Non-Compete Fights – Part III: Best Practices for
Defending Against Non-Compete Agreements
This article, Part III in a three-part series, provides a brief overview of some of the best practices for defending against the enforcement of restrictive covenant agreements, including non-compete and non-solicit agreements. Part II focused on best practices with respect to the steps to take to enforce non-compete and non-solicit agreements. Part I focused on best practices in drafting such agreements.
As background, non-compete, non-solicit, and non-disclosure agreements are all forms of “restrictive covenants.” Similarly, non-attorneys and even attorneys often refer to non-competes and non-solicits generically as “non-competes.”
It is not uncommon for individuals who work in fields that rely heavily on customer relationships (such as staffing/recruiting, insurance, and healthcare) to be required to sign restrictive covenant agreements at the start of employment. When an individual who signed a restrictive covenant with a company begins discussions with a new potential employer, that’s usually when the enforceability of and defenses to the non-compete agreement are considered.
When making that analysis, the following should be examined: (i) defenses based on the four corners of the agreement; (ii) substantive defenses and other angles for leverage should a dispute arise; and (iii) strategies on how to respond to a cease and desist letter or a lawsuit.
1. Common Defects in the Language of Non-Compete Agreements
Each non-compete agreement must be reviewed individually to determine possible ways to prevent its enforcement. However, some common defects include the following:
- The non-compete agreement was not signed. If it was not signed by the worker, it is unenforceable in most states, including Florida.
- The business seeking enforcement merged or was sold after the non-compete agreement was signed, and the agreement has no “successors and assigns” clause. Under those circumstances, the agreement is generally unenforceable by the successor company. As discussed in a prior article, non-compete agreements generally include many boilerplate provisions and a “successor and assigns” clause is sometimes missing.
- The agreement specified the job role of the worker, that worker subsequently changed job roles, and the agreement failed to contain a provision stating that such change is immaterial to enforcement. Some Florida courts have held that a change in position prevents enforcement of the agreement, absent such a provision stating otherwise.
2. Common Defenses and Other Arguments to Leverage in a Non-Compete Dispute
In non-compete disputes, it is crucial to obtain as much leverage as possible, especially if the individual subject to the agreement has limited funds to litigate. To obtain leverage in non-compete disputes, we always recommend thoroughly vetting the following issues:
- Consider whether the company seeking enforcement has legitimate business interests in enforcing the full extent of the agreement. In Florida and most states, statutes and case law provide for limited circumstances under which a court may enforce restrictive covenants. These considerations require the employer to demonstrate one or more “legitimate business interests.” Section 542.335, Florida Statutes, defines “legitimate business interests” and is generally the starting point for determining what types of interests may be protected by a restrictive covenant. This is a detailed, fact-based analysis.
- Consider the circumstances of the individual’s employment and assess whether that individual has a potential employment-based claim (e.g., wrongful discharge, unlawful harassment, misclassification, unpaid wages, etc.). Some of the most common potential employment law violations involve unpaid wages, including failing to properly pay commissions or overtime work, and misclassification of an employee as an independent contractor or as exempt under the Fair Labor Standards Act (“FLSA”).
- Consider any other unlawful acts or embarrassing information. Even if it is not a defense to enforcement of a restrictive covenant as a matter of law, an employer may be hesitant to prosecute a restrictive covenant if it believes the other side may publicly disclose violations of law or potentially embarrassing information about the company. That information can and should be used as leverage.
3. Responding to Respond to a Cease and Desist Letter or a Lawsuit
A former employee or competitor who receives a cease and desist letter from a party seeking to enforce a restrictive covenant should consider proactive ways to respond. The common adage in football is often true in litigation: “The best defense is a good offense.” At a minimum, the recipient should provide a response to the cease desist letter that includes sufficient detail to explain why it is partly or completely unenforceable and to put the other side on notice of any information that can be used as leverage. As a practical matter, when a company sends a cease and desist letter and it is ignored, that company often assumes it is because the recipient has no defenses and hopes the matter will simply go away by ignoring the letter.
An aggressive approach would be for the former employee or competitor to consider filing suit first. If the former employee sues first, he or she can file an action for declaratory relief, among other claims. In that same suit, or a separate suit depending on strategy, the former employee may also sue for any employment law violations that were uncovered during the vetting process. When an employee sues first, it allows him or her to dictate the venue and help frame the dispute for the court based on his or her side of the story.
To be sure, most individuals seek to avoid the cost and time involved in litigation. Providing a detailed response to a cease and desist letter is more often the route taken, especially when the individual is not seeking to compete head to head with the former employer for customers and clients.
Finally, in the event the individual and/or competitor is sued by the former employer, it is generally recommended that the case be removed to federal court, if possible. Federal courts are generally less likely to fully enforce a non-compete. Generally, federal judges have more time and resources than state court judges to analyze whether the plaintiff met their burden of proof as to all of the many elements that must be proven. Of course, the drawback of federal court is that it is often more expensive because of the amount of briefing required and the accelerated pace at which federal courts hear and decide cases.
In sum, a cease and desist letter regarding a restrictive covenant from a former employer can strike fear in the hearts of the former employee at best, or at worst, throw a wrench in the career of the former employee. Likewise, rival companies hiring such an individual may find their energies diverted to manage what can lead to complex, expensive litigation. That is why it is critical to take a demand letter seriously and consult with an attorney who specializes in litigating restrictive covenants. Evaluating your options early on can save time and expense down the road.