Non-Compete News: Sixth Circuit Gives Attorneys' Fees to Employer

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Executive Summary: This month, the United States Court of Appeals for the Sixth Circuit affirmed a lower court’s award of attorneys’ fees to an employer after it had been granted a preliminary injunction against its former employees. See Kelly Servs. v. De Steno, 2019 U.S. App. LEXIS 875 (6th Cir. Jan. 10, 2019). The employer never received a final determination regarding the enforceability of the non-compete provisions in employment agreements. Nevertheless, because the underlying agreements contained provisions requiring the employees to cover Kelly’s attorneys’ fees in enforcing the agreements, a final determination was not necessary to award Kelly its fees. This decision demonstrates the importance of including attorneys’ fees provisions in employment agreements.

Background and Procedural History

To protect their important business interests, employers regularly include non-compete provisions in their employment agreements. Additionally, employment agreements often contain clauses that employees will be responsible for the costs associated with enforcing the agreement. Often, these clauses contain language stating that the “prevailing party” will be entitled to its attorneys’ fees. However, the language in Kelly Services excluded such terms and provided that the employee would pay for any costs incurred by the employer in “enforcing” the agreement.

Kelly is a company that specializes in providing employment staffing and consulting services. In February 2016, three former employees (the “defendants”) who worked in Kelly’s Minneapolis Division left Kelly to work for a competitor in the Minneapolis area. The defendants had signed employment agreements with Kelly containing non-compete provisions that restricted them from working in staffing services within the Minneapolis market for a period of one year. The agreements also included provisions that required the employee to compensate Kelly for any legal costs associated with enforcing the agreements by either stating that: (1) the employee would “pay Kelly’s reasonable attorney’s fees and costs involved in enforcing this Agreement” or (2) the employee would “pay any and all legal fees, including . . . all attorneys’ fees . . . incurred by the Company in enforcing this Agreement.” Based on these agreements, Kelly sued the former employees alleging, among other things, breach of contract.

In May 2016, the District Court for the Eastern District of Michigan granted a preliminary injunction restricting the former employees from working for any competitors of Kelly in the Minneapolis market for 60 days. The former employees then filed an interlocutory appeal challenging the preliminary injunction, but the appeal never reached the Sixth Circuit for a decision. After the district court extended the preliminary injunction indefinitely pending the Sixth Circuit’s ruling, the former employees dismissed their appeal. In June 2017, several months after the enforcement period of the non-compete provisions expired, the district court lifted the injunction and entered a mediation order. After mediation failed, both parties moved for summary judgment. In its summary judgment motion, Kelly sought its attorneys’ fees.

In their summary judgment motion, the former employees argued that the non-compete provisions were unenforceable and that the district court’s grant of preliminary injunctive relief did not amount to a determination of the merits of Kelly’s claims. Further, the former employees argued that, under the Seventh Amendment, they were entitled to a jury determination of attorneys’ fees. Kelly, on the other hand, asserted that it had been granted all the relief it sought in its complaint against the former employees (preliminary injunctive relief) and, thus, the only remaining issue was the amount of attorneys’ fees owed to it by the former employees.

The district court determined that Kelly was entitled to attorneys’ fees under a plain reading of the employment agreements because all agreements included language that employees would be responsible for fees “involved in enforcing” or “incurred . . . in enforcing” the agreements. As to the Seventh Amendment issue, the district court concluded that a jury was not required to decide the amount of damages. It reasoned that submitting the issue to a jury would mean that the “trial would then become a trial about the cost of the trial itself, ultimately requiring the jury to calculate the cost of each passing minute.” The former employees then appealed the decision to the Sixth Circuit.

Sixth Circuit Decision

On appeal, the Sixth Circuit affirmed the district court’s decision on January 10, 2019. First, the court held that, pursuant to the language in the agreements, the former employees owed Kelly its attorneys’ fees. The court explained that the agreements “by their terms do not require a final determination of liability in favor of Kelly as a condition for the award of fees” because the agreements did not employ the terms “prevailing party.” However, the court cautioned that the exclusion of such language would only go so far and that a court would likely not allow employers to obtain attorneys’ fees where there is little or no basis for enforcement or enforcement is attempted to harass or oppress the former employee.

Next, the court held that the Seventh Amendment did not require a jury trial to determine the reasonableness of the attorneys’ fees. Relying upon the reasoning of a Second Circuit decision, McGuire v. Russell Miller, Inc., 1 F.3d 1306, 1315 (2d. Cir. 1993), the court concluded that parties only have a right to a jury to determine “legal” issues, as opposed to “equitable” issues such as the reasonableness of attorneys’ fees.

Employer Takeaway

This decision serves as a reminder to employers to include provisions addressing attorneys’ fees in employment agreements. Additionally, it demonstrates that language addressing attorneys’ fees need not be limited to the prevailing party. While the court in this case did not ultimately rule on the enforceability of the non-compete provisions, the employer was still awarded its attorneys’ fees in pursuing and obtaining the preliminary injunction. Thus, any employers currently using or planning to use non-competition or non-solicitation provisions in their employment agreements should review the language addressing attorneys’ fees. Although it may only be enforced in a limited number of situations, the language should exclude terms that attorneys’ fees only will be awarded to the prevailing party or after a final determination by the court.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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