Employment Law: Is Your Non-Compete Affordable to Enforce?

Employers Should Take Steps To Ensure That They Can Afford To Enforce Non-Disclosure And Non-Competition Agreements.

For 10 years Mike Brown served as the Vice President of Sales for ABC Technologies which is located in Maryland.  In that capacity, Brown had: (1) supervised ABC’s sales staff; (2) developed close relationships with key customers and vendors; (3) identified prospective customers; (4) prepared and reviewed sales proposals; (5) participated in formulating business and marketing plans; (5) obtained sensitive financial data; and (6) conferred with the R&D staff about developing new products and services.

Two months after Brown resigned from ABC, the company learned from its customers that Brown was working in North Carolina as the Vice President of Sales for XYZ Systems, ABC’s primary competitor.  The customers told ABC that Brown had solicited them to move their business to XYZ.  ABC also learned that Brown had asked several ABC employees to join him at XYZ. 

Bill Smith, ABC’s CEO, immediately conferred with the company’s attorney about enforcing the non-competition and non-disclosure agreement signed by Brown while employed by ABC.   The attorney told Smith that ABC could file a lawsuit to enforce that agreement, but and that legal action would probably have to be filed in North Carolina because a Maryland court could not exercise personal jurisdiction over Brown. 

The lawyer also advised Smith that the attorneys’ fees and litigation expenses would total at least $100,000 and that the law would not permit ABC to recoup those expenditures from Brown, even if the company won.  When confronted with that information, Smith decided that the cost and inconvenience associated with enforcing the agreement outweighed the gain to be realized if ABC succeeded in the lawsuit, despite the fact that Brown had blatantly breached the contract.

ABC could have made the decision to sue Brown much, much easier by including provisions in the non-competition and non-disclosure agreement which required Brown to: (1) submit to personal jurisdiction and venue in a court located in Maryland in a lawsuit filed to enforce that contract so ABC need not incur the inconvenience and cost of chasing after the employee in another state; and (2) reimburse ABC for its attorneys’ fees and litigation expenses if the company prevailed in that litigation.  Most courts will enforce such provisions, especially if the state specified for location of the litigation has a relatively close nexus to the employment relationship, so the only remaining economic consideration will be whether Brown has the financial wherewithal to pay ABC those amounts.  

As a consequence, employers should ensure that non-competition and non-disclosure agreements signed by their employees contain personal jurisdiction and attorneys’ fees provisions.  If existing contracts do not, employers should require employees to sign new contracts or amendments to those agreements.

Without taking that simple step, employers may mistakenly believe that they have effectively insulated themselves from unfair competition by unscrupulous, disloyal former employees.  Indeed, those provisions can radically alter the cost-benefit analysis when deciding whether to sue to enforce contracts and can deter employees by substantially raising the potential financial stakes for them if they are found to have breached their contracts.  


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