I recently ran across a great article about noncompete agreements, which touch upon two important issues that threaten the success of every non-compete lawsuit: the role choice of law provisions play in noncompete litigation and damages at the preliminary injunction stage of a non-compete lawsuit.

As to the article by Paul O. Lopez, Can Noncompete Agreements Be Enforced If They Cause Substantial Economic Harm, it discusses a noncompete dispute that involved Florida law. Mr. Lopez notes that Florida has a non-compete statute that expressly provides “in determining the enforceability of a restrictive covenant, a court … shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” The purpose of this statutory provision, as Mr. Lopez explains, was to “essentially do away with the economic hardship defense and to make it clear that a well-drafted non-compete agreement could be enforced against employees, regardless of the financial burden that it caused the employee.”

However, the viability of this sort of statute was called into question in TransUnion Risk & Alternative Data Solutions v. MacLachlan. In this case, the employer filed suit against its former employee who joined a competitor. The suit sought to enforce TransUnion’s noncompete agreement under Florida’s non-compete statute. Initially, the district court entered a preliminary injunction after finding that the agreement was enforceable, and the employee violated it.

But on appeal, a unanimous panel of the U.S. Court of Appeals for the Eleventh Circuit agreed with the former employee. Accordingly, it reversed the preliminary injunction granted for TransUnion Risk because the trial court did not consider the economic impact to the employee if the injunction was issued and failed to balance that harm against the company’s need to have an injunction in place. This balancing is required under the federal court rules that apply to issuing injunctions (Rule 65 of the Federal Rules of Civil Procedure). In other words, the Eleventh Circuit ruled that regardless of what Florida state law, the federal trial court was required to evaluate the economic impact to the employee if an injunction were issued and to balance that against the company’s need to have an injunction in place.

Choice of Law and Damage Issues Pose Risks in Every Non-compete lawsuit

The issues of sort of choice of law and damage issues involved in the TransUnion Risk case were also recently discussed on this blog:

1. Turning to choice of law issues, we recently explained that differences in state law may create enforcement issues for employers seeking to enforce non-compete restrictions where the company is in one state, and the employee is in another. See Differences in State Law Create Hurdles for Enforcing Non-Compete Restrictions, which discussed a non-compete lawsuit involving Texas law and former employees who lived in Oklahoma. In that case, the court refused to issue a preliminary injunction based on the application of Oklahoma law and even though the non-compete agreement in question provided that Texas law would govern the relationship. The TransUnion Risk case discussed above involves the same conflict, except it is between state and federal law.
2. Turning to the issue of damages at the preliminary injunction phase of a non-compete lawsuit, we recently obtained an order denying a former employer’s motion for preliminary injunction. One of the arguments we made in defeating this motion was that the economic harm to the employee if the injunction was issued outweighed the harm against the company’s need to have an injunction in place. See Focusing on Legitimate Business Interests Still Key to Enforcing Non-compete Agreements. Regarding this argument, Michigan non-compete law, unlike Florida non-compete law, closely resembles the federal court rules concerning preliminary injunctions concerning balancing the harm of issuing an injunction versus not issuing it.

Take Aways

Personally, I take a lot of interest and professional enjoyment negotiating the competing interests and multiple legal considerations that go into resolving noncompete litigation. And the cases discussed above highlight two challenges that often lurk in every noncompete dispute – damages and choice of law.

Both issues can significantly alter the course of an action to enforce or defendant against a noncompete restriction. And for these reasons, it is critical for employers to have a carefully drafted noncompete restriction that is tailored to their particular situation. From the perspective of the employee, it is equally important to understand – before agreeing to any noncompete restriction – how future employment opportunities may be affected.

For more information about enforcing or disputing non-compete restrictions, contact Michigan attorney Jason Shinn. Mr. Shinn routinely represents both companies and individuals in non-compete lawsuits.