Securing the Bag – Sixth Circuit Affirms Award of Attorneys’ Fees to Staffing Company

by Bradley Arant Boult Cummings LLP
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In today’s competitive job market, it is customary for employers to include restrictive covenants, e.g., non-competition and non-solicitation provisions, in employment agreements. While these covenants are essential to protect employers from unfair competition, an attorney’s fees provision is just as critical to save employers tens of thousands of dollars in litigation expenses. In Kelly Services, Inc. v. De Steno, the Sixth Circuit not only illustrates the importance of strategically drafted damages provisions in employment agreements, but also defines the role of a jury in determining the amount of certain fees to be awarded to a party.

Background

Kelly Services, a staffing and consulting company, hired Dale De Steno, Jonathan Persico, and Nathan Peters. Before joining Kelly Services, all of the men were required to sign employment agreements that included non-compete provisions. The agreements also included damages provisions that stated that if the employee breached the agreement, he would pay reasonable attorneys’ fees, court costs, and any other related fees and/or costs incurred by Kelly Services in enforcing the agreement.

In early 2016, De Steno, Persico, and Peters left Kelly Services to work for a competitor in similar staffing positions in the same market area. Kelly Services sued the men for breach of the non-competition provisions and breach of the duty of loyalty and moved for a preliminary injunction. The district court found: (1) Kelly Services made an initial demonstration that irreparable harm may occur without an injunction; (2) harm to Kelly Services from not issuing an injunction outweighed the harm to the former employees; (3) Kelly Services demonstrated that it would likely prevail on the merits; and (4) public interest was more favorable to Kelly Services. Consequently, the district court enjoined De Steno, Persico, and Peters from violating their non-compete agreements and determined that the preliminary injunction would last for 60 days. De Steno, Persico, and Peters filed an interlocutory appeal challenging the preliminary injunction.

On July 25, 2016, three days before the preliminary injunction was set to expire, Kelly Services requested a 60-day extension.  The district court granted an extension until the Sixth Circuit ruled on the interlocutory appeal. However, within a few weeks, De Steno, Persico, and Peters voluntarily dismissed their interlocutory appeal and litigation continued. In the spring of 2017, the district court retroactively lifted the preliminary injunction and the parties engaged in mediation. After mediation was unsuccessful, the parties moved for summary judgment. The district court acknowledged that Kelly Services had received all of the injunctive relief that it sought in its complaint and agreed with Kelly Services that the only remaining issue was the amount of attorneys’ fees and costs owed to Kelly Services. Ultimately, the district court ruled Kelly Services was contractually entitled to reasonable attorneys’ fees under a plain reading of the employment agreements and a jury was not required to decide the amount of damages. De Steno, Persico, and Peters appealed.

Sixth Circuit Affirms District Court’s Award of Attorneys’ Fees

On appeal, De Steno, Persico, and Peters initially argued that the non-compete provisions were unenforceable under Michigan law and the district court never finally ruled on that issue. Like the district court, the Sixth Circuit rejected that argument, concluding that even though the district court did not reach the enforceability issue, the former employees still owed Kelly Services attorneys’ fees based on the terms of the agreements themselves. Specifically, De Steno’s agreement provided that he would “pay Kelly’s reasonable attorney’s fees and costs involved in enforcing [the] Agreement.” Similarly, Persico’s and Peters’ agreements provided that they would “pay any and all legal fees, including . . . all attorneys’ fees . . . incurred by [Kelly Services] in enforcing [the] Agreement.” The Sixth Circuit ruled that Kelly Services’ attorneys’ fees were “involved” or “incurred” “in enforcing” the employment agreements, so Kelly Services was entitled to these fees under a plain reading of the contracts. The court emphasized that the terms of the agreements did not require a final determination of liability in favor of Kelly as a condition for the award of fees.

“Unlike numerous similar agreements, these contracts [did] not employ the words “prevailing party,” nor by their literal language [did] they require a final determination of liability.”

Although the Sixth Circuit recognized that there could be problematic cases in which efforts to “seek enforcement” were unreasonable, made with little or no basis, made for the purpose of oppression or harassment, or simply unsuccessful, none of these scenarios were at issue in the present case.

In addressing the former employees’ argument that a jury must determine the amount of attorneys’ fees under the Seventh Amendment, the Sixth Circuit again sided with the district court. The court explained that the Seventh Amendment grants parties a right to a jury only for a determination of legal issues, not equitable ones, and no legal issues existed in this case. The court also stressed that it would have been “highly impractical” for a jury to determine the amount of attorneys’ fees in the instant case because the parties would have to submit evidence on attorneys’ fees before the end of the trial and resultant necessary legal services. With no provision in the employment agreements specifying the amount of attorneys’ fees to be awarded, and in the interest of fairness and efficiency, the district court rightfully determined a reasonable amount of attorneys’ fees. The Seventh Amendment did not require otherwise.

Securing the Bag

So how can employers increase their likelihood of “securing the bag” from rogue employees who violate restrictive covenants and expect to escape liability? Here are a few ideas:

  1. In addition to drafting enforceable restrictive covenants, draft damages provisions so that you are compensated for enforcing the agreement, not merely prevailing in litigation. Unless contrary to public policy, courts will generally enforce an attorneys’ fees’ provision just as any other term in a contract. Protect yourself first.
  2. Do your homework, and be sure you have a factual basis to show that your former employee violated a restrictive covenant. The rumor mill may be enough to begin investigating an employee, but it may not be enough to get a preliminary injunction. Research the former employee’s LinkedIn profile for employment updates. Review the subsequent employer’s website for any press releases about new hires or lists of employees in certain departments or industries. The internet and social media are great resources to verify suspicions of breach of an employment contract.
  3. Confront the former employee before engaging in litigation. Send a cease and desist letter to the employee and his or her subsequent employer detailing the terms of the restrictive covenant and the factual basis for your belief that the covenant has been violated. Hopefully, this is sufficient to compel the employee to adhere to the terms that he or she originally agreed to. If not, you can place the potential defendant on notice that you will seek legal action to remedy the breach. Because of your well-crafted employment agreement and due diligence, the law is likely to be on your side.

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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