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Design restrictive agreements that protect you—and stick in court

by on
in Employment Law,Human Resources

Do you rely on restrictive agreements (also known as noncompete agreements) to prevent employees from working for the competition and stealing your customers? If so, now is a good time to make sure those agreements will stand up in court.

A recent 11th Circuit Court of Appeals case—Proudfoot Consulting Co. v. Gordon, No. 08-14075, 11th Cir., 2009—illustrates the obstacles and complexity that can trip up employers that take former employees to court.

The appeals court affirmed a trial court’s injunction enforcing Proudfoot’s restrictive agreements and preventing former employee Derrick Gordon from working for the competitor. But the court also refused to make Gordon pay damages for breach of contract and reversed a judgment that would have paid the company more than $1.6 million.

Terms of the noncompete

The agreement in Proudfoot set out a six-month post-termination moratorium that prohibited Gordon from working for any of Proudfoot’s direct competitors, contacting the company’s clients and soliciting its employees.

The agreement also barred Gordon from ever using or disclosing the company’s confidential information and required him to return the company’s materials and information after his employment ended.

When Gordon initially gave notice of his resignation, Proudfoot apparently felt confident he would comply with the restrictive covenants and would not attempt to obtain employment with a competitor.

Out the door, info in hand

But there were signs that Gordon wouldn’t abide by the agreement; Proudfoot apparently missed those signs because of complacency or, perhaps, misguided confidence in the agreement’s deterrent effect.

During meetings in which Proudfoot executives tried to convince Gordon not to leave, Gordon lied about his next job and stated that his new position would be with a noncompeting business. He never mentioned that he would really be working for one of Proudfoot’s direct competitors. Proudfoot officials did not press for any further information about the prospective employer.

The company was also aware that during his employment, Gordon had access to, received and, in many instances, used information about specific clients, projects, operations and pricing information. He had copies of training materials, company employee lists and his clients’ business cards. Some of this material was in the form of electronic files he had downloaded. Gordon took that information when he left.

Now that the 11th Circuit has ruled—affirming the validity of the restrictive agreement but disallowing damages—it appears Proudfoot may have won the battle but lost the war.

What the court wants to see

The 11th Circuit ruling in Proudfoot noted several troubling aspects that an employer can encounter and must surmount to enforce restrictive agreements. It said employers have several ways to use restrictive agreements to protect legitimate business interests.

Agreements can restrict an employee from working only with his or her own past customers. Simply knowing other customers’ identities and pricing terms won’t put the employee in violation of the agreement. The employer would have to be able to prove that the employee had access to nonpublic pricing information or company strategies that actually give the new employer a competitive edge.

Agreements can restrict use of specialized training “beyond what is usual, regular, common or customary” in the company’s industry. It’s not “specialized” enough if it only addresses the company’s particular methodologies, practices and procedures.

Geographic limits spelled out in the agreement must be reasonable—for example, areas where the employer has clients and competitors.

The 11th Circuit also addressed how it will treat breach-of-contract damages. Damages may be awarded if the employer can prove it would have actually obtained business if not for the former employee’s violation of the terms of the agreement.

The employer must prove it suffered damages. In other words, a breach-of-contract lawsuit can’t simply be an attempt to claw back the competitor’s profits—that’s not a legitimate breach-of-contract remedy in Florida.

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