Current Trends in Non-Compete Law – October 2017

The following are current trends and topics in non-compete law and non-compete litigation for October 2017. Let’s jump right in:

  1. Forged Non-Compete Agreements: Although it may seem far-fetched, companies occasionally forge non-compete agreements. To state the obvious: Forging a non-compete agreement is both morally reprehensible and incredibly stupid. But that doesn’t stop it from happening. In any given month, I see at least two or three instances of non-compete forgery. First, I doubt that high-ranking corporate officers and executives authorize this sort of conduct. The most likely scenario: An employee in the HR department either (A) forgot to get some papers signed or (B) lost some documents. That employee is afraid of being reprimanded, so they just do an e-signature, put the documents in the file and assume it will never come up. But if it does come up, it can be explosive. Quite often, non-compete disputes begin with the potential plaintiff sending a cease & desist letter to the former employee and the new employer. And, quite often, the new employer terminates the employee based on the cease & desist letter.  If this happens, and the underlying non-compete agreement was forged, it gives rise to potential claims for tortious interference and defamation. If the plaintiff files an actual lawsuit based on a forged non-compete agreement, it also gives rise to potential claims for malicious prosecution. Punitive damages are also possible.
  2. Non-Compete Agreements & Low Wage Workers: Inexplicably companies continue to sue low wage workers for non-compete violations. Over the past few years, there has been pushback against non-competes for low wage employees (e.g. Jimmy Johns). But this hasn’t put an end to the practice. We continue to see non-compete agreements used at every level of every industry (e.g. factory workers, security guards, office workers, administrative assistants, etc.).  In many instances, these non-compete agreements are completely unenforceable for lack of any legitimate business interest. Filing suit on an unenforceable non-compete agreement – or even sending a cease and desist letter – can result in litigation and significant fee exposure. Given these considerations, it is hard to comprehend why companies continue to (A) pursue frivolous non-compete lawsuits (B) pay hundreds of thousands of dollars in attorneys’ fees to litigate these cases and (C) risk losing and paying the other side’s attorneys’ fees. Enforcing or attempting to enforce a non-compete agreement against, e.g., a factory worker or other low-level employee does not make business sense. Even suing a mid or upper level employee for a non-compete violation does not make sense unless that employee poses a legitimate threat to the company’s bottom line. The reality: This is driven by bad lawyers and greed. I have seen numerous cases where the plaintiff spent $500,000+ in fees before giving up.
  3. Arbitration & Carve Outs: The intersection between arbitration provisions and carve outs for injunctive relief is poorly understood. If an agreement calls for arbitration under the “rules of the AAA”, you have incorporated the relevant AAA rules into that agreement. Under the AAA rules, the question of whether or not an issue must be arbitrated (i.e. arbitrability) must be resolved first by the arbitrator(s). Upshot: Most carveout provisions allowing for a lawsuit seeking injunctive relief aren’t properly written. If legitimately tested (i.e. motion to compel arbitration in front of a judge who understands the law), the entire case is going to arbitration regardless of the carve out.
  4. No-Hire Provisions: No-hire and no-poaching provisions are still a hot-button issues. We usually think of these as agreements between competitors from entirely different companies. But here’s a new wrinkle: Within franchises. Apparently, McDonalds franchisees agree not to hire each others’ employees. This is bad for employee mobility, suppresses wages and is ultimately bad for the market/competition. As the Apple/Google/Pixar etc. no-poaching litigation reminded us: This raises antitrust concerns.
  5. Referral Sources: Florida’s Supreme Court has ruled that referral sources (in the physician non-compete context) can potentially be legitimate business interests. The Florida Supreme Court did not say they automatically are protectable— rather that they can be in certain circumstances. I predict this will result in tremendous confusion and that many Florida trial courts will interpret this to mean that referral sources automatically are a legitimate business interest. Referral relationships should be subject to the same analysis as “substantial” (and therefore protectable) customer relationships. This analysis is laid out in (1) Evans (5th DCA) and (2) IDMWorks.  Both are my cases.
  6. State Level Reform: Some states, e.g. Massachusetts, continue to debate sweeping non-compete reforms. Proposed legislation in MA would ban non-competes against low wage workers, those employed for less than a year and those terminated without cause (among other changes).

Jonathan Pollard

Pollard PLLC is a litigation boutique based in Fort Lauderdale, Florida and focused on competition law. The firm and its attorneys have experience litigating and arbitrating complex non-compete, trade secret, trademark, and other competition claims. For more information, please call their office at 954-332-2380.