Should You Negotiate Your Non-Compete? Yes, and Here's 5 Reasons Why.

It's no secret that most employees feel as if they have no choice but to sign a non-compete presented to them by their employer. For some, it is handed to them the first day on the job, while for others it is tendered in connection with a new compensation plan, a promotion or increased access to clients or confidential information of the company.

Trying to negotiate a non-compete with an employer is no easy task, and the vast majority of employees don't even try. However, employees should always make an effort to review it carefully, understand the terms and try to negotiate a more favorable agreement. Here are 5 reasons why this is so:

1. By and large, an employer will respect you if you scrutinize what you're signing. Questioning the terms of an agreement, even its fundamental fairness, shows diligence and business acumen. This is not much different than negotiating a higher salary or a sign-on bonus. Most employers don't expect you to sign your life away or abandon your self-interest. An employer may even feel that an employee who blindly signs a personal contract won't be the most savvy person to deal with tough customers or vendors.
2. Failed negotiations could help you in a subsequent dispute. For instance, if you end up in a non-compete dispute, and the employer previously failed to make changes to the terms of a non-compete that you requested, it could help demonstrate that the contract is adhesive and unreasonable. It will also help negate the impact of any representations you disagree with that are contained in the agreement.
3. Negotiating the agreement will help you understand the employer better. There is a fairly good chance that if the employer is accommodating and willing to modify terms that may not apply to you, or willing to narrow up the covenant, that employer is someone you want to work with for the long term. Keep in mind that in small or closely-held organizations, your opportunities for negotiation are better. On a related point, you also may learn something about whether the employer has had issues in the past with other employees and what its intent is regarding enforcement.
4. Negotiations should allow you to understand the non-compete better. Many sophisticated employees have never seen a non-compete before and are unclear as to what it actually restricts. By consulting with your counsel and your employer, you will have a much clearer understanding of what it actually prohibits, and this may clear up some misconceptions you might have. This understanding will help you evaluate a potentially competitive opportunity that may arise in the future.
5. You might actually get something out of your negotiations. If you don't negotiate, you may be accepting a covenant your employer is perfectly willing to modify for you. There is no sense being bound to the most restrictive covenant if you don't need to be.

Massachusetts Non-Compete Legislation Re-Introduced

Russell Beck, author of the awesome Fair Competition Blog, has written extensively today about the refiled bill in Massachusetts that would modernize and govern non-compete agreements. Mr. Beck points out a number of changes to the prior bill and summarizes the key take-aways from the legislation. This is an excellent article worth reading in full to see what state legislatures are considering as far as reform. Remember that Massachusetts has a vibrant high-tech community, and that much debate has surfaced in recent years about whether its non-compete laws have caused a brain drain to California - the state most hostile to employee non-compete arrangements.

Meanwhile, in the great State of Illinois, which has not yet filed for bankruptcy, Rep. Jill Tracy reintroduced the Covenants Not to Compete Act, the text of which can be found here. Even assuming the General Assembly would take up this legislation and pass it through the required floor readings, the bill likely would go through several modifications. (Having written this legislation for a representative a few years ago, I would like to see something done with it in a modified form. No, not everything in this bill reflects my personal belief as to how the law should be.)

Let's Talk Procedure!! The Burden of Proof In Non-Compete Cases

You can tell from the title of this blog that I am very excited to discuss mundane aspects of civil procedure with my readers.

In actuality, though, this procedural issue - the burden of proof - is a fairly important one for clients and attorneys to understand. By now, if you've been reading this blog, you're aware that non-compete contracts must be reasonable to be enforceable.

This is important in practice for a couple of reasons. First, it is not enough for an ex-employer simply to establish a breach of the non-compete agreement. A court must also find the agreement is reasonable in time, space and scope. Second, in most jurisdictions, this requires an employer to plead in the Complaint that the agreement is reasonable.

Experienced attorneys normally set forth detailed factual allegations to show why the non-compete is reasonable. These allegations may include statements about a unique product or service that the employer offers, the development and protection of confidential information, and an employee's development of client goodwill.

But when it comes down to brass tacks - to trying a case at a preliminary injunction hearing or trial on the merits - whose burden is it to tackle the issue of reasonableness?

Like many areas of non-compete law, jurisdictions vary in their answer to this question. In some states, the employer bears the burden of demonstrating reasonableness. These states include: Arizona, Illinois, and Mississippi. In other states, like Connecticut, the employee must demonstrate unreasonableness.

There are some twists. In Florida, the burden is on the employer to demonstrate a protectable interest that would support the covenant, while the employee has the burden of showing that a facially reasonable covenant is overbroad and beyond what is necessary to protect the employer. In Michigan, much like its flagship school's football program, the answer is unclear. A recent case in 2007 stated the burden is on the employer, but in doing so relied upon the law in place before the legislature significantly reformed non-competes in 1985. Much like Brady Hoke trying to work with Rich Rodriguez's recruits, this seems to be a square peg in a round hole solution.

In Ohio, an employer actually has a heightened burden. That is, it must demonstrate reasonableness by "clear and convincing evidence", a not insignificant factor to consider when picking choice of law.

In practice, does all this stuff about burden of proof matter? Absolutely. In a jurisdiction that puts the onus on an employee to establish reasonableness, that employee's counsel will have to request a significant amount of discovery that may relate to the protectable interests asserted by an employer. The employee certainly would have a longer case to present, with more witnesses to show that the covenant is unreasonable and overbroad.

At the end of the day, cases still turn on their facts, and an employer who has a poorly drafted covenant still faces an uphill battle. But who has the burden of proof is a factor to consider for all attorneys at the outset of any non-compete case.

Fee Petition in Restrictive Covenant Case Approaches $500,000 (Marlite, Inc. v. Eckenrod)

Any reasonable client wants to know how much a project is going to cost. Some projects are fairly discrete and easy to budget. A contract review, negotiating a new employment agreement are a few that come to mind.

Budgeting for litigation, however, is a herculean task. What may start out as a reasonable budget may bear no semblance to reality if an adversary takes an unexpected course during a case.

In the world of trade secrets and non-compete disputes, the cost of legal services often times far outweighs the potential value of the claim. A recent Florida case, which dealt with little more than a breach of a no-hire agreement and relatively uncomplicated trade secrets misappropriation claim following a sale of business, resulted in a fee petition of $448,860.55. The plaintiff's counsel charged 2,265 hours of time to the case - about the same number of total hours (not billable) that I worked in 2010.

So why do these types of competition cases seemingly generate such large fees? Here is a non-exhaustive list:

(1) Raw emotion: Competitive disputes often result from a bad divorce among employee and employer. A pure economic analysis of whether litigation makes financial sense generally is not as critical of a factor as in other cases.

(2) Speed: By definition, unfair competition cases have to move fast, particularly from the plaintiff's perspective. A preliminary injunction trial can effectively decide many issues in the case, which sometimes results in efficiency. Often times, however, it results in mutliple evidentiary hearings and several layers of fact discovery.

(3) E-Discovery: Electronic discovery and the exploding volume of information available to attorneys has made commercial litigation extraordinarily expensive, especially for individual defendants. Projects such as document and privilege review and metadata searches consume far more time than clients expect.

(4) Proof of Damages: Proving liability is not nearly as difficult in competition cases as establishing a legal basis for damages. Lost profits are especially hard to prove, particularly in cases of indirect competition. Even cases of trade secrets misappropriation are hard to quantify. Normally, expert witness testimony is required for complicated damages analysis, resulting in higher fees and discovery costs.

(5) Number of Witnesses: In competition cases, there seem to be a lot of knowledgeable witnesses. Think about co-workers, customers, vendors, the new employer. Numbers add up quickly, and interviewing or deposing those witnesses is very costly.

As a final note, the court examining the nearly $500,000 fee petition cut back the award by 67%, reasoning that the level of success achieved against the individual defendant was limited. By contrast, the corporate defendant had no fee liability, but it clearly was the target of the plaintiff's case.

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Court: United States District Court for the Southern District of Florida
Opinion Date: 1/5/11
Cite: Marlite, Inc. v. Eckenrod, 2011 U.S. Dist. LEXIS 2268 (S.D. Fla. Jan. 5, 2011)
Favors: N/A
Law: Federal

Specific Allegations Required to State Claim for "Threatened" Misappropriation of Trade Secrets (Edifecs Inc. v. TIBCO Software)

The Uniform Trade Secrets Act allows for sweeping injunctive relief if a plaintiff can demonstrate an actual, concrete business secret and either actual or threatened misappropriation.

It is important to remember that the theory of threatened misappropriation is relevant only to claims for an injunction, not damages. The same goes with the concept of "inevitable disclosure." If a plaintiff has a cognizable damages claim, then actual misappropriation must have already occurred.

What does "threatened" disclosure mean? In California, where a substantial number of technology trade secrets cases are fought each year, courts have held that "threatened misappropriation means a threat by a defendant to misuse trade secrets, manifested by words or conduct, where the evidence indicates imminent misuse."

A recent Washington case, Edifecs Inc. v. TIBCO Software Inc., applying California law, held that a plaintiff's claim of threatened misappropriation did not survive a motion to dismiss when the only factual allegations related to the defendant's purported failure to segregate employees who knew of the plaintiff's trade secrets and who joined the defendant following a lawful acquisition of the plaintiff's competitor. The court specifically noted these allegations suggested no "affirmative conduct that would indicate a threat" of misappropriation.

It is difficult to discuss the concept of inevitable disclosure without discussing threatened misappropriation. The two theories are so closely linked as to be virtually indistinguishable in many cases. For instance, does an employee threaten to misappropriate trade secrets simply by joining a competitor in a similar position, or is this merely inevitable disclosure. Similarly, if an employee engages in suspicious conduct in addition to joining a competitor, such as downloading documents on the eve of departure, can this be considered a "threat" of misappropriation? Each case, of course, depends on many unique facts.

For practitioners, it is essential to determine whether your jurisdiction recognizes the theory of inevitable disclosure. If it does not, then the theory of threatened misappropriation certainly is available to pursue injunctive relief. But as Edifecs demonstrates, the Complaint should contain affirmative, clear allegations of imminent use of an actual trade secret.

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Court: United States District Court for the Western District of Washington

Opinion Date: 12/17/10

Cite: Edifecs Inc. v. TIBCO Software Inc., 2010 U.S. Dist. LEXIS 138654 (W.D. Wash. Dec. 17, 2010)
Favors: Employee

Law: California

Difference In Degree of Competition Between Wedding Photographers Results In Denial of Injunction (LCD Videography v. Finomore)

I must confess that having dealt with the wedding photography industry last year, I was not particularly sympathetic to the litigants in the case I am about to discuss. That is not to say there aren't wonderful businesses in this niche space, but my experience was less than satisfactory.*

The Ohio case of LCD Videography v. Finomore presents an issue that courts often confront: how should a non-compete agreement be enforced when the degree of competition between the ex-employer and the departing employee is quite small? I see this often when employees leave to start up their own business, and in many cases avoid contacting former customers altogether.

In LCD Videography, the trial court denied the employer's motion for preliminary injunction largely on the basis that no real, imminent harm would result from the defendants' continued competitive conduct. In that case, the trial court appeared persuaded by the fact that the employer conducted large-scale national and international weddings, while the ex-employees relied on a close network of friends and family to shoot smaller more intimate weddings.

The trial court noted that the employees' non-compete agreements, which prohibited competition within 75 miles of their former place of business, were reasonable and protected legitimate interests of the employer (which, though not discussed at length, appeared to be specialized training). However, the court found that, despite a likelihood of success on the merits, the employees did not pose any real threat to their former company.

There are a number of cases like LCD Videography, where courts look at the disparity between plaintiff and defendant to deny injunctive relief. For those defendants in a position similar to the ex-employees in the LCD Videography case, it is important to de-emphasize the level of competition between the parties. Particularly when the ex-employees avoid directly competing for firm clients, an employer will have a difficult time in such a case getting a non-compete enforced.

* (Yes, that picture is from my wedding. I could not think of a way to paste a clever photo for this article without violating copyright law or misappropriating someone's likeness.)

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Court: Court of Appeals of Ohio, Eleventh Appellate District
Opinion Date: 12/30/10
Cite: LCD Videography, LLC v. Finomore, 2010 Ohio App. LEXIS 5420 (Ohio Ct. App. Dec. 30, 2010)
Favors: Employee
Law: Ohio