By: James B. Sherman Esq.

2011 is fast becoming "the year of the non-competition dispute" here at Wessels Sherman law firm. Although I can't put a finger on precisely what is causing this spike in litigation over the comings and goings of employees, it appears to have coincided with the (slowly) improving economy. Already this year our lawyers in Minnesota, Iowa, Illinois and Wisconsin have been involved in a wide variety of disputes alleging violations of non-compete agreements and other restrictive employment agreements. Some of these cases have become particularly contentious, more so than most others I have litigated in courts throughout the Upper Midwest over the past twenty plus years!

One of the more hard fought cases we have had this year involves a matter I am working on with a colleague in Iowa, Joe Laverty. The client in this particular case had an employee who signed a typical non-compete agreement that prohibited him from working, as an employee, proprietor, etc., in competition with the client. The contractual restriction was in effect both during the course of the employee's employment and for two years following the end of his employment.

After the employee's employment ended, he started a competing company within the geographical territory proscribed by his contract. In response, we wrote a standard "cease and desist" letter" on behalf of our client, asserting the non-compete agreement and asking the former employee to cease violating its covenants. This soon-to-be defendant responded through his legal counsel, essentially saying: "take a hike." A lawsuit was then brought and the defendant responded through court pleadings with the typical claim that the non-compete was not enforceable and/or that it did not prevent him from competing. After another attempt at reason was brushed aside, we quickly brought a motion for a preliminary injunction to obtain a court order commanding this fellow to abide by his non-competition agreement.

After an evidentiary hearing, the court granted our client an injunction as we had requested. What makes this particular case so unusual, however, is that within days of the court's order enjoining this fellow from competing with our client, we received evidence that he was continuing to compete and was openly advertising his competing business! Meanwhile, back in court, the defendant did not attempt to appeal the court's decision but claimed he did not fully understand what the court had ordered him to stop doing.

Such brazen conduct and antics were met with a stern letter on behalf of our client. When that, too, was ignored we took the unusual step of filing another motion asking the court this time to find the defendant in contempt of its earlier order enjoining him from competing. After a hearing on this new motion, a judge found probable cause for a finding of contempt and reserved a final ruling - and determination of appropriate sanctions - for trial.

Obviously this case is unusual in that most former employees do not keep competing even after a court has ordered them to stop. More often than not a stern "cease and desist letter" under threat of litigation from a law firm such as ours that practices in this area of the law is more than enough to get most people's attention. Non-compete and other restrictive covenant matters are one of the few areas where as management-side attorneys we at Wessels Sherman find ourselves on either side of these issues. In other words, we represent employers in drafting and/or enforcing their agreements with employees or former employees, but just as often we are retained by employers who are seeking to hire someone who has restrictive covenants with their current or former employer. Seeing these issues from both sides of the coin, so to speak, and having litigated disputes of these sorts for over two decades in multiple states in which I am licensed to practice law, has led to some useful tips I will share with employers:

• Litigation should be seen as a last resort. Although good for lawyers, all too often employers charge into litigation without assessing what often becomes the primary issue - is the particular employee in question worth all the expense and disruption of litigation? On the other hand failing to go after one employee who violates a non-competition agreement may undermine future court enforcement of the agreement with other employees.
• Employers looking to hire someone with post-employment restrictions still in effect must proceed with caution. In my humble opinion too many lawyers focus on whether or not the restrictive agreement is "enforceable" in court rather than addressing threshold issues such as (again) - is the particular employee in question worth all the expense and disruption of litigation?
• Hiring employers are often sued by the new employee's former employer. Allegations can range from stealing confidential information or "misappropriation of trade secrets," to unfair competition or tortiously interfering with their employment agreement with their former employee. What many do not realize (and their lawyers often fail to warn them) is that under certain circumstances they may wind up paying both their own lawyer fees as well as those of the suing employer if it is successful. The Minnesota Supreme Court said as much in a landmark decision several years ago in Kallock v. Medtronic.
• In the right circumstances, it may well be worth going to court to protect one's business interests. Instances of unfair competition, misappropriation of trade secrets, etc. can threaten a company's very existence and inaction is tantamount to business suicide. The trick is in knowing when and when not to do battle.
• Although having a solid, well written non-compete agreement or other type of restrictive covenant with employees can provide a business with better protections and options in the event an employee or competitor attempts to compete unfairly, those without such contracts are not entirely without legal recourse. Common law recognizes certain fiduciary duties that all employees (even former employees) owe to their employers based on the nature of each particular employment relationship. A suit for breach of fiduciary duties, conversion of property or misappropriation of trades secrets, defamation, etc. may exist without a contract.
• Non-compete agreements are not for every employer, nor are they necessarily needed for every employee. Unlike most other contracts, these types of agreements are scrutinized by the courts and must be reasonably drafted to protect only legitimate business interests. With this in mind, employers looking to restrict the competitive capabilities of employees and/or former employees should consider whether a non-compete or less restrictive non-solicitation agreement (where the employee can work for a competitor but agrees not to solicit customers or employees, for example, of the current employer) is appropriate and, if so, for which employees. Other, less restrictive agreements - such as confidentiality clauses - may be enough to do the trick and they typically require less policing and enforcing.

For more information on drafting/enforcing restrictive employment agreements of all kinds (e.g., non-compete/non-solicitation/confidentiality and trade secrets), or for advice on how to deal with a job applicant who has such an agreement with her or his current or former employer, contact James B. Sherman at (952) 746-1700, or email jasherman@wesselssherman.com.