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How To Deal with Non-Compete Agreement Violations

LEGO scene of police with a terrified office employee

In our last article, we discussed common questions related to non-compete agreements. The most important question not addressed is “What do I do if I think someone is violating a non-compete?” This requires a considerably more expansive answer, so here we are with a separate discussion on how to respond.

 

INVESTIGATE

  • Review documents
    • Gather any papers that discuss your business policies. This includes employment contracts, standalone non-compete agreements, employee handbooks, separation agreements, or release of claims agreements.
    • Determine whether any establish a promise like a non-compete. If you do have such an agreement, identify the parameters of the agreement (i.e., the length in time, geographic region, and type of conduct restricted)
    • Assess the enforceability of the agreement. Check if laws have changed in what is appropriate in a non-compete. Factors worth considering include the parameters of the agreement, the consideration given, or the circumstances that necessitate such an agreement.
  • Scrutinize the employee’s activities
    • Immediately examine the nature and extent of the employee’s activities. Some activities that may be relevant include:
      • Contacting customers to solicit their business or recruiting other employees to join the new employer
      • Misuse of company documents like: taking documents home, emailing documents to a personal address or a competitor, destroying documents
    • Determine whether the employee has taken or shared any confidential information or trade secrets. There’s an entire discussion to separately have about trade secrets (which will probably arrive in an upcoming article) but the violation of trade secrets can be relevant to a non-compete investigation.
    • Analyze electronic evidence. Computers have a wealth of metadata that can shed light on an employee’s activities. Depending on the complexity and resourcefulness of the employee, some of this investigation may require forensic analysis by IT professionals. PRO TIP: Don’t move, copy, or alter any folders or documents until they can be analyzed or risk losing valuable metadata.
    • Conduct strategic interviews. Hearing from people involved can be valuable, whether the suspected employee or others they may have interacted with, such as other employees or customers. If considering interviewing, be strategic about who, when, and in what order would be most effective. Alerting the employee may encourage them to hide their activities while discussing with others may allow for word to spread to the original employee.

 

CONSIDER INFORMAL LEGAL ACTION

  • Formulate a strategy. Sometimes legal action other than a formal lawsuit can be the most effective or appropriate response to a violation. Some factors that would influence such a decision include:
    • Likelihood a court will enforce the non-compete
    • Egregiousness of the conduct
    • Level of harm already caused
    • Level of potential harm in the future
    • Whether the harm is irreparable
    • Sending a message to other employees
  • Send a cease and desist letter to the employee. These letters typically outline the employee’s conduct, how that violates the agreement, and demands the employee stop from engaging in such conduct. Such a letter is not a formal legal action but essentially amounts to a lawyer’s equivalent of “cut it out… or else.” Even if the employee continues to violate the agreement after receiving the letter, that can be used in a lawsuit to demonstrate how the employer attempted to be reasonable.
  • Alert the new employer about the employee’s actions. The other employer may want to avoid potential litigation associated with the agreement or just finds an employee that violates employer policy to be an improper fit at their company. However, reaching outside the business to discuss conduct may open a business to potential claims of defamation, libel, or tortious interference with business if any claims turn out to be false.

 

SEEK INJUNCTIVE RELIEF

  • This is where an employer is wading into formal legal action.
  • An injunction is an order from the court that requires a party to do something or stop doing something or face legal consequences.
  • Different types of injunctions may be appropriate, depending on the circumstances:
    • Temporary restraining order is a short-lived, immediate order that a court may grant to prevent harm that would occur even before the court holds a hearing. This involves the highest standard to satisfy before a judge would grant because a justice prefers allowing both sides to make their arguments in a hearing before ruling but sometimes (rarely) that can be too late.
    • Preliminary injunction can be granted after a hearing and applies until a case is resolved.
    • Permanent injunction is issued at the end of a trial as a legal resolution to the case and is final.
  • Assess possible causes for action, which means the legal reason for bringing a lawsuit. The most common actions include:
    • Breach of contract. The is the most common action for this dispute, which basically means someone did not follow through on the promise made in a contract, which here would be the non-compete agreement.
    • Tortious interference with contract. This involves the breach of the common law right prohibiting people from interfering with others’ contracts, like those with vendors, customers, or clients.
    • Breach of duty of loyalty or fiduciary duty. Managers, supervisors, or employees given a certain level of trust often have a requirement to not harm their employer. Each state will have different standards relating to whom this duty applies or to what extent. Sometimes this type of action may help a claim survive even in cases where the non-compete is deemed unenforceable.
    • Unfair competition. Courts don’t like an employee using their employer’s confidential information to compete against that employer
    • Civil conspiracy. If the employee worked with others to violate the non-compete agreement, the others may also be liable for aiding or abetting the employee.
  • Claims against the new employer may also be available. Relating to conspiracy, the new employer may be in trouble if they encouraged the employee to violate the agreement, using proprietary information even if they are unaware the employee is misappropriating. However, this may open up the employer to counterclaims of unfair competition, tortious interference with business, or other actions.

 

 

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