to hide the formation of the new company.
- Check social media, including both LinkedIn and Facebook.
- If the former employee was in sales, directly ask trusted clients whether they have been contacted by the former employee. That obviously may not be an option if such an inquiry would risk loss of business. Other companies naturally don’t prefer to get involved in a potential lawsuit.
3. Confirm the agreement is enforceable.
Ok, you feel confident the former employee is violating a restrictive covenant. Any decent non-compete attorney knows that, before recommending action, there are still certain threshold questions that should first be addressed. Some the most important questions that must be addressed include:
- Was the agreement signed by the former employee? If not, it is unenforceable in most states, including Florida.
- Does the business have a legitimate business interest in enforcing the non-compete or non-solicit? Most states, including Florida, have a statute that defines “legitimate business interest.” If the non-compete or non-solicit agreement is not supported by any legitimate business interest, then it is considered an unenforceable agreement.
- After the employee was initially hired, was there a merger or sale of the business? If so, a non-compete or non-solicit agreement may only be valid it contains a “successors and assigns” provision.
4. Confirm no employment law violations.
In addition to confirming the non-compete or non-solicit is enforceable, it is also prudent to assess whether the former employee may have any strong defenses. Once a lawsuit is filed against the former employee, he or she will try to counter sue for any and all potential wrongdoings in connection with their prior employment. Sometimes those alleged wrongdoings have teeth, leaving a business open to serious exposure.
The most common alleged employment law violation is for unpaid wages, such as not properly paying commissions, not paying for all overtime work, or in connection with misclassification as an exempt employee under the Fair Labor Standards Act or as an independent contractor.
5. Send a cease and desist letter.
Only after the business has completed the previous steps and decided to move forward on enforcement, then a non-compete attorney should send a cease and desist letter to the former employee, and potentially their new employer. The letter should: (i) remind the employee of their post-employment obligations; (ii) include a copy of the signed agreement; (iii) detail the actions that are alleged to be in violation of the agreement; and (iv) request a written confirmation that the violations will cease.
6. Send a second, final cease and desist letter – or not.
If no response or an inadequate response, is provided to the first cease and desist letter, then it often times helps to send a second cease and desist letter – with a copy of a draft lawsuit attached that the business intends to file. While some former employees will ignore a mere cease and desist letter, seeing a copy of a lawsuit with their name as “Defendant” typically gets their attention.
As a caveat, a second cease and desist letter with a draft lawsuit is generally not recommended when: (i) the former employee responded to the first letter by indicating they will not stop their competitive behavior; or (ii) the business is rapidly losing clients to the former employee. Under either of those circumstances, it’s typically best to immediately seek an injunction.
7. Pursue an immediate injunction.
File a lawsuit and immediately ask the court to issue an injunction to prevent violations of the non-compete or non-solicit while the lawsuit is pending. The operative word is “immediately.” As context, one of the requirements to obtain an immediate injunction (courts refer to it as a “temporary” or “preliminary” injunction), is that a plaintiff demonstrate that, absent the injunction, they will suffer “irreparable harm” during the course of the lawsuit. As a result, any unnecessary delay in seeking an injunction can be considered evidence that there is no irreparable harm.
Generally, if a business waits longer than only a few months to seek an injunction, it will be too late. While the business can still pursue damages in the lawsuit, it is less likely a court will enjoin the former employee from competing during the course of the lawsuit.
8. Set realistic expectations when defining a “win.”
It is important for a business to set its expectations in defining what a “win” realistically looks like for a non-compete or non-solicit lawsuit. This is because courts in most states, including Florida, are not permitted to enforce a non-compete or non-solicit to the extent they are overbroad. For example, it’s not uncommon for non-competes in Florida to prohibit any competitive activity for a period of two years within the entire state of Florida. If, however, the former employee only handled sales in one county, then the court will likely only prohibit the former employee from competing within that county.
It is therefore important to analyze the extent to which a non-compete or non-solicit will likely be enforceable. By reasonably predicting what a court will likely decide, the parties can also more efficiently negotiate an out of court settlement. Stating the obvious, if a business can obtain by settlement the same or better outcome it would achieve through continued litigation, that is ideal.