Declaratory Judgments In Non-Compete Cases – Electing Offense Over Defense

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After a weekend of gorging on football as well as turkey, I’ve got offense and defense on my mind, and a recent Georgia appellate decision got me to thinking about how those basic gridiron principles apply to non-compete cases.  The case, Lapolla Indus. V. Hess, No. A13A1097, 2013 Ga. App. LEXIS 926 (Ga. Ct. App. November 15, 2013), involved a variation of the usual scenario of an employee subject to a non-compete agreement leaving his position for a new employer.  The old employer, ready to get its money’s worth for a non-compete agreement it paid good money to an attorney to draft, sends a cease and desist letter to its former employee threatening to sue the employee for breach of contract and seeking an injunction, damages, and attorney’s fees.  The old employer, as happened in Lapolla, often also sends a letter to the new employer putting it on notice of the existence of the non-compete agreement and threatening to sue the new employer for tortuous interference with contract if it continues to employ the employee in contravention of the employee’s  covenants.

What usually happens is that the employee and new employer either throw the cease and desist letter in the trash or fire back a response letter informing the old employer of all the reasons why their accusations are legally or factually wrong and that they’ll counterclaim or seek attorney’s fees if the employer actually sues.  The Lapolla case highlights another option available to employees and their new employers in instances of a potential breach of a non-compete — the filing by the employee and/or the new employer of a declaratory judgment lawsuit seeking a ruling by the Court that the non-compete covenants are unenforceable.  Instead of waiting around to be sued, i.e. playing defense, the employee and new employer take control of the proverbial litigation ball and file their own lawsuit.

There are several potential benefits to the employee and new employer in this strategy:

  • the psychological benefits of being the Plaintiff;
  • choosing the forum to litigate the dispute, which may also dictate which state’s laws apply, which may in turn dictate the result;
  • quickly testing how serious the old employer is about enforcing the agreement;
  • forcing an early resolution of the dispute; and
  • minimizing exposure to liability by getting an answer on the legal issue of enforceability before moving on a hire that might potentially be a breach.

In Lapolla, the tactic worked, because the trial court refused to apply the Texas forum selection and choice of law clause in the non-compete agreement and ruled that the employee’s non-competition covenants with the former employer were unenforceable, and the Georgia Court of Appeals upheld that part of the ruling.

Burr Point:  When being accused of non-compete breaches, employees and their new employers should consider filing a declaratory judgment action.  While defense may win championships in football, an offensive mindset usually pays off when it comes to non-compete litigation.