Employers commonly require employees to execute noncompetition agreements (also referred to as covenants not to compete or restrictive covenants). Under Michigan law (MCL 445.774a), such agreements will be enforceable if reasonable.
In theory, an enforceable noncompete agreement generally places certain limitations on an employee’s ability to work for a competitor or to start a competitive venture business following an employee’s departure. But as the venerable Yogi Berra noted, “In theory there is no difference between theory and practice. In practice there is.”
So setting theory aside, in “practice” what happens when an employee is in violation of a noncompetition agreement?
There are few right or wrong answers in terms of a proper response, just trade-offs between decisions and informed decisions. But the following are a few critical strategic issues that should be considered when it comes to drafting a strategy for litigating noncompete issues:
Is the noncompete agreement enforceable?
Before taking any action against a former employee, the first question that needs to be answered is whether the noncompete agreement is enforceable. Otherwise, you could be exposing your company to liability. Consider, for example, former employers have been held liable for tortiously interfering with their former employee’s new employment relationship by threatening litigation over an unenforceable non-compete agreement.
Should the new employer be sued?
Assuming the noncompetition agreement is enforceable, the next question is who should be sued: the former employee, the new employer, or both? The answer to this question will depend on a number of considerations.
Reasons for not suing the new employer
The new employer may not have notice of the noncompete agreement, which warrants against naming it in the lawsuit. Sending the new employer a copy of the non-compete agreement and advising that, if necessary, you intend to fully enforce your legal rights under the non-compete has several advantages:
- Generally a new employer is not interested in “hiring a lawsuit” and its associated costs. Accordingly, it may voluntarily terminate the new hire to avoid both once it is educated about the noncompete agreement and subsequent violation by the former employee.
- Providing notice also has value in that it concretely documents the new employer’s knowledge of the non-compete agreement. Not only is such knowledge a likely element for your legal claim, it also puts you on better footing when asking a judge to award injunctive relief against the new employer (i.e., a temporary restraining order) by showing the new employer had actual knowledge of the noncompetition agreement that is being violated. This eliminates a compelling argument that judicial relief should not be awarded against the new employer because it was merely an “innocent bystander” caught in the crossfire between you and your former employee.
- In addition to providing notice of the actual noncompete agreement, you should also put the new employer on notice that an evaluation of its preservation obligations is appropriate in response to a reasonable expectation of litigation. By providing such notice, you are laying the foundation for later obtaining sanctions if there is a failure to preserve information involved in the litigation.
Another reason you may not want to sue the new employer is because an individual employee is unlikely to have sufficient financial resources to hire legal counsel to defend against the noncompete violation. But by suing the employer, you may make a “deep pocket” available in which to pay legal expenses or the new employer may have insurance that extends to the individual employee.
Reasons to Sue both the Former Employee and New Employer
You may have “smoking gun” evidence, such as e-mails between the former employee and new employer showing that the new employer actively encouraged the individual to misappropriate your information with the intent to violate the non-compete agreement, which leaves you with little choice but to sue the new employer.
There may also be compelling business reasons for suing the new employer. For example, the new employer may be using your former employee (and likely his or her knowledge previously gained from your company) to move into your market or geographical region or to actively solicit your current employees and/or customers. Obviously these circumstances create compelling business and legal reasons to include the new employer in the litigation.
It is important, however, to make certain business justifications do not overshadow state or federal legal and ethical requirements for maintaining an action. Generally, speaking, a claim must be well grounded in fact and warranted by existing law. Failing to comply with these requirements may result in a range of sanctions for filing a legally frivolous claim.
The reasonableness of a noncompete agreement is often subject to judicial interpretation. It is, therefore, absolutely essential when drafting noncompete agreements to understand the statutory requirements for an enforceable noncompete agreement. As noted above, these requirements focus on “reasonableness.”
And when it comes to noncompete litigation it is often more art than science where there are no fixed or mechanical responses for responding to a breached noncompete agreement. Instead, each set of circumstances has its own unique business and legal issues. Accordingly, a noncompete litigation strategy should be developed by considering the above issues and other relevant considerations with legal counsel and business stake-holders.