What do I mean by judicial engagement? For simplicity, I mean a bridge between judicial activism and judicial restraint. It's a method of evaluating and deciding cases, plain and simply.
The term is somewhat in vogue in libertarian circles (which I inhabit) and used when litigants challenge economic regulations on the grounds that they are irrational or impinge on personal liberties.
So when a government enacts a law that restricts economic freedom - say, an occupational licensing requirement - those who favor judicial engagement do not want courts to abdicate their roles. That is to say, courts should not simply defer to whatever the legislature says is a rational justification for the law.
Rather, courts must engage with the evidence and ensure that it supports the need for the law. And on that score, advocates for judicial engagement would argue that protectionism is never a valid governmental interest. Unfortunately, the black-letter rules that attend government economic regulation all but invite trial judges to defer entirely to whatever the legislature says. An overreading of these black-letter principles leads courts to the wrong results, in which they often time rely on theoretical assumptions or abstract hypotheticals.
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The same decisional framework, judicial engagement, applies to non-compete cases because the applicable legal rule already demand a searching analysis without granting undue deference to the party in whose favor a non-compete runs. So that seems easy enough and a perfectly reasonable analogue to the traditional playing field for the theory of judicial engagement.
I digress for a second, but only a second. As my colleague Jonathan Pollard writes in a recent post, non-competes are first and foremost restraints of trade. Unless we are discussing a negotiated agreement (such as in a sale of business) with real consideration, non-competes are not traditional contracts. They may not even be contracts at all.
When an employer involves the government, here the judiciary, the same liberty concerns arise - with just as much force as an irrational, generally applicable regulation that the legislature passes. The problem that has vexed courts, lawyers, and litigants is how to engage or grapple with the facts in a non-compete dispute. To be sure, judicial restraint is no method of deciding such cases at all.
But many courts employ a burden-shifting approach that all but requires an employee to prove the impossible: that the employer lacks a legitimate business interest in enforcing a restraint. Allowing employers, for instance, simply to mouth some variant of a "legitimate business interest" is not the proper way for a judge to sanction a restraint and impede someone's livelihood.
Let me be clear: nothing in the philosophy of judicial engagement calls upon courts usurp their roles. Just as it is crucial for courts to assess the rationale for governmental regulations of economic activity, it is a moral imperative for them to scrutinize an employer's attempt to enforce through court order a restraint of trade. This is particularly so given the dead weight that enforced and unenforced non-competes have on the economy and productivity.
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Let's take an example of judicial abdication, rather than engagement. The Kansas case of Servi-Tech, Inc. v. Olson is as bland of a non-compete case as you can get. I've handled some variation of this dispute for 20 years, and this fits within the most basic of fact-patterns, summarized (for simplicity as follows):
- Employee signs a non-compete agreement, containing a broad 2-year market-based restraint wherever the company's clients are located;
- Employee's non-compete also contains a 2-year restriction against soliciting clients with whom he had contact;
- Employee works for 2 years before the company terminates him;
- Employee receives nothing but his job for signing the agreement;
- Employee is assigned 10 clients when he starts;
- Employee's friends and family then comprise 5 additional clients after he starts;
- After being fired, employee stays in the same field and works only with his 5 "friends-and-family" contacts.
The district court enforces the non-solicitation agreement against the employee and includes within the injunction the 5 new clients that joined the company because of their relationship with the employee.
I am simplifying the case for purposes of this discussion. And there are elements of the court's ruling that are proper (if not in reasoning then certainly in result). For instance, the court found the market-based restraint unenforceable, which seems fairly obvious.
But I am concerned about the reasoning in the injunction opinion, particularly its lack of engagement with the facts. On this score, the court seems just to be accepting at theoretical value whatever the employer has said in defense of its broad restraint.
For instance, in discussing the employer's proof of a legitimate business interest, the court said this:
"Olson received some special crop consulting and agronomy training from Servi-Tech, so Servi-Tech has a legitimate business interest to enforce the non-competition clause to protect its investment in him. This, coupled with Servi-Tech's interest of not losing customers, justifies the non-solicitation provision ... that prevents Olson from contacting customers he had worked with as a Servi-Tech employee."
Let's examine this further.
First, the court never describes any aspect of this "training" that the employee, Olson, received. Training if an oft-asserted, rarely convincing "interest" in need of protection. Would companies fail to train people if they lacked non-competes? Does all training incentivize performance or build goodwill? Hardly. The interest is easy to state in the abstract but it often falls apart under even the most basic level of scrutiny. More problematically, the court in Servi-Tech never explains why the particular training received justifies a 2-year work ban (to be fair, it later found the non-compete unreasonable on other grounds). Put differently, the court abdicated its role to assess the proper fit between the asserted interest and the scope of the restriction.
Second, the interest in "not losing customers" is hardly one to justify a restraint of trade. True, there may be something special about a particular customer relationship - exclusivity, large up-front capital investment - that could justify a customer-based restraint. But no business wants to lose customers. Classifying this as an interest, much less a proven rationale, is judicial abdication and the product of undue deference to whatever the employer says.
Third, the court uses this purported interest to justify a restraint on all customers Olson had worked with at Servi-Tech. But what about the five family members who came to Servi-Tech because of Olson. What does the court say about them: "...they still became Servi-Tech's clients - not Olson's. Once they became Servi-Tech's clients, Servi-Tech was entitled to the benefits of doing business with them." True. That only is relevant, though, for the time Olson worked there. Nothing indicates that Servi-Tech did anything to create goodwill with those small group of personal contacts Olson had. Perhaps they would have come even if Servi-Tech had a poor marketplace reputation. In all likelihood, their fealty was to Olson himself. The court simply used an overbroad rationalization - "they're the employer's clients" - to justify a restraint that limits not just Olson's rights, but those of the clients themselves.
This is not to say, of course, that enforcement of all non-solicitation covenants leads to the same analytical problem. All I am asking for is for courts to engage and not defer. Engage with the facts, as well as the logical conclusions and implications of what the employer alleges.
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So what must judges do to engage, rather than defer or abdicate? Here are some preliminary suggestions and steps:
(1) Hold the employer to a strict burden of proof. In some states, this is not an option for judges. Unless the legislature has made a qualitative judgment concerning this burden, the employer must bear it at all times.
(2) Evaluate the fit between the asserted business interests, the evidentiary facts, and the scope of the restriction. It is not enough for the employer simply to state an interest it deems worthy of protection. The court must demand hard evidence that supports an interest over and above protectionism. And the employer must demonstrate the logical relationship between the interest and the restraint's reach.
(3) Disaggregate special skills, training, or customer relationships from those that are ordinary or common. Too often, we see employers recasting easily acquired industry knowledge (even if through day-to-day work experience) as trade secrets. And training that is conventional on-the-job training, or gained via everyday work experience, is often something that employers provide regardless of having a signed non-compete.
(4) Examine the time period of the restraint and assess its fit to the asserted interest. It is insufficient for courts to point to some case 20 years ago where a durationally similar non-compete was enforced. That is not engagement - that's punting.
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Of course, these are just starting points. I have advocated, too, other approaches such as "quick-look" hearings on adequacy of consideration or facial validity of the agreement. Those may have some utilitarian, pragmatic benefit. But if we're constrained at this point to evaluate all non-compete cases individually, then judges really need to start doing so. No more deference to the employer. No more blind acceptance of allegations that have some theoretical appeal. And no more forgiveness of evidentiary lapses.
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