Although some departing employees are willing to risk violating their non-competes when they leave a company, a recent court decision reinforced one of the significant dangers that those employees can face in doing so. In this decision, a federal appeals court in Ohio ruled that a former employee who violates a non-compete can be forced to pay the employer’s legal fees, even if the former employer does not prevail on all of the issues raised.
In an opinion issued on January 10, 2019 in Kelly Services Inc. v. De Steno, the U.S. Court of Appeals for the Sixth Circuit considered a case involving three employees who left Kelly Services to join a competitor. The employees had signed non-compete agreements during their employment, so Kelly Services sued them and secured a preliminary injunction. The injunction was not permanent, and was intended to remain in effect only until the court could examine the enforceability of the restrictions in the non-competes. The court maintained the injunction for the one-year period set out in the non-compete and lifted the injunction shortly after that period expired, all without ever ruling on the enforceability of the restrictions.
After the court lifted the injunction, Kelly Services asked the court to order the employees to pay for its attorneys’ fees. Kelly Services based its request on language in the agreements that allowed Kelly Services to recover the fees and costs involved “in enforcing” the agreements. The former employees objected to the request and argued that Kelly Services could not recover its fees and costs because it had not actually won on its claims. The district court found, however – and the Sixth Circuit agreed – that the former employees had to pay the fees and costs because the specific language in the agreements did not require Kelly Services to win. Rather, the agreements only required that Kelly Services incurred the fees “in enforcing” the agreements.
Although the Sixth Circuit did not have to reach the issue, its language suggested that there are limits to the circumstances in which broad fee-shifting provisions will be enforced. For example, the Sixth Circuit suggested that it would not be proper to award fees incurred in enforcing an agreement if the former employer’s efforts to enforce the agreement lacked sufficient legal basis or were simply designed to oppress or harass a former employee.
This case reinforces the importance of both including a fee-shifting provision in agreements of this nature and having the proper language in those agreements.
For more information on best practices in drafting and enforcing restrictive covenants and related agreements, contact Chris Koehler.