Non-Compete Litigation & Consent Orders: A Recent NJ Case & Cautionary Tale

A recent case out of the United States District Court for New Jersey raises interesting issues related to non-compete litigation and consent orders. Let’s take a look:

The underlying facts of the case are simple enough: Job Connection Services (JCS) is a staffing company. Jose Munoz worked for JCS from 2007 to 2012. Robert Abreu worked for JCS from 2005 to 2013. Both worked in New Jersey. Both Munoz and Abreu signed non-compete agreements with JCS, under which they agreed not to compete with JCS in a sixty-mile radius of any JCS office.

In June 2013, JCS filed a lawsuit against Munoz and Abreu alleging that they had violated their non-compete agreements. Apparently, these two ex-employees had launched their own staffing company called Right Hand Staffing Solutions (“Right Hand”) within the restricted territory. According to the complaint, Munoz and Abreu had used JCS’s confidential customer lists to solicit business on behalf of Right Hand. One particular JCS client – APC Postal Logistics – had stopped doing business with JCS and started working with Right Hand.

In September 2013, the court held a settlement conference with the parties. Let’s stop right there:

The lawsuit was filed in June 2013. Only three months later, there is a settlement conference. As I have previously noted on numerous occasions, staffing agency non-compete agreements are often unenforceable. Often, the facts ultimately show that the customers at issue use multiple staffing agencies to fill open positions and do not maintain exclusive relationships with any one staffing agency. This sort of scenario strongly suggests that no legitimate business interest exists and that the restrictive covenants at issue are unenforceable. That said, each case turns on is specific facts. So in this case, the customer relationships may have been different (i.e. exclusive) and therefore protectable. We will never know, because that ship has sailed.

On September 4, 2013, the parties entered a Consent Order. The Consent Order provided that JCS would dismiss the action with prejudice. In exchange, the Defendants agreed that for the next year, they would not service, solicit or conduct business with certain of JCS’s clients identified on a separate schedule. Defendants further agreed that if any of these customers contacted them, they would be required to inform those customers that they could not conduct business with them until August 31, 2014.

Anybody with experience litigating these sorts of cases can guess what happens next: After the Consent Order was entered, the Defendants and their company Right Hand continued to do business with certain of JCS’s customers. Specifically, the Defendants continued to do a significant volume of business with APC from the time of the Consent Order forward.   Eventually, word got back on JCS. In January 2015, JCS filed a motion to reopen the case and enforce the Consent Order.

The Court made quick work of the motion: The Defendants agreed to the Consent Order. They agreed not to solicit certain of JCS’s customers for a one-year period. They violated Consent Order. That’s it. The Court wound up issuing an injunction preventing the Defendants from doing business with APC for another year.

Although the facts of the case are pretty simple, the lessons here are very important ones:

The Takeaways:

• Consent with Caution: I have been down this road before. I have defended very ugly, very difficult non-compete cases where we were forced into early mediation. This case comes from a similar posture: It was forced into an early settlement conference with the court. In my experience, when any neutral is pushing an early settlement in a non-compete case, they are usually pushing a consent order that effectively enforces the non-compete. Just like we have here: Plaintiff drops the case with prejudice and, in exchange, defendant agrees to stay out of the market or stay away from certain clients for a set term. These terms are put into a consent order. The court retains jurisdiction to enforce the terms of the consent order.

• There are huge problems with agreeing to this sort of consent order. In litigation, a defendant can attack a non-compete or non-solicitation agreement in numerous ways, particularly in the staffing industry context. But once the defendant agrees to a consent order, its over. After a consent order has been issued, the defendant no longer has any right to challenge the enforceability of the restrictions on the merits. This raises some interesting questions about the interplay between consent orders and traditional antitrust principles. Can the parties enter a consent order that enforces an otherwise illegal restraint of trade? To me, the answer is not entirely clear. But the bottom line is that once a party agrees to a consent order, that party gives up the right to attack the underlying merits of the lawsuit (except through perhaps a 60(b) motion, but the facts would have to be incredibly compelling).

• A Note on Mediation: I know this was a court settlement conference, but I want to make a note about mediation: If you are mediating a non-compete dispute, it is imperative that the mediator have significant experience with non-compete litigation. If the mediator does not have substantial experience with non-compete litigation, then the mediator will look at everything through the wrong lens. In non-compete cases, there are two lenses: restraint of trade and contract. The restraint of trade lens comes first. The court must evaluate whether or not the restraint is reasonable (time, territory, line of business and legitimate business interest). If the restraint is reasonable, then the case becomes a breach of contract case and the court or mediator can turn to the contract lens. But if the restraint is not reasonable, then the contract does not matter— it is an illegal restraint of trade and utterly unenforceable. Many mediators do not grasp this concept. They treat non-compete cases like routine breach of contract cases. For mediation to be worth anything, you need a mediator with non-compete experience.

The case is Jobconnection Servs., Inc. v. Munoz, 2015 WL 3440842, at *1 (D.N.J. May 28, 2015).

Jonathan Pollard is a trial lawyer and business litigation attorney based on Fort Lauderdale, Florida.  He focuses his practice on competition law and has extensive experience litigating non-compete, trade secret and antitrust claims.  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.