It’s time to take a hard look at non-compete agreements in the car business. Let’s use an example: AutoNation, the Fort-Lauderdale-based car industry giant and Fortune 500 company.
For the past twenty years or more, AutoNation has had a field day filing weak non-compete lawsuits. AutoNation files these cases in its backyard, the United States District Court for the Southern District of Florida. In every case, AutoNation claims that a general manager or some other higher-ranking employee has gone to a competitor and is causing AutoNation irreparable harm. That’s right. The general manager of an AutoNation in, e.g., Austin has gone to work for, say, a Nissan dealership fifteen miles away. And in spite of being a multi-billion dollar company, AutoNation invariably screams and cries about how much harm this could cause them.
So AutoNation seeks a preliminary injunction. To the best of my knowledge, either one of the following two things happens: (A) The case settles confidentially prior to a ruling, or, (B) AutoNation gets its injunction. AutoNation is not alone. Sonic Automotive, another industry giant and Fortune 500 company, does the exact same thing. Companies like AutoNation and Sonic push these non-compete agreements and non-compete lawsuits because they’ve been doing it for years. Change is hard. And in some places, like South Florida, they have a track record of favorable court decisions. In spite of that, it’s time for us to reevaluate non-compete agreements in the auto sales industry.
The AutoNation Approach to Non-Compete Litigation
Not to beat up on AutoNation, but they’re the 800-pound gorilla in the market, so let’s stick with that example. These days, every time AutoNation files a non-compete lawsuit, it sticks to the same playbook. The AutoNation playbook: (1) Confidential information. AutoNation argues that basically everything inside the company is unique, proprietary and highly confidential. Best practices, methods, strategies, financial data, everything. AutoNation contends that if any if this information ever fell into the hands of a competitor, it would be cause them irreparable harm. Let me give you an actual example. This is AutoNation claiming that it’s “motivational techniques” are proprietary. You can’t make this stuff up:
Q [Mr. Pollard] Is it your testimony that AutoNation has proprietary motivational techniques?
A. I believe so. . . .
Q. When was the last time that you attended Group One’s General Manager training?
A. I have not.
Q. When was the last time you attended Penske’s General Manager training?
A. I have not.
Q. When was the last time you attended Sonic’s General Manager training?
A. I have not.
Q. How can you sit here today and testify that AutoNation has proprietary motivational techniques in the car dealing business when you do not know about the inner workings of the training at Penske, Sonic or Group One?
A. Because our training is specific to our proprietary tools that no one else has, and those are motivational as well.
Q. If the training is specific to tools that are proprietary to AutoNation, how is Mr. McMann who is working at Phil Long Ford and doesn’t have access to those tools using any of that proprietary training?
A. All of those tools were built with our best practices from our 250 plus stores nationwide. With those best practices, we build the tools that build the behavior. He could simply take that behavior to a competitor.
(2) Training: AutoNation argues that its training is so incredible that the company has a protectable interest in its training investment. AutoNation routinely makes these contentions in litigation but offers virtually no evidence to support them. Instead, they rely on approach of “We are AutoNation and we’ve gotten injunctions before so give us one now”. That’s a bad approach. Again, AutoNation is not alone. Other car industry giants do the same thing. They do this because it’s worked for the past twenty years or more. But the time’s they are a changing. Let’s attack both of these claimed legitimate business interests based on market realities of the year 2018.
Attacking Claims of Confidential Information
AutoNation, Sonic and every other car company pushing these cases makes the same basic argument: The confidential information at issue can be boiled down to three components: (1) best practices (2) strategic knowledge and (3) financial or numerical data. When you drill down to specifics, each of these contentions falls apart. Let’s take best practices. There are literally thousands of publicly available resources on auto dealer best practices. You can search Google. You can subscribe to Automotive News— They’re always covering best practices. McKinsey has articles on best practices for auto dealers! There is no way that AutoNation or any other big car company has best practices that are truly novel, unique, or proprietary. Moving on to strategic knowledge: Companies like AutoNation generally run the “They know our plans” argument. When you cross-examine these folks in court and press them for the details, they give nothing but generic answers. Let’s be real: This is the car sales business. When we talk about strategic plans, we’re not talking about, say, Apple and a secret plan for a new product. AutoNation, Sonic, Group 1—- These companies don’t build cars. They sell cars. There’s no secret sauce here. What’s their “secret” strategic plan? To buy another dealership? To improve customer service? To find new ways to drive business? Shocking! Nobody could have ever guessed.
Now for the big one: AutoNation and the other major players hammer the fact that general managers and certain other employees had access to years of financial and numerical data. During their tenure, these employees knew about pricing, volume, revenue, and margin. You know what I say to that? So what. Let’s take two rival dealerships. The general manager Joe leaves an AutoNation Ford dealership and goes to, e.g., a Nissan dealership 10 miles away. Pricing? The pricing is usually online. New car pricing is all based on MSRP. Any discounting is based on the dealer’s volume. You think your inventory is secret? Anybody can go online and see what cars you have in stock. Any competitor who really wanted to know what cars you were moving could monitor your inventory online and by visiting your lot. Say Joe knows that his former dealership was doing about $7 million a month in revenue. Again, who cares. What could Joe possibly do with that knowledge? Absolutely nothing.
AutoNation and Non-Compete Injunctions: A Matter of Tradition in Florida
The problem, particularly in Florida, is that the United States District Court for the Southern District of Florida has previously embraced AutoNation’s generic arguments about confidential information wholesale. The most famous case is Autonation, Inc. v. O’Brien, 347 F. Supp. 2d 1299 (S.D. Fla. 2004). And in my opinion, the Court got it wrong. The O’Brien court catalogued a generic list of supposedly confidential information that O’Brien had access to during his tenure with the company. This included “best practices”, “peer performance reports”, information disclosed in monthly operating meetings and information available on AutoNation’s “Dealer Central” web portal. The problem: Even if this information was confidential: (1) The record seems devoid of any evidence regarding how the defendant could have used that information to engage in unfair competition and harm AutoNation and (2) The defendant had an expert who testified that all of the information at issue was commonly known within the industry and could not be used to engage in unfair competition. In spite of this, the Court gave AutoNation its injunction.
The problem is that O’Brien has set poor precedent and – in my opinion – does not follow relevant, controlling Florida state court authority. See, e.g., Passalacqua v. Naviant, Inc., 844 So. 2d 792, 796 (Fla. 4th DCA 2003) (no legitimate interest in confidential information where plaintiff failed to articulate how its methods were unique and how defendant could use that information against them in market to gain unfair advantage). O’Brien basically assumes a legitimate business interest if the defendant was exposed to any confidential information. O’Brien should have placed the burden on AutoNation to prove what specific information was at issue and show how it could be used to engage in unfair competition (consisted with Passalacqua). Beyond that, the Eleventh Circuit has called the O’Brien decision into question re confidential information and legitimate business interests! See, e.g., Proudfoot Consulting Co. v. Gordon, 576 F.3d 1223, 1236 (11th Cir. 2009).
Non-Compete Litigation & the Bad Actor Problem
The other problem: The bad actor problem. The bad actor problem happens in non-compete litigation all the time, not just in AutoNation cases. But we’ll stick with AutoNation as an example. A defendant steals a bunch of AutoNation documents and materials. That’s wrong and stupid. The Court steps in to police morality and issues an injunction. In the process, the Court gives AutoNation a free pass. The Court allows AutoNation to ride on boilerplate allegations about confidential information. The Court doesn’t do this because it is proper under Florida Statutes 542.335, binding Florida state court case law, Federal Rule 65 or any other legal authority. Instead, the Court does this to punish the bad actor. That is judicial activism. I hate to break it to you, but there’s a whole lot more judicial activism out there these days than anyone likes to admit. And it’s a particularly acute problem in the non-compete space. The problem decisions in bad actor cases: They make bad case law. In seeking to punish one specific bad actor, the Court issues a ruling that becomes precedent and is applied in other cases. The Court wanted to punish that one bad actor. It never intended that the particular opinion, with less than stellar legal analysis, where the Court likely gave the plaintiff the benefit of every doubt and cut some corners– to become legal precedent.
Logically (and legally), the same standard re proving a legitimate business interest should apply in every case, regardless of whether the defendant is a good actor or a bad actor. But in practice, that does not happen. In non-compete and trade secret cases, courts routinely consider whether the defendant is a good actor or a bad actor in determining how to rule. This creates inconsistent case law that diverges not based upon the existence of legitimate business interests, but instead based on the good actor/bad actor dichotomy.
Non-Compete Agreements & Training
I see it all the time: The plaintiff in a non-compete case claims that they gave the defendant some sort of training. And as a result, the defendant should be frozen out of the industry for a couple years. Here are some of the most absurd examples from my recent cases:
- Special Counsel / Adecco: This case involved legal staffing and recruiting. Special Counsel claimed that it had a protectable interest in training because it taught the defendant – a recruiter – about the legal industry. Among the other parts of this “extraordinary training”: Special Counsel claimed it taught the defendant how to use LinkedIn! Special Counsel claimed it taught the defendant how to handle rejection! They did role plays! Oh my god! This is all so extraordinary, specialized and proprietary. This case settled after multiple days of an injunction hearing but prior to any ruling.
- IDMWorks: IDMWorks claimed that it had a protectable interest in training because it gave employees access to training on various Oracle products. This material was all created by Oracle and widely available to anyone in the market who wanted to pay for it. By definition, that’s not extraordinary. This one settled after we won the injunction hearing. The decision is now one of the seminal SDFL non-compete cases. See 192 F. Supp. 3d 1335 (SDFL 2016).
- AutoNation: AutoNation claimed part of its training included “proprietary motivational techniques”. AutoNation claimed it provided training on its specialized tools and that – somehow – a former employee could go to another dealership that doesn’t use those tools but still unfairly use the training. This was mind blowing. AutoNation claimed its training is extraordinary within the industry but its witness had absolutely no knowledge of the training offered by the main trade association or any of AutoNation’s biggest competitors.
What’s happening here is this: In many instances, companies enforce non-compete agreements (1) to prevent ordinary competition and (2) as a talent retention tool. They cannot put together a coherent explanation of how a particular ex-employee is threatening them with unfair competition and irreparable harm. But they still feel compelled to sue (and their lawyers are usually pushing litigation). So they have to come up with SOME argument regarding the existence of a legitimate business interest. And that’s how we end up with companies like AutoNation testifying that their training is extraordinary (1) even though it is training in the AutoNation product and (2) even though they have no idea what training looks like at their biggest competitors.
Of course, under Florida law, there is no protectable interest in training unless that training is truly extraordinary and not available elsewhere in the industry. And from my perspective, teaching general managers how to run a car dealership isn’t extraordinary. You can get that kind of training anywhere.
Final Thoughts on Auto Dealer Non-Competes
Non-compete agreements have become ubiquitous, even in the car business. It’s not just dealers, salesman and general managers. It’s also service technicians. There’s no legitimate basis for 99% of these people having outright non-compete agreements. At most, these folks should be subject to a limited non-solicitation agreement that prohibits them from soliciting the company’s long-standing customers.
Jonathan Pollard is the principal of Pollard PLLC, a litigation boutique based in Fort Lauderdale, Florida and focused on competition law. The firm and its attorneys have extensive experience litigating and arbitrating complex non-compete, trade secret, trademark and antitrust matters. Their office can be reached at 954-332-2380.