A recent case out of the Eastern District of Missouri provides a perfect example of what judges should do when evaluating non-compete agreements: That is to say that judges should conduct a thoughtful analysis that accounts for the realities of the marketplace. Far too often, I find that enforcement of non-compete agreements involves dogmatic references to the sanctity of contract, a superficial analysis of the facts that overwhelmingly credit’s the plaintiff’s depiction of the market and boilerplate findings about confidential information and customer relationships. But not this time and not with this judge. Let’s take a look:
The case comes to use from St. Louis, Missouri. Kforce and Beacon Hill are both staffing agencies. Kforce is large, national agency with 62 offices throughout the country. Kforce has a St. Louis office with roughly 50 full-time employees. In contrast, Beacon Hill has less than half that number of offices, including a St. Louis with five employees.
Enter the third main character, Gary Hahn. Earlier in his career, Hahn had worked at another staffing agency called Signature Consultants. On September 17, 2012, Hahn began working as an account manager for Kforce. As a condition of his employment with Kforce, Hahn signed an employment agreement (“the Agreement”) that contained confidentiality provisions and various restrictive covenants. In essence, the Agreement barred Hahn from competing with Kforce in any way or having contact with any of Kforce’s clients for a period of 12 months.
During his tenure at Kforce, Hahn was responsible both for generating new accounts via cold-calling and for handling existing accounts. Kforce gave Hahn certain existing accounts. Two of those existing accounts, which feature prominently in this case, are Charter Communications and Magellan Health. Charter is a massive telecom concern traded on the NASDQ. Magellan Health is a massive healthcare concern, likewise, traded on the NASDAQ. Hahn had worked with Charter prior to joining Kforce and also had some pre-existing contacts with hiring managers at Magellan.
In April 2014, Hahn accepted a job with Beacon Hill. Prior to leaving Kforce, Hahn emailed himself various Kforce documents, including client target lists and organizational charts. Additionally, Hahn reached out to certain Kforce clients, informed them of his impending departure and promised that he would be in touch shortly to provide them with his new contact information at Beacon. Hahn also forwarded himself certain job postings that Kforce had been asked to fill.
After making the move over to Beacon, Hahn reached out to Charter and Magellan, two of his former accounts at Kforce. He contacted certain hiring managers at those companies, gave them his new contact information, invited some of them to a Beacon Hill company golf tournament and asked one of them to lunch. Apparently, one of those hiring managers accepted that lunch invitation. In late August 2014, Hahn was having lunch with a hiring manager from Charter. Somebody from Kforce happened to be at that very same restaurant and immediately reported back to corporate on this utterly scandalous development. So, since Kforce had Hahn’s old emails archived, they began reviewing those emails for any evidence of misconduct. Upon reviewing those emails, Kforce learned that Hahn had emailed certain corporate documents to his personal email address. Having found the proverbial smoking gun, Kforce sent a letter to Beacon explaining that Hahn had breached his non-compete agreement, that Hahn had stolen confidential corporate information and that they would sue Beacon for tortious interference. Shortly thereafter, a hiring manager from Charter accidentally sent a proposal intended for Beacon to Hahn’s old Kforce email address. That was the last straw and Kforce sued seeking a preliminary injunction.
On these facts, one can easily imagine a court taking a superificial view of things and issuing an injunction: Hahn appeared to have emailed himself some Kforce documents. He claimed he did so because he worked from home. Kforce countered that the timing was suspect and that those documents contained confidential information. Additionally, Kforce claimed that it had paid for Hahn to build up relationships – especially with Magellan and Charter – and now Hahn was unfairly using those relationships to benefit his new employer. There are many judges that would have credited Kforce’s allegations without digging deeper, would have considered Hahn a bad actor and decided it was perfectly fair to issue an injunction. But that is not what happened here. Judge Perry took a hard look at Kforce’s allegations and ultimately concluded that their case was pretty weak. Here’s how she disposed of it:
- Confidential information: Kforce claimed that an injunction was necessary to protect its confidential information. This information consisted principally of the names of hiring managers and information about company structure and hiring needs. The Court disagreed. First, the record clearly reflected that this information was widely known throughout the staffing industry. All of the information at issue was available publicly and via certain subscription websites used by staffing agencies, including Beacon Hill. Apparently, Kforce tried to argue that the Agreement itself established that Hahn had access to confidential information— because it said so. Practice pointer: This never works. Just because a non-compete agreement says the employee had access to confidential information does not make it so. Bottom line: There was no confidential information at issue; everything was readily available to any competitor in the industry.
- Customer relationships: This is where the Court really latched onto market realities: The rationale for protecting customer relationships in the sales industry is because a customer’s goodwill toward a company is often bound up with an individual representative. In other words, in the non-compete context, a customer might be inclined to follow a sales rep from one company to another if the products and services are interchangeable. But in the staffing industry, it doesn’t work that way. The Court point blank concludes that it is not the relationship between account managers and hiring managers that carries the day. Instead, it is all about the staffing agency’s ability to deliver quality candidates and get successful placements. Beyond this, other aspects of the market further weakened any argument for protecting customers. The staffing industry is fiercely competitive. Staffing companies routinely compete to fill jobs that are publicly posted. In other instances, account managers email job advertisements to multiple staffing agencies at the same time. One exhibit introduced at the injunction hearing was an email in which Charter sent out a job posting for in IT manager to numerous staffing agencies at the same time. That email was sent to both Kforce and Beach Hill in addition to numerous other staffing agencies. The record revealed that this was not uncommon. In fact a representative of Charter testified that it works with 20 staffing firms and has over 100 hiring managers. Nobody has exclusive or guaranteed contracts.
Ultimately, the Court summed it up as follows:
On this record, there is no evidence that Hahn’s contact with customers was such that it enabled Hahn to entice a client’s business away from Kforce in favor of Beacon Hill. Rather, the evidence at this point suggests that in this industry the decision as to which staffing agency gets the placement fee is dependent upon the staffing agency’s ability to produce the candidate selected for placement… Given the competitive realities of this industry, the Court cannot conclude at this time that Hahn and Beacon Hill should be precluded from competing for placements . . . along with Kforce and other staffing agencies.
- Irreparable harm: The court went on to note that although KForce may have had better odds of success on its fiduciary duty claim, it still was not entitled to an injunction because it had no evidence of irreparable harm. Kforce was still doing business with Charter and Magellan. In fact, their placements at Charter had increased. Any business lost – in the form of a commission for securing a placement – could easily be calculated.
- Fierce competition: I am always suspect of non-compete agreements in industries where competition is particularly fierce. If there’s fierce competition, bidding, lack of exclusive relationships— If there’s anything in that direction, a non-compete agreement might be subject to attack.
- Staffing Industry Non-Competes: Where non-compete agreements are analyzed thoughtfully, the jig is probably up for many non-compete agreements involving recruiters, headhunters, staffing agencies, etc. Sure, I could still see a non-compete being enforced against someone who held a leadership role at one of these companies or if there was an exclusive placement contract at issue. But in many instances, recruiters and headhunters would have strong grounds to fight non-compete agreements. The case at bar presents an excellent example. If you have 20 or more staffing agencies all vying for a company’s business – i.e. all fighting to fill positions for that company – that should militate strongly against enforcement of any non-compete agreement. Nobody has the inside track. If someone switches companies, it’s basically irrelevant: They still have to produce successful candidates who ultimately get placed.
Toward the end of its opinion, the Court made an observation that many courts fail to make in the non-compete context: If the Non-Compete Agreement was enforced, and if Hahn and Beacon Hill were barred from competing for any Kforce customers, then Kforce would obtain an advantage that it could never fairly gain in the market: the elimination of a competitor. This is how courts should analyze non-compete agreements— by accounting for market realities and demanding more from plaintiffs than lip service about confidential information, customer relationships and irreparable harm. Regardless of any other considerations, the burden should be on non-compete plaintiffs to clearly establish the threat of unfair competition based on actual market conditions and dynamics. Unfortunately, not all judges are as thorough, thoughtful and excellent as Judge Perry. The case is Kforce Inc. v. Beacon Hill Staffing Grp. LLC, No. 4:14 CV 1880 CDP, 2015 WL 128060 (E.D. Mo. Jan. 8, 2015).
Jonathan Pollard is a trial lawyer and litigator based on Fort Lauderdale, Florida. He focuses his practice on defending non-compete and trade secret claims. Jonathan routinely represents doctors, corporate executives and other high level employees who are switching companies, or, who have started their own ventures. Beyond litigation, Jonathan advises employees, companies and business owners regarding restrictive covenant issues in connection with employment contracts, separation agreements, hiring decisions, the purchase or sale of business interests and the execution of commercial leases. Jonathan has been interviewed about non-compete issues by reporters from INC Magazine, the BBC, the National Federation of Independent Business and The Tampa Bay Times. In addition to his background in non-compete and trade secrets work, Jonathan has broad experience as a competition lawyer, generally, and has litigated numerous cases under both the Sherman and Lanham Acts. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380. For more information, visit http://www.pollardllc.com.