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It’s Time to Abolish Employee Non-Compete Agreements

Employee non-compete agreements are pretty much bullshit. And it’s time we get rid of them, with perhaps a few very limited exceptions. This is not an unstudied opinion. Rather, it’s my opinion. I began my career doing proper antitrust work at Boies, Schiller & Flexner and then became an authority on non-compete defense in Florida (a very pro non-compete state). I will explain where things presently stand:

Non-Compete Agreements & Antitrust Principles 

Contrary to popular belief, non-compete cases are fundamentally not breach of contract cases. Instead, they are fundamentally restraint of trade cases. Any non-compete case must be viewed through two lenses.  The first lens is the antitrust or restraint of trade lens. The second lens is the breach of contract lens.  It works in that order. No exceptions.

So we take the first lens: A non-compete agreement is, by its very nature, an agreement not to compete and a restraint of trade. Contracts in restraint of trade are presumptively illegal. That is antitrust & Sherman Act 101. Idiots often push back against this and argue, “But it’s a non-compete agreement and that’s different. We enforce those all the time.” That’s hollow bullshit. Many states have statutes governing non-compete agreements. In numerous states, the non-compete statute is part of the state’s antitrust law.  Take Florida: The relevant non-compete statute is Florida Statutes 542.335.  The overall Chapter 542 is the Florida Antitrust Act.  You know what state non-compete statutes are? They are a codification of the classic antitrust “Rule of Reason” analysis.  Under the Rule of Reason, you do a comprehensive evaluation of a particular restraint of trade based on market realities to determine whether or not that restraint is illegal.

In the non-compete context, many people think about reasonableness only as a matter of temporal and geographic scope. Again, wrong.  Those are the easy reasonableness questions. The real question – the big ticket item – is whether or not the restraint is reasonably necessary to protect a legitimate business interest.  This is supposed to be a high burden.  But over the years, Florida courts – particularly Florida state trial courts – have made it a minimal burden.  Likewise, certain Florida appellate courts have built in a litany of presumptions in favor of non-compete enforcement.  They’ve created an entire pro-non-compete regime that is – in many respects – completely detached from market realities. Quite often, all a plaintiff has to do is file a non-compete case, give lip service to confidential information or special customer relationships, and they get their injunction. And to make matters worse: Some state appellate courts routinely issue what are called “per curium affirmed” or “PCA” decisions.  This is where they affirm the trial court’s order without a written ruling.

Consider this absurdity:  Certain of the drafters of Florida’s non-compete statute wrote a law review article that lays out this framework and urges more rigorous scrutiny of non-compete agreements. Most Florida state trial court judges and most plaintiff-side non-compete lawyers completely ignore this fact. That’s why we see so many non-compete agreements that are solely intended to prevent legitimate competition, and not to protect any legitimate business interest.

 

So that’s the antitrust lens.  Only after addressing geographic scope, temporal scope and legitimate business interest does the case ever become a breach of contract case. That’s how it’s supposed to work.

The Internet & the Rise of Non-Compete Agreements

From approximately 1995 until the present day, the use of non-compete agreements has spread dramatically. This is not anecdotal. Statistical data on the amount of non-compete litigation in federal and state courts backs this up. How did that happen?  The internet and the information age. Every Joe Schmo business owner could go online and find a template of a non-compete agreement. And in big companies, you had risk-averse corporate or outside counsel seeking every advantage (no matter how absurd, unethical or legally unprincipled).  So we went from an era when non-compete agreements were generally limited to a handful of top-ranking employees to an era where everybody has non-compete agreements.  I mean, somebody in Jimmy Johns corporate thought it was a brilliant idea for sandwich makers to have non-competes. That, of course, is unmitigated bullshit. But that’s exactly what happened. Non-competes exploded. Now, they’re ubiquitous. Everybody has a non-compete. The recruiter. The maid. The dog walker. The pest control guy. The doctor. The paralegal. The factory worker. The car salesman.

The Internet & the Information Age 

Almost paradoxically, as the internet was driving the use of non-compete agreements during this time period, it was also undermining the legitimacy of non-compete agreements.  Let’s take a specific, industry example:  Legal recruiting.  In 2000, legal recruiting was a vastly different industry than it is today.  In 2000, information was less widely available. That information wasn’t confidential by any means. In 2000, finding out about open positions, working with law firms to meet their needs and identifying talented candidates took more legwork.  I would have been skeptical of a non-compete in the legal recruiting industry in 2000, given that none of this was ever truly confidential. But in 2017? Don’t make me laugh. Nearly everything is online. Many firms have hiring partners or recruiting contacts. Many firms post open positions. You can identify candidates by searching Google or LinkedIn. There are countless informational resources available to anyone who has internet access. That’s changed the market reality.

Consider this: Plaintiffs in non-compete cases generally argue that their legitimate business interest takes the form of (1) confidential information (2) special customer relationships and/or (3) an extraordinary investment in an employee’s education or training.  Think about how the internet disrupted all of that.

  1. Confidential Information:  We are in a case right now where the Plaintiff claims that certain attorney openings at various law firms amounts to confidential, protectable information. That’s nonsense. You can get that information online via job postings or by messaging people on LinkedIn who work at the firm.  Other examples: Customer lists. We are always seeing the claim that customer lists are confidential, proprietary or even trade secret. Again, this is usually absurd. If the customers are corporate customers, forget it. Anyone can identify corporate customers, what they need, what they buy, who the contacts are, etc. And even if the customers are private individuals who buy, say, expensive cars—  In 2017, you can buy lists like that from lead/list brokers.  At the very least: In 2017, much of the information previously litigated as valuable, proprietary, confidential information is no longer any of those things.
  2. Customer Relationships:  Again, LinkedIn, Google, email.  All of this has made customers – both corporate and individual customers – far more accessible. Sure, back in 1995 or 2000, you may have had a special customer relationship.  You may have had unique access to that customer– access that your competitors didn’t have. But in 2017? Everybody has access to everyone.  That’s slight hyperbole, but it’s close to the truth.  The upshot: Legally protectable customer relationships are far less likely to exist.
  3. Training / Education:  For an employer’s investment in training/education to constitute a legitimate business interest, that investment/training must be extraordinary. It must go above and beyond the type of training education the employee could receive anywhere else in the industry. That’s a high bar to begin with. But the internet and the rise of the information age pushes the bar higher: Do you realize how much education and training on virtually anything is available online?  Again, real case example: A Plaintiff in a non-compete case is fighting tooth and nail and arguing that they have a legitimate interest in the training they provide to legal recruiters. Part of their argument?  They train non-lawyers about the law and law firms. That’s extraordinary.  Of course it’s not. Anyone with internet access can go online and find literally tens of thousands of free resources on how to be a legal recruiter.  Upshot: In 2017, it’s far less likely that anyone has a legitimate interest in extraordinary training or education.

In fact, there are some recent decisions finding that a post on LinkedIn or Facebook violated an employee non-compete agreement. Let’s consider that for a moment: If an ex-employee going on LinkedIn and posting, “We’re open for business!” is actually a threat to your business, it’s not because that action constitutes unfair competition. It’s because your business is probably trash.

The problem here:  We have cases from 1995, 2000, 2005 even 2010 that enforce non-compete agreements supposedly to protect a legitimate business interest.  Given the rapid expansion of access to information over the past 20+ years, how can we regard these cases as controlling authority?  We’re supposed to revere courts and judges and take the legal process seriously. It’s supposed to be fair, impartial, thoughtful, reasoned, dispassionate. Well, most of what I see in Florida state trial courts (and even some Florida federal courts) in non-compete cases just doesn’t live up to that expectation. It’s moralized, “I’m enforcing the contract because you signed it. This crazy lawyer Pollard is talking about antitrust and he’s just an idiot. I’m holding you to your bargain because I’m the moral authority.”  This is what I refer to as the “bad actor problem” in non-compete and trade secret cases. Judges often depart from the actual law out of a desire to punish the defendant or to regulate morality.  And these courts and judges often fall back on cases enforcing non-compete agreements from 10 or 20+ years ago, when market realities were different. That’s not right. It fails basic logic. What constituted a legitimate business interest in 1995 may not constitute a legitimate business interest today.  But try making that argument in a Florida state trial court. Unless you drew a particularly brilliant, thoughtful judge (and there are some of those), you’ll get laughed out of court and the judge will rely on that precedent to backstop their moralizing.

Big Firms & the Rise of Non-Compete Practices

There are thousands of lawyers throughout the country who have built entire careers on enforcing non-compete agreements.  As the use of non-compete agreements expanded, their careers took off. There are hundreds of 60 and 70 year old lawyers in Florida who have been prosecuting non-compete agreements in a generally pro-non-compete legal regime for the past 20 or 30 years.  It’s not hard work.  Part of the reason why it’s so easy is because Florida trial court’s have routinely misapplied the law.  Many state trial court judges don’t view non-compete agreements as restraints of trade. They view them purely as contracts. Their framework: Give lip service to any legitimate business interest and I’ll enforce the contract as a matter of morality and holding people to their bargain.  As often happens, if the court issues an injunction – even one that’s completely wrong – the defendant doesn’t have the resources to appeal.

So certain courts, judges and lawyers take the following view:  I’ve enforced non-compete agreements for decades. That’s how we do it around here.  You know how many times I heard that exact same line?  A partner at Ford Harrison in Orlando told me that enforcing non-compete agreements without an evidentiary hearing was business as usual in the Middle District of Florida. We appealed. She said we had no chance of ever winning. The United States Court of Appeals for the Eleventh Circuit disagreed. We won. Most of these ultra aggressive plaintiff-side non-compete lawyers are used to (1) operating in state trial courts and railroading defendants in emergency proceedings (2) operating in front of judges they know (3) operating in front of judges who don’t understand this area of law.  Never mind that they haven’t been tested on appeal, or in front of a judge who understands and applies the actual law.  You know what happens in those situations?

  • Federated National Holding Co. v. Prygelski, CACE-17-004342 (Broward County 2017) (denying publicly traded company’s bid to enforce non-compete agreement against former CFO).
  • Silva et. al. v. Nightingale Nurses, LLC, Case No. 4D17-0032 (Fla. 4th DCA 2017) (granting stay of injunction and contempt orders pending appeal in non-compete and tortious interference dispute between rival nurse staffing agencies)
  • Lucky Cousins Trucking v. QC Energy, 223 F. Supp. 3d 1221 (M.D. Fla. 2016) (denying preliminary injunction in trucking industry non-compete and trade secret dispute)
  • IDMWorks v. Pophaly, 192 F. Supp. 3d 1335 (S.D. Fla. 2016) (denying preliminary injunction in software non-compete dispute)
  • Evans v. Generic Solutions, 178 So. 3d 114 (Fla. 5th DCA 2015) (vacating injunction in non-compete and trade secret dispute related to Tony Robbins’ companies)
  • Moon v. Med. Tech. Associates, Inc., 577 F. App’x 934 (11th Cir. 2014) (vacating injunction in non-compete dispute involving rival medical gas companies; denied on remand)

These are just some of my most significant cases in this arena. We’ve been in several cases where the plaintiff made the very bad decision to attempt to enforce a bogus non-compete agreement against one of our clients. And they’ve spent hundreds of thousands of dollars – in some instances north of $1 million – on a losing effort. What reputable lawyer would ever advise that course of action? None. But it happens all the time. Lawyers who have plaintiff-side non-compete practices and rely on that sort of work as their bread and butter are always improvidently pushing frivolous non-compete litigation. They aren’t looking out for the client’s interest.  They aren’t truly evaluating the business side concerns and asking, “Do we really need non-competes anymore? Is this ex-employee really hurting us? Is what we call the secret sauce really secret? Are we trying to protect against unfair competition or just afraid of competition in general?”  Those are the legitimate questions to ask. But your 60-year-old veteran big firm management-side non-compete lawyer who will bill $500,000+ for the case?  He’s not asking those questions. He’s driving the litigation out of his own self interest.

The Answer: A Modest Proposal 

California bans employee non-compete agreements. And it seems like businesses in California still manage to get by.  I’m in favor of other jurisdictions following suit and adopting an outright ban on employee non-compete agreements.  Likewise, California law on non-solicitation agreements is far more reasonable (prohibiting only solicitation based on use of trade secrets). Beyond that, we still have non-disclosure agreements and robust trade secret protections. And, if absolutely necessary, I could see some jurisdictions fashioning a reasonable exception for C-level executives. But even that is unnecessary. A regime mirroring California would do just fine. Will it ever happen?  No.  Not when judges in certain states don’t understand the law or simply opt not to apply it. (Yes, that’s judicial activism. Where’s the outrage from judicial conservatives?).  And not when so many companies are willingly lead down the path of frivolous non-compete litigation by self-interested lawyers who stand to bill $500,000 or $1 million+ for pushing poorly written papers and grandstanding in Florida state courthouses.

Post Script: Answers to Some Good Questions Raised by Readers

  • I have no problem with certain limited non-solicitation agreements.  But the problem tracks the foregoing analysis:  Companies and lawyers who abuse non-compete agreements tend to be greedy, risk averse, paranoid and afraid of fair competition.  They are grasping for any market advantage. Suppose the law allowed for limited use of non-solicitation agreements to protect against (1) solicitation of customers using trade secrets (like in California) or (2) interference with certain exclusive, long-term customer relationships.  Even under this regime, plaintiffs would seek a broad application of any non-solicitation provision. Quite naturally (they are sadly predictable), they would argue that any solicitation MUST have involved trade secrets and that every customer was exclusive and long-term.  It would be better than where we are now. But the usual suspects would still be overreaching (and lying).

 

  • Sale of a business non-compete agreements are completely different.  If someone pays $10 million to acquire a business, then expecting the seller to exit the market for a set period of time is entirely reasonable.  In my view, that’s not an unreasonable or illegal restraint of trade. Compare that to companies locking up employees with bogus non-compete agreements. The argument for sale of a business non-compete agreements being pro-market and reasonable is much stronger.

 

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Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. He is recognized as an authority on non-compete law and has been quoted on non-compete and related issues in The Wall Street Journal, Bloomberg, FundFire, Digital Guardian, PBS NewsHour and many more. For more information, call 954-332-2380. 

 

 

 

 

 

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Need a non-compete or trade secret attorney somewhere other than Florida? I have relationships with non-compete and trade secret attorneys throughout the country. Call my office at 954-332-2380.

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