Preventing an Employee From Working for a Competitor Unravels without an Enforceable Noncompete Agreement
A fantastic, but often overlooked movie is True Romance. The movie stars Christian Slater whose character, Clarence Worley, delivers the following line:
If there's one thing this last week has taught me, it's better to have a gun and not need it than to need a gun and not have it.
This line should also be in the mind of every employer when it comes to using employee noncompete agreements. A recent decision by the Michigan Court of Appeals where the court sided against the employer in a dispute between it and the former employee reinforces this point. This decision also provides important insight to individual employees for avoiding liability for improperly competing against their former employers.
Employee is Hired. Employee Departs. But where is the Noncompete Agreement?
In Michigan One Funding, LLC v. MacLean, the individual employee was employed as Michigan One's president, but shortly thereafter resigned to leave for a competitor.
While employed, Mr. McLean had signed an employment agreement requiring, among other items, that he return all of the company's property upon termination of his employment. Significantly and ultimately to the detriment of the former employer, Mr. McLean did not enter into any noncompete agreement.
If You Are Trying to Prevent a Former Employee From Working for a Competitor, Creative Legal Theories May Pay the Price of Admission to get into the Courthouse, But without a Noncompete Agreement, Don't Expect to Stay Too Long.
Shortly after Mr. McLean's departure, his former employer filed a lawsuit to obtain a preliminary injunction to prevent him from working for a competitor. However, because there was no noncompete agreement in place, the former employer was left to cobble together the facts and circumstances into various claims, including conversion, unjust enrichment, and a violation of the Computer Fraud and Abuse Act. The Court was not buying this and found that the plaintiff employer simply did not have any proof that its former employee had actually stolen or used any of its confidential information.
In reaching this decision, the court rejected the former employer's argument that because its competitor's business actually increased after the former employee's arrival, there must have been a disclosure of its confidential information. But the court found, again, that there was no proof of any causal relationship between the increase business and claimed disclosure. Accordingly, the court ended up dismissing the employer's lawsuit, which was affirmed on appeal.
Lessons Learned For Employers - It is Better to have an Enforceable Noncompete Agreement and Not Need it than Need a Noncompete Agreement and Not Have it.
For employers, the shortest distance between preventing a former employee from going to a competitor and unfairly competing is an enforceable noncompete agreement. This is because supporting such a claim in a lawsuit is significantly streamlined and an easier preposition rather than resorting to creating a Frankenstein-like amalgamation of legal theories like those relied upon above.
Additionally, having a noncompete agreement means that employers avoid - or at least put off - having to "put up or shut up" in terms of convincing a court your company should be able to prevent an individual from working for a competitor. In other words, the court above picked apart the former employer's claims at the begninning of the litigation because there was little to no evidence of disclosure.
In contrast, with a noncompete agreement, an employer's proof is much more straightforward: Did the employee sign a noncompete agreement; Is that noncompete agreement enforceable; and Did the former employee breach the noncompete agreement? This analysis is intentionally simplified and omits a number of elements to be addressed in a noncompete lawsuit, but it illustrates the entirely different and employer-friendly analysis that a court will likely engage in.
Also in terms of unearthing evidence, it can be an expensive up-front cost because of the frequent need for computer forensic examinations to show the former employee took and used trade secret or confidential information to unfairly compete. Based on our law firm's experience, in the Metro Detroit market these examinations can run a couple thousand dollars per PC/laptop, which excludes attorney involvement time for reviewing the results making them an expensive gamble for employers. And without a noncompete agreement, an employer is left to double down on the bet that some digital dirt will be found.
In the case under discussion, the parties actually discussed and Mr. McLean agreed to submitting his personal computers and storage devices to a computer forensic examination. It is also noteworthy that this forensic examination did not take place due to no fault of Mr. McLean. In other words, the employer seemed to be the reason for why this computer forensic examination did not take place.
Lessons Learned for Employees - Don't Get Into a Noncompete/Unfair Competition Dispute in the First Place, but in any event, Plan for the Worse.
For individuals, Mr. McLean appears to be a text book example of how to leave one employer for a competitor.
First, Mr. McLean returned all files and information that he had access to during his employment.
Second, he also confirmed that he was in compliance with the terms of the employment agreement in that he had returned all of his former employer's information.
Third and most importantly, Mr. McLean's representations appeared to be truthful, especially in light of his agreement to make his home computers and portable storage devices available to a court appointed computer expert for a forensic inspection.
Fourth, prior to his resignation, Mr. McLean did delete a number of computer files (416 to be exact) consisting of old work files that were outdated work product. This deletion, however, was in compliance with whatever policies his former employer had in place and the files were retrieved by the former employer's IT personnel.
In this regard, it is important for departing employees to understand and comply with whatever computer policies an employer has in place. It is also important not to take extraordinary efforts to circumvent those policies, which may raise suspicion. For example, while Mr. McLean did delete files, he did so without using any sort of software deletion tool to irretrievably delete those files.
Certainly the steps taken by Mr. McLean did not insulate him from a lawsuit. But that lawsuit was ultimately dismissed in his favor, which is the next best result.
This Blog has written extensively about claims under the Computer Fraud and Abuse Act (see also this link) arising in the employment relationship. For more information about noncompete agreements and court actions for breach of a noncompete agreement. To discuss your specific noncompete agreement questions, contact Jason Shinn, whose law firm specifically focuses on noncompete law and litigation.