The purpose of a non-competition agreement is to protect a company’s legitimate business interests. Legitimate business interests may include protecting a company’s goodwill and customer relationships, confidential information and trade secrets, and preventing unfair competition from former employees and independent contractors. Employees and independent contractors are often required to sign a non-competition agreement prior to commencing the employment or contractual relationship.
Non-competition agreements are frequently the source of litigation. Most often the employer will pursue legal action against the departing employee that signed a non-competition agreement, and that employee’s new employer, seeking to enforce the terms of the contract. Similarly, an independent contractor and the new person or entity engaging the contractor could be pursued if the new relationship is in violation of the terms of a non-competition agreement between the independent contractor and a former contracting party.
There are different approaches to enforcing a non-competition agreement to protect a company’s legitimate business interests. The strategy most often utilized consists of first sending cease and desist letters with a copy of the non-competition agreement attached to both the departing worker and the entity that engaged the worker (“new employer”). On occasion, a cease and desist letter will resolve the matter, either by the worker discontinuing the relationship, or the new employer terminating the relationship, in order to forego the cost of, and time involved in, litigation.
If the cease and desist letters are unsuccessful in resolving the dispute, and other attempts, if any, to negotiate a resolution with the worker and/or the new employer have similarly been unsuccessful, the next step to enforce the non-competition agreement is to commence a lawsuit. A lawsuit enforcing a non-competition agreement most often includes claims against both the worker subject to the contract, and the new employer who engaged the worker in violation of that contract.
Claims Against the Worker
While the claims asserted against a former worker will vary depending on the specific facts of each situation, claims most often asserted include, as appropriate: (1) breach of contract; and (2) breach of duty of loyalty, if the worker engaged in improper acts while an employee. If the worker has or knows the company’s trade secrets and is or may be using that information to the company’s detriment, and/or the worker has other company property, additional claims may include: (3) misappropriation of trade secrets; (4) unjust enrichment; (5) conversion; and (6) civil theft. If the worker is improperly interfering with the company’s current or potential business relationships, additional claims may include: (7) tortious interference with contractual relationships; and (8) tortious interference with prospective economic advantage. If the worker is making statements to third parties about the company that are untrue and that, among other things, tend to harm the company, additional claims may include: (9) defamation; and (10) defamation per se. Other claims may be asserted against the worker depending on the unique facts of the case.
Claims Against the New Employer
Claims asserted against the new employer that engaged the worker will also vary, though often include: (1) tortious interference with contractual relationships; (2) tortious interference with prospective economic advantage, if the new employer is improperly interfering with the company’s potential business relationships; and/or (3) misappropriation of trade secrets, if the new employer has improperly obtained the company’s trade secrets and is or may be using the trade secrets to the company’s detriment. A key element to a tortious interference with contractual relationship claim against the new employer will be the new employer’s knowledge of a contractual relationship between the worker and the company. This is one reason why the non-competition agreement is often attached to a cease and desist letter sent to the new employer, thereby putting the new employer on notice of the contractual relationship, and setting the groundwork for claims against the new employer if attempts to resolve the matter prior to commencing a lawsuit are unsuccessful
Temporary Restraining Order and Temporary/Preliminary Injunction
Depending on the severity of the breach of the non-competition agreement, and the imminent and irreparable harm that may befall the company if the worker is permitted to continue to engage in actions that violate the non-competition agreement while the lawsuit is pending, the company may seek a court order requiring the worker to comply with the non-competition agreement pending the outcome of the lawsuit on the merits. There are two court orders that are often utilized to protect a company until the court or jury can decide the merits of the lawsuit—a temporary restraining order (“TRO”), and a temporary (the term often used in state court) or preliminary (the term often used in federal court) injunction. Securing an injunction is usually a two-part process: first seeking a TRO against the worker and new employer that will remain in place until a temporary/preliminary injunction hearing; and second seeking a temporary/preliminary injunction that will remain in place until the lawsuit is ultimately decided on the merits.
Part One: A Temporary Restraining Order
A TRO—a motion brought before the court seeking an order precluding the worker, and perhaps the new employer, from engaging in certain acts—is often pursued immediately upon serving and filing the lawsuit against the worker and the new employer, and may be sought on an ex parte basis (without giving notice to, and without appearances by, the worker, new employer, or their counsel). An ex parte TRO may be appropriate if the mere act of providing notice that a TRO is being sought may result in irreparable harm that the TRO is intended to prevent in the first place. In other circumstances, notice of the motion for a TRO and the hearing date on which the court will consider the motion are provided to the worker, new employer, or their counsel. Even though notice may be provided to the other side, the TRO motion is frequently unopposed in light of the very short time period from when the lawsuit is commenced and the TRO hearing is scheduled, which can be as short as one or two days.
When deciding whether to grant a TRO, a Minnesota state court will typically consider five factors: (1) the relationship between the parties preexisting the dispute; (2) the balance of the harms between the parties; (3) the likelihood of success on the merits; (4) public policy considerations; and (5) administrative burdens, if any. See Dahlberg Bros. v. Ford Motor Co., 272 Minn. 264, 274–75, 37 N.W.2d 314, 321–22 (1965). Rule 65 of the Minnesota Rules of Civil Procedure generally governs the injunction process in Minnesota state court.
Minnesota federal courts evaluate the following factors: (1) the threat of irreparable harm if the injunction is not granted; (2) the harm suffered by the moving party if injunctive relief is denied compared to the effect on the non-moving party if the relief is granted; (3) the public interest; and (4) the probability that the moving party will succeed on the merits. See Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). Rule 65 of the Federal Rules of Civil Procedure generally governs the injunction process in federal court.
Of the factors considered the court places the most weight in the balance of the harms between the parties, and the likelihood that the company will be successful in proving the claims asserted in the lawsuit. The court will also consider whether to impose a bond or other form of security in the event that the TRO is later found to be improper. If the court grants a TRO, it will generally stay in place until the court has an opportunity to hear a motion for a temporary/preliminary injunction.
Part Two: Temporary/Preliminary Injunction
The nature of a TRO is that it is temporary and will only remain in place until the court has an opportunity to more fully consider whether an injunction should remain in place pending the outcome of the lawsuit, which can last, on average, ten to fourteen months, or longer. In order to preclude the worker, and perhaps the new employer, from engaging in certain acts in violation of the non-competition agreement during the lawsuit, the company will need to seek a temporary/preliminary injunction. A motion for a temporary/preliminary injunction will include an evidentiary hearing that may involve evidence in the form of documents introduced as exhibits, affidavit testimony, and/or live testimony from witnesses setting forth the factual basis for why the injunction should be issued. The factors considered by the court in deciding whether to issue the injunction are the same factors the court considers when deciding whether to impose a TRO. If the court issues an injunction, the order will often stay in place pending the outcome of the lawsuit, unless a motion is later brought by the worker and/or new employer seeking to dissolve the injunction.
The outcome of the injunction hearing—whether the court granted, denied, or later dissolved or refused to dissolve, or modified or refused to modify an injunction—is immediately appealable as a matter of right.
Trial and Damages
Whether the non-competition agreement is ultimately found enforceable, and also whether the worker and new employer are liable to the company for damages, will depend on the facts discovered during the lawsuit, and a decision by a court or jury. A decision could be based on a motion for summary judgment, or a bench or jury trial.
The court or jury will decide, among other things: (1) whether the non-competition agreement is valid, and if so, to what extent; (2) whether the worker violated the contract, and whether the new employer tortiously interfered with the contract; and (3) if so, what damages, if any, the company is entitled to recover from the worker and/or new employer. The court or jury will also decide other claims that were asserted in the lawsuit, and whether to issue a permanent injunction that will remain in place for a period of time that will vary depending on the facts of each case.
About the Author: Attorney Steven M. Cerny is a Partner at JUX Law Firm and focuses on business and employment law, and litigation. Steven frequently drafts non-competition agreements, advises clients on the enforceability of non-competition agreements, and litigates disputes involving non-competition agreements.