Last week, the Wall Street Journal ran a story about non-compete agreements making it difficult for younger journalists to get new jobs and move up in the news world. The article focused substantially on a young journalist named Stephanie Russell-Kraft who moved from Law360 to Thomson Reuters. Shortly after beginning work at Thomson Reuters, her former employer sent her new company a letter informing them of Ms. Russell-Kraft’s non-compete agreement. After receiving that letter, Thomson Reuters terminated her employment. Let’s unpack this:
Restraints of Trade
This is Non-Compete 101. Many people including lawyers and bad judges view non-compete disputes as pure breach of contract cases. That is utter nonsense. Non-compete agreements are restraints of trade. As such, in any non-compete case, there are two lenses: antitrust and contract. The antitrust lens comes first. The court must evaluate if the restraints at issue are reasonably necessary to protect a legitimate business interest. If not, then depending on the applicable law, the non-compete is utterly unenforceable or the restrictions must be reformed to make them reasonable. If there is absolutely no legitimate business interest, then the case is over and the restraints are illegal restraints of trade. If the plaintiff can establish a legitimate business interest in need of protection, only then does the case become a matter of contract. In cases like that of Stephanie Russell-Kraft, there simply is no legitimate business interest at issue. That means the non-compete is unenforceable, end of story.
Bogus Non-Compete Agreements
The labor market in the United States is awash with bogus non-compete agreements. The Law360 non-compete is utter bullshit but in no way unique. The vast majority of my practice is defending non-compete and trade secret cases. At this point in my career, I have seen thousands of non-compete agreements and been involved in 400+ non-compete disputes. I estimate that approximately 80% of the non-compete agreements I’ve seen over the years have been unenforceable under the applicable choice of law. Sure, there are truly egregious examples like news reporters and factory workers. But there are also hundreds of other examples where a non-compete may seem plausible but where there truly is no legitimate business interest: any industry that’s transparent and hyper-competitive, staffing and recruiting, anything where projects are bid, etc. Companies use non-compete agreements even where it’s unenforceable because there is no downside risk. If they can enforce it, great. If not, then at least they tried. And in certain jurisdictions where the law is pro-non-compete and the state courts routinely issue injunctions, it’s worth a shot.
If I were a big company like Thomson Reuters and I got some sort of cease and desist letter related to a bogus non-compete agreement, you know what I would do? I would laugh. But unfortunately, Thomson Reuters and a bunch of other companies (or more accurately, their lawyers) have zero risk tolerance.
There are two reasons why companies should take a hard stance against bogus non-compete agreements. The first is principle. Maybe it’s because I grew up poor and have a chip on my shoulder. Maybe it’s because I place an outsized value on fairness. But something about a company threatening my company with a lawsuit over a bogus non-compete agreement would really tick me off. In that instance, I would turn around and sue Law360 for (1) a declaratory judgment holding the non-compete unenforceable and (2) some type of unfair competition. That would resolve the issue and going forward, Law360 would realize that it shouldn’t mess around.
The second reason, which does not apply in this specific instance, is economics. I have been involved in numerous cases where (1) there was the threat of a lawsuit for breaching a non-compete (2) the non-compete was likely unenforceable for various reasons and (3) the allegedly wrongful conduct was net profitable. Example: Guy leaves a construction company and starts his own construction company. He has a non-compete, but it is likely unenforceable. The old company threatens to sue him. What should he do? If he has good counsel and the non-compete is likely unenforceable, then he should make as much money as he can! Same thing in the employee poaching and raiding context. If hiring this team of people is going to be lucrative and you can defend the non-compete/tortious interference case with a high likelihood of success, then hire that team, make money and defend the case. If you beat the injunction, litigate the case for a year, keep doing business, make $2 million and the other side caves on the brink of trial and agrees to a mutual walkaway, you’re only out some attorneys fees. Let’s say it cost $250,000. You’re up $1.75 million.
I see this situation all the time. Unfortunately, even when the law and the economics are favorable, it’s maybe 10% of businesses that are willing to take any risk. It’s usually the lawyers. It’s these hand-wringing lawyers who only know one thing: Play is safe. These lawyers say, “Don’t do it. It’s too risky. You could get sued.” And you know what? That is terrible business advice! The right advice is, “Let’s look at the cost benefit analysis. Let’s look at the strength of our legal position, what we could gain if we win and what it could cost if we lose. Then let’s make a business decision.”
But most lawyers don’t get principles and business decisions and risk tolerance. That’s how Thomson Reuters ends up firing a young reporter based on a letter from a rival about a bogus non-compete agreement. If I were up in New York and got a call from the young reporter in this case, I would have taken the matter on a contingent hourly basis, immediately sued Law360 for a declaratory judgment and tortious interference and ultimately banged them out for $100,000 in legal fees and possibly some damages. But that’s just me.
Jonathan Pollard is the principal of Pollard PLLC, a Fort Lauderdale-based litigation boutique focused on competition law. The firm and its attorneys have extensive experience litigating non-compete, trade secret and antitrust matters. They represent clients throughout the country. Their office can be reached at 954-332-2380.