We seem to spend a lot of time at our firm litigating over so-called noncompetition agreements. That’s great for lawyers, but not particularly enjoyable for clients, because litigation is unavoidably time-consuming and expensive, even if you’ve agreed to an alternative billing arrangement with your chosen “Legal Eagle.”
Let’s drill down on what non-competes are, and how you can avoid ending up in Court over them. The concept behind a noncompetition agreement is simple. Company gives Employee a job. Company knows that Employee will have access to Company’s sensitive and confidential information, like customer data, intellectual property and trade secrets. So, Company’s quid pro quo goes something like: “We’ll pay you X dollars in salary and bonuses, but you have to agree not to compete with us in any way for two years after you leave. That means you can’t try to solicit our clients, and you can’t try to take our employees.”
Most courts will enforce these types of restrictions if they’re reasonable. But which state’s law applies to the agreement can be important. California and Louisiana, to name two states, are pretty tough on non-competes. (California basically says they’re not worth the iPad they’re printed on.)
Now, here’s an interesting twist. What if Employee leaves Company, hasn’t solicited any of Company’s clients or employees, but wants the non-compete declared null and void because it’s overbroad? Most (overwhelmed) judges will go out of their way to avoid unnecessary work, and normally won’t decide any issue unless it’s “ripe.” But that would put the Employee in a tough spot, because he or she has to make a living, and has potential handcuffs on.
That was the situation in the recent case of Bradfield v. Heartland Payment Systems, which you can read here.
A former Heartland Payments Systems salesman (Bradfield) left the company to work for a competitor (Above & Beyond), then sued to escape an agreement blocking him from dealing with Heartland’s customers even though he hadn’t broken the pact and said he had no plans to do so. (Heartland is in the business of credit card processing and payroll.) Bradfield argued that the contract was overbroad, and hindered his performance in his new job. (Bradfield’s argument was a tad weird. Sure, he hadn’t broken the agreement yet…but why would he be suing if he didn’t intend to do so in the future?)
Heartland filed a motion to dismiss the case, arguing that there was nothing to fight about, given Bradfield’s contention that he was in compliance. The Court, however, disagreed, writing: “In my view, Heartland’s premise is erroneous,. The harm to Bradfield which he seeks to remedy by a declaratory judgment is the substantial, realized harm of his preclusion from obtaining clients he could otherwise pursue absent the various non-solicitation provisions in the parties’ agreement.”
The Court also noted that Heartland refused to cancel the agreement, meaning that an actual dispute existed. The Court wrote: “Defendant cannot claim that Plaintiff has not presented a judiciable controversy based on a lack of an immediate harm, and at the same time, hold Plaintiff accountable to the restrictive covenants, which Plaintiff argues are not enforceable. To find that Plaintiff, in this situation, can only resolve the present dispute by violating the covenant first, would run counter to the purpose of the Declaratory Judgment Act.”
Notably, Bradfield isn’t the only former Heartland worker involved in a dispute over a non-solicitation agreement with the company. A few months ago as I write this, another Court granted a preliminary injunction to Heartland, blocking former worker Robert Volrath from breaching his deal. Like Bradfield, Volrath left Heartland for Above & Beyond, a company that Heartland’s founder launched after selling the company in 2016. (When anyone in management leaves to start a competing company…look out.)
So, what are the practical takeaways from this case? Here are a few:
First, if you’re on the employee side, be very careful what you’re signing. We’re all bombarded with information on a daily basis, so it can be very easy not to read the fine print. Make sure you’re aware of, and comfortable with, the restrictions in any proposed agreement, because they can really come back to bite you. Also, always ask whether there’s room for negotiation. (I notice, for example, that the agreement in the Heartland case has no geographical limitation. Maybe that could’ve been negotiated. Yes, I’m the best at 20/20 hindsight.) If management says take it or leave it, you might be better off leaving it.
Second, if you’re on the management side, ask yourself: Is it worth it? What level of “top secret” information is this employee really accessing? (There are lots of companies in California that stay in business just fine without non-competes.) Maybe you’ll win in Court (Congratulations!), but who needs the legal fees, aggravation, and potential increases in EPLI premiums? And who wants a reputation for being difficult with departing employees? In other words, pick your battles.
Third, I often wonder how many of these lawsuits might be avoided if everyone sat down when an employee was leaving and…just talked. That’s unfair of me to say here, because I don’t have all the facts about Bradfield’s departure. But after 30 years of trial work, I can tell you that usually, no one wins. So, why not put egos aside and work things out?
Hey, forget about that last question. It would put me out of business.