5 Reasons A Business Should Sue A Former Employee Who Violates A Non-Compete Agreement
Many businesses require their employees to sign a non-compete agreement or covenant not to compete either upon their hiring or as a condition of continued employment.
Many businesses require their employees to sign a non-compete agreement or covenant not to compete either upon their hiring or as a condition of continued employment. A non-compete agreement generally places certain limitations or restrictions on a former employee’s ability to work for a competitor or to start a competing business following that employee’s departure from his or her former employer. There are often specific guidelines on how these non-compete agreements must be presented to employees. (In New Hampshire, for example, businesses must present their employees with the non-compete they are required to sign either with an initial job offer or an offer of a change in job classification.)
When an employee leaves his or her employer and takes a job with a competitor in violation of his or her non-compete agreement, a business often believes it has a difficult decision to make: sue the former employee and spend money on attorney’s fees, or save the money and risk that the employee harms the business’s interests by working for a competitor.
This choice, however, does not have to be perceived as a no-win situation. Rather, a business should use these situations as opportunities to protect its interests and bottom line. Although it may sound harsh to sue an individual who is merely looking for a job, or seek a temporary restraining order or injunction preventing that person from working for a competitor, the reality is that today’s market is a competitive, cutthroat environment. A competing business will look for every advantage possible, including poaching an employee whose talent will strengthen its performance and whose absence might weaken his or her former employer. Thus, when a non-compete is in place, and an employee ignores its restrictions, a business should strongly consider taking legal action against that employee and protect its interests.
Of course, this action should be considered only if the non-compete agreement is enforceable. (There also exists a separate question of whether a business should take legal action against the employer, but that issue is beyond the scope of this article.) If the non-compete is enforceable, below are five specific reasons businesses should take legal action against these employees if they refuse to comply with the agreement.
Prevent the former employee from taking his or her talent or customers to a competitor
The most classic reason for taking legal action against a former employee who violates a non-compete agreement is to prevent that employee from using his or her talent to benefit a competitor, or to prevent that employee from taking your customers to a competitor.
With respect to the employee, even if he or she no longer wishes to work for you, you can diminish the harm from the departure by preventing that employee from taking his or her talent to a competitor. If they don’t want to work for you, then they can work for no one. In that situation – at least for the length of the time restriction in the non-compete agreement – you can maintain the status quo, prevent your competitor from gaining an advantage, and find a way to replace the departing employee.
With respect to your customers, although many non-compete agreements restrict a former employee from disclosing your customers to a competitor or soliciting them after departure, many courts have begun to water down these restrictions because they have proven to be too limiting for the employee.
Given that development, it is imperative then for you to prevent that employee from working in the industry in your geographic area, or for a competitor, altogether. That way, again, you can maintain the status quo, prevent your competitor from gaining a quick advantage, and develop a strategy for recovering those customers.
Prevent a competing business from acquiring market share
Often, a competing business will hire your former employee and use that employee (and his or her knowledge gained from your company) to move into your geographic area or market and expand its presence. This situation presents a compelling business reason for taking the necessary steps to undermine this effort.
It would be worthwhile to engage an attorney and prevent a competing business from using your former employee as a pawn in its quest to acquire market share. There is no doubt your competitor might have an effective marketing team. But don’t let them use your former employees in place of their own marketing personnel.
Prevent the former employee from disclosing trade secrets
Non-compete agreements typically have a confidentiality provision or some other specific provision that prohibits an employee from disclosing a business’s trade secrets or other sensitive information to a competitor. When an employee who has been exposed to such information leaves for a competitor, a business should take immediate, proactive steps to protect its interests and prevent that employee from disclosing that information.
The restrictions against competition in non-compete agreements, which are generally based on time and geography, do not apply to trade secrets and other confidential information. Those materials are almost always protected. Businesses should ensure former employees do not jeopardize their interests and provide the competition with an advantage.
Demonstrate that a non-compete agreement actually means something
In my practice, I have encountered employees who adopt a very cavalier attitude towards non-compete agreements. They assume their former employer would never sue them because they are somehow insignificant and do not merit the effort. When this kind of attitude prevails, future employees will similarly disregard a non-compete agreement and jump ship to a competitor.
Businesses should never allow their employees to disregard non-compete agreements (or any kind of agreement). Indeed, if both the employee and the business ignore the non-compete agreement, then it was a waste of time and money to prepare one in the first place.
Businesses should ensure their employees respect these agreements and understand that disregarding them attracts negative consequences. Unfortunately, the best method for building that level of respect is by taking legal action against an employee who violates a non-compete. Although this requires an expenditure of time and money, over time, a consistent approach of enforcing these agreements will dissuade future employees from moving to a competitor and ignoring a non-compete’s restrictions.
Create favorable case law establishing that a non-compete is valid and enforceable
Assuming your non-compete agreement complies with your state’s applicable law, it is helpful to have at least one or two court decisions holding it is valid and enforceable. Although this would require suing a former employee who violates the agreement and then litigating the violation, this effort reaps future benefits.
Filing a lawsuit against a former employer who violates a non-compete and litigating that violation will ultimately lead to the court issuing a decision that concludes the agreement is valid and enforceable, and the former employee violated it.
A published court decision in favor of your agreement can then be used later if a future employee violates the same non-compete. For example, you could cite the decision in a cease-and-desist letter to a former employee who jumped ship to a competitor, or to that former employee’s new employer. Relying on that decision will make your demand more compelling and likely persuade the employee to find another job or take a different position with that competitor.
Even if you were forced to sue that employee, you could cite the decision in a filing with the court and dispose of the lawsuit much earlier than if you didn’t have that decision in your back pocket.
Meet the author: Robert Fojo
Robert assists clients with business and commercial transactions, civil litigation, and complex dispute resolution. He helps businesses defend themselves when lawsuits are filed against them and prosecute their own lawsuits when they have been wronged. In this regard, Robert handles a wide variety of legal issues, including general commercial disputes, construction matters, class action lawsuits, real estate disputes, disputes concerning the competitive bidding process and government procurement and contracting, employment claims, and appellate litigation. Robert also assists small-to-medium size privately held businesses, venture investors, and entrepreneurs with cost effective legal solutions that address their specific business needs.
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