Employee noncompete restrictions are supposed to provide a company with a means to preserve its legitimate competitive interests when an employment relationship ends. But they can also be used by unscrupulous employers to make demands that outside of the guardrails of the judicial system would resemble extortion.
This post discusses a recent example of arguably a frivolous noncompete lawsuit and suggestions for both companies and individuals to consider when it comes to entering and enforcing noncompete restrictions. While our law firm represented the defendant, the information discussed below comes directly from public and non-confidential sources like court filings and non-confidential communications between the parties and opposing counsel.
First, however, a brief explanation about noncompete restrictions; They typically prohibit an employee from working for a competitor, soliciting the employer’s workforce from leaving to join a competitor, soliciting clients from the former employer, or some combination of the preceding. And when these restrictions involve a reasonable scope and restrictive time period, they will often be enforceable.
However, in a recent lawsuit filed by Pogoda Management Co., Inc., against a former employee, Pogoda sought to enforce its noncompete restriction. Pogoda claimed its former employee could not work for a competitor in a geographic area where Pogoda conducts its self-storage business for two years unless approved by Pogoda’s President.
Pogoda is a Michigan-based company. It owns or manages self-storage facilities. Its former employee moved from Michigan to a state where Pogoda had no storage facilities or other business. The former employee also took a position with no responsibility for soliciting business, setting pricing, or managing any storage business in any geographic location where Pogoda conducted business.
Additionally, our investigation in response to Pogoda’s complaint uncovered many statements from Pogoda’s owners about the relevant “competitive area” for its storage facility business as being limited to a radius of only a few miles from a storage facility. All facilities operated by the defendant’s new employer were many miles outside of this competitive area, which provided additional evidence that Pogoda’s noncompete was overbroad and its claim had no merit.
These facts were extensively discussed in correspondence to Pogoda’s counsel written to try to resolve the lawsuit and then to establish a basis for obtaining monetary sanctions against Pogoda and its counsel for filing a frivolous lawsuit, as well as to comply with court requirements for filing a summary judgment motion.
But Pogoda’s attorney repeated he was not interested in discussing the merits (or lack thereof) of Pogoda’s claims. Instead, Pogoda threatened to extract its attorney fees under the noncompete provision, and its attorney even bragged his rate was $695.00 an hour. Further, Pogoda promised to ensure the judge restricted the defendant, the sole income earner for his household, from working.
Pogoda, through its attorney, went on to offer this explanation laughing about how Pogoda’s downside was limited to paying its own attorney fees if it was not successful and “it’s not like we got a thousand of these guys out there,” so if the noncompete gets knocked down,” there is no “precedential” concern. Related to this threat, Pogoda could identify no damages in the form of lost customers, lost business, or any effort by the defendant to solicit Pogoda’s customers, current employees, or the like.
This significant pressure put on someone in the defendant’s position, no matter how remote the chances were, a judge would agree with Pogoda’s claims.
Fortunately, in Pogoda’s haste to extract a quick settlement, it left a lot on the table. Also, after the settlement was reached and confirmed in writing, Pogoda’s attorney advised it had “buyer’s remorse” and would refuse to abide by the settlement terms unless the defendant agreed to reinstate important confidentiality protections and enforcement provisions that Pogoda had waived as part of the settlement. Pogoda eventually backed down when it became clear there was no merit to its position. But for a party and its attorney to even try to make arguments, representations, and claims so contrary to the facts that a settlement was reached and confirmed in writing speaks volumes as to the significance of the mistake.
So with this backdrop, here are a few take-aways for people and companies regarding noncompete enforcement.
- First, for employees, carefully read and understand the post-employment restrictions you may be asked to sign. You may have no choice but to sign the noncompete if you want to accept the employment opportunity, but at least you can weigh the rewards against the post-employment risks.
- Second, conduct due diligence on the prospective employer’s history and reputation for enforcing non-compete restrictions. We routinely do this for our clients (individuals or prospective employers seeking to hire someone subject to a noncompete restriction) when assessing noncompete risks. A company with a track record for enforcing or not enforcing noncompete restrictions provides valuable information about assessing noncompete risks and defenses.
- Third, it is critical to resolve noncompete disputes competently to avoid harming or compromising other aspects of your business. For example, Pogoda agreed to settle its noncompete dispute, but in doing so, it also agreed to waive all contractual obligations, including those protecting the confidentiality of its business information that had nothing to do with the noncompete restrictions.
- Fourth, this case is a textbook example for why federal and states have proposed or passed legislation to limit the use and enforcement of non-compete restrictions. And the above example should be the poster child for Michigan to revise its noncompete law. Noncompete restrictions – when used properly – have legitimate purposes so an outright ban would be overkill. However, slight revisions to Michigan’s noncompete law would allow employers to continue to protect their legitimate competitive interests while limiting or discouraging the abusive tactics described above. In the coming weeks, we will discuss some of these proposed changes.
On a personal note, I’ve published articles through this Blog for over 10 years. In that time, I’ve avoided personal criticism of attorneys or litigants. Mostly because I like to assume everyone’s just doing their job when it comes to advocating for their clients, even if reasonable attorneys can disagree over the arguable merits of a claim.
But in writing this post, I opted to discuss in more detail the professional frustrations stemming from the Pogoda example. I made this decision because Pogoda and its lead attorney were prepared to renege on a settlement by disclaiming a settlement was reached (despite Pogoda’s attorney’s written email confirming the details of the settlement) and then making arguments that defied credibility in order to alter the settlement terms to revive Pogoda’s confidentiality restrictions from its employment agreement.
Noncompete litigation, like any litigation, is a complex process involving people. And people make mistakes. Accepting this, I would have normally worked with opposing counsel to reach an agreement for options to continue to protect the confidentiality of Pogoda’s business information that would not have compromised our client’s interests. But there comes a point where bad behavior should not be rewarded.
For the past 20 years, Mr. Shinn has represented employers and employees in all aspects of noncompete matters. Use this link to contact Michigan attorney Jason Shinn if you have questions about this article or complying with Michigan noncompete law. Since 2001, Mr. Shinn has represented companies and individuals concerning the issues discussed above.