25 Feb To Sue or Not to Sue: Is Non-Compete Litigation Worth It?

In my last two posts, I discussed non-compete agreements and nondisclosure agreements, both of which are key for small businesses operating in a competitive market.  However, neither agreement is worth the paper they are written on, if your business is not prepared to enforce the agreement.

An employer who is considering whether to enforce a non-compete agreement must strongly consider the pros and cons of spending valuable business resources litigating the agreement.  Not only must your non-compete be rock solid (see prior post on how to do this), there must be sufficient factual and legal support for any claims before you initiate a legal action.  Second-hand knowledge from a customer will not be sufficient, unless that customer is willing to sign an affidavit (a burden you may not want to impose on a good client).

Do You Have Enough Evidence?

To determine whether your business has enough evidence to pursue a non-compete claim, your business will need to promptly conduct its own investigation to gather the necessary information.  This will include gathering the relevant documents, interviewing witnesses, and preserving electronic evidence.  Your business will want to conduct this investigation promptly because doing so demonstrates to the court that your business has a “legitimate business interest” to protect.  This will also ensure your business minimizes any damages resulting from the employee’s competitive activity, and that all potential evidence is preserved before it is “lost” or otherwise destroyed.

Documentary Evidence

The applicable documentary evidence your business needs to establish a claim will differ depending on how many contracts or agreements are involved in your business’s hiring process.  Employees often sign several documents before and during the employment relationship, such as employment applications, offer letters, employment contracts and stock option agreements.  Pay close attention to these agreements, to ensure that none of them include a merger provision that impacts a non-compete provision or other non-compete signed by the employee.  Also, your company should be sure to gather and review all settlement agreements, separation agreements and/or severance agreements the employee might have signed, as these agreements could also prohibit an employee from serving his former employer’s clients and prevent the employee from soliciting former co-workers.

Witnesses

Your business’s investigation should also include witness interviews.  Witnesses may include individuals who worked with the employee, as they may have seen the rogue employee violating the non-compete, and may have been asked to join the departing employee at his or her new employment.  Clients and customers may also be able to confirm the employee’s violation of the non-compete agreement, but your business should tread lightly on burdening customers or clients with such a request.  You do not want to risk upsetting the customer or dragging them through litigation, as it might result in loss of business.

If any of these witnesses have first-hand knowledge of the violation (i.e., they saw the violation or were asked directly by the rogue employee to somehow violate the agreement), your business should strongly consider asking the witness to sign an affidavit, which is a statement made by the witness under the penalty of perjury.  This affidavit will serve to memorialize the violation while the events are still fresh in the witness’s mind, and will provide strong support for asking the court for an injunction, which would serve to immediately stop the violations from causing further damage.

Preservation of Electronic Evidence

The last part of your business’s investigation must include preservation of electronic evidence.  If the violation is worth pursuing, i.e., stands to greatly impact your business’s bottom line, this is not a step to overlook.  You must immediately seize the employee’s computer and cut off the employee’s access to the business computer system, as well as the building where files may be physically stored.  Failure to do this will give the rogue employee the ability to delete or transfer company records to him or herself via a personal email account, or via a personal storage device such as a thumb drive.

Your business must also work quickly to preserve the employee’s emails, computer hard drive, and any additional electronic devices.  If paper files are a concern, your business will also want to review security footage of the building or records the building might keep on employees accessing the building after hours.

Lastly, your business will want to consider hiring a technology specialist to make what is called a “forensic image” or snapshot of the employee’s computer hard drive, as well as other electronic devices used by the employee.   This should occur before your business even turns on the computer or other electronic devices.  This will ensure no evidence is spoiled, and preserve the evidence for a later forensic examination, if needed.

Are There Any Other Factors to Consider Before Initiating Litigation?

Even if you have strong proof that an employee violated the non-compete, your business still needs to strongly consider whether litigation is, overall, in its best interest.  As demonstrated above, these litigations are very fact intensive, which means they are very expensive to pursue in court.  Moreover, there are numerous, non-monetary factors to think about.  Consider the following:

• Could the litigation give rise to negative publicity, and adversely affect your business?
• Will litigation lead to bad morale among employees or cause employees to leave?
• Does your business have the resources to devote to producing documents and conducting other time-intensive preparation for trial?
• If your business loses the case, will this encourage other employees to ignore their own non-compete agreements?
• Will your business be taking a position during litigation that could later be used against it, if your business is sued by a former employee and your business is forced to defend a non-compete case in the future?

These are all difficult, subjective questions to consider.  If you are unsure about whether to litigate, call Edwards Law today to assist you in the decision-making process.  The first consultation is complimentary.