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

Refer to This: Referral Sources Can Be a Legitimate Business Interest for Non-Compete Purposes in FloridaCan relationships with referral sources give rise to a legitimate business interest sufficient to enforce a non-compete? The answer is yes, at least in Florida.

A Little Helpful Background

Generally speaking, non-compete agreements (that prevent a former employee from working for your competitor) are not enforceable unless they protect an employer’s “legitimate business interest.” Non-competes that merely serve to prevent ordinary competition are generally not enforceable because they are simply a restraint on trade. Rather, there has to be something that would give the former employee an unfair advantage in future competition with the employer. This “something more” is oftentimes referred to as a legitimate business interest.

An employer seeking to enforce a non-compete with a former employee must convince the court that it is seeking to protect a legitimate business interest (not just trying to keep the employee from competing). In other words, if there is a legitimate business interest at stake, the court might enforce the non-compete; if there is no legitimate business interest, then the court likely will not. Note that non-compete law is entirely state specific—so check your state statute and caselaw.

What Happened in Florida Last Week (Other than the Hurricane)

Now, back to Florida. Last week, the Supreme Court of Florida ruled that a home healthcare company’s referral sources can be a legitimate business interest. There were two separate cases, both involving a marketing representative for a home healthcare company. Both marketing reps’ job duties primarily consisted of cultivating relationships with referral sources (usually healthcare providers), so those referral sources would refer patients (i.e., paying customers) to the home healthcare companies.

Both of the marketing reps signed non-competes prohibiting them in one way or another from soliciting referral sources for competing home healthcare companies. During their respective employments, the marketing reps developed relationships with referral sources, presumably using their employer’s funds to do so. Subsequently, both of the marketing reps resigned their employment, went to work for competitors, and solicited the referral sources that they had worked with during their prior employment. The former employers said this behavior violated their non-competes (with one even alleging that the employee “absconded” with the referral source list).

The original employers suffered a loss in new patient referrals and revenue, and they filed suit. Florida’s lower courts split on this issue. One court dismissed the case finding that referral sources did not constitute a legitimate business interest. The other court entered a temporary injunction in the employer’s favor, with an implicit finding that referral sources did constitute a legitimate business interest.

The Supreme Court of Florida construed Florida’s non-compete statute and held that it did not exclude referral sources from being a potential legitimate business interest. The court further held that home health service referral sources can be a protected legitimate business interest under Florida’s non-compete statute because they are a home health company’s “most important business asset.” In its unanimous opinion, the court wrote:

“Moreover, it seems obvious that allowing an employee to work for a short period, receive pay to cultivate referral sources using a [home health company’s] resources, and then remove advantageous information to a direct competitor to solicit those same referrals – all of which was precluded by a non-compete contract that the employee signed – would not only condone but actually encourage unfair competition.”

The issue of whether referral sources are legitimate business interests may be hotly contested under many states’ non-compete laws. The Florida high court was quick to caution, however, that its ruling was industry-specific and depended on the facts and circumstances of each non-compete case.

Employers should be cautious not to interpret this decision as a ruling that all relationships with referral sources can give rise to a legitimate business interest sufficient to enforce a non-compete. As lawyers are fond to say, it all depends.

Non-compete ContractMany companies have their employees execute non-compete clauses either in employment agreements or as separate documents. The justification for doing so is to protect the company from training workers who later leave and take their new talents and the company clients to a competitor or to protect certain trade secrets. Most states restrict the terms of non-compete agreements, limiting both the geographic scope of where the ex-employee can work and the time period of the restriction. Some lawyers make a good living either attempting to negate such agreements or moving to enforce them.

On October 25, President Obama issued a “State Call to Action on Non-Compete Agreements” that followed up on several federal studies claiming that non-competes affect over 30 million U.S. workers in a negative fashion. The White House called on state legislators and governors to engage in several strategies to reduce the use of non-competes:

  1. Completely ban non-compete clauses for “certain workers,” defined broadly to include workers under a certain wage threshold; public health and safety workers; workers who do not possess trade secrets; and “those who may suffer undue adverse impacts from non-competes”
  2. Improve the transparency of non-compete agreements. The document calls on banning non-competes unless they are proposed before a job offer or in connection with a raise or promotion. Essentially, the White House would like the states to do away with the practice of using continued employment as consideration for a non-compete.
  3. Incentivize employers to write enforceable contracts. The White House wants to do away with blue-penciling and encourage complete nullification of non-compete agreements that may only have a single unenforceable clause.

Obviously, this call to action does not have any force of law and will not affect existing statutes or case law within the states. However, it does indicate an effort, at the federal level, to categorize these types of agreements as unfair. The White House push should be a reminder to employers that they need to make sure that their non-competes comply with state law and that supervisors are properly enforcing the terms.