On Monday, I offered several reasons why non-compete cases don't settle. Today I flip this concept around.
It is true most non-compete cases do settle, a reflection that business cases get resolved for pure economic reasons. But, in the context of non-compete suits, what are the motivations that drive parties to compromise their claims and defenses? Again, I offer five:
1. Non-Compete Disputes Yield Uncertain Outcomes. There are a few overriding reasons why this is so. First, resolution of a case often depends on the rule of reasonableness, which I and others have discussed so often. By definition, courts can reach different outcomes on similar facts under this flexible, case-specific approach. Second, many jurisdictions employ a blue-pencil, or modification, rule that enables a court to award some relief even if it finds the agreement is unreasonable. Third, judges have personal views on this subject, a reflection that there is an inherent tension between the freedom to contract and the freedom to compete. Uncertain outcomes naturally drive parties to settle for fear of a loss.
2. Business Solutions Abound. Imagine a personal injury case. The lone satisfactory outcome for the plaintiff is pretty straightforward - it needs cash. A business competition case is more dynamic. Potential solutions include not only payment of cash or injunctive relief, but also the acquisition of all or part of a competitor's business. A plaintiff even may be satisfied by a lengthy "earn-out" related to certain customer business or a license fee for intellectual property in dispute. An employer may waive a non-compete so long as an employee simply stays out of a very narrow business segment, or away from a certain customer, for a period of time. In short, even contentious cases are amenable to creative business solutions not apparent in a large class of civil lawsuits.
3. Legal Fees Can Mount Quickly. Most non-compete and trade secrets are positioned for a quick injunction hearing so that the parties see a judge's initial conclusions on the merits of the case. Although this can have the effect of creating leverage for the party that achieves a favorable outcome, it also forces the parties to think settlement for fear of running up large legal bills in a compressed timeframe.
4. There's Usually An Asymmetry In Resources. In most employee non-compete cases, the defendant simply won't have the financial muscle to litigate. While this dynamic is less prevalent in trade secrets cases, competition litigation is often characterized by a vast disparity in the legal resources that the parties bring to bear. Start-ups and individual defendants are at a huge disadvantage, and there is almost never insurance coverage to backstop a defense.
5. The Attorneys Think Like Businesspeople. Compound an attorney's natural inclination to fight with the coarse feelings attending non-compete cases, and you have a toxic brew. But sometimes the attorneys can temper their clients' personal animoisities and encourage the parties to reach a sensible business result. This is when attorneys need to act as counselors - to become, in effect, part of the management team - and craft a solution that will avoid litigation and unnecessary legal expense. My experience is that, in non-compete suits, if the attorneys have a full and complete understanding of the larger business dynamics, they often can bring a fresh perspective and creative ideas to help settle cases.
Next week, I will post the final installment on this series devoted to settlements: some brief thoughts on bankruptcy considerations in the context of settlements.