Injunctions Barring Enforcement of Invalid Non-competes

posted by Neil Klingshirn  |  Jan 24, 2010 1:07 PM [EST]  |  applies to Ohio

Employers who enforce non-competition agreements have long sought temporary restraining orders (TROs) and preliminary injunctions to bar employees from violating valid non-competition agreements.  Courts may also grant TROs and preliminary injunctions to bar employers from interfering with the employee's new employment relationships by enforcing invalid non-competition agreements.

Requirements for an Injunction barring Enforcement

A TRO or preliminary injunction (both referred to in this article as a preliminary injunction) requires proof that the:
Some courts discuss the third factor, whether issuance of the injunction would cause substantial harm to others, as a “balancing of harms.” There, the courts consider the harm that the injunction could cause the other party and non-parties.

Substantial Likelihood of Success on the Merits

The employee must prove that the non-competition agreement was entirely or partially unenforceable.  For example, in Brenneman v. NVR, Inc., 2007 U.S. Dist. LEXIS 12761 (S.D. Ohio Feb. 9, 2007), the court held that an ambiguous geographic restriction and an overly broad prohibition against working in any position for a competitor rendered a non-competition agreement unenforceable under Virginia law. Similarly, a Georgia federal appellate court held that a lack of consideration voided a non-competition agreement. Bryan v. Hall Chemical Co., 993 F. 2d 831 (11th Cir. 1993) See also Enron Capital & Trade Res. Corp. v. Pokalsky, 227 Ga. App. 727 (Ga. Ct. App. 1997).

If a court finds a non-competition agreement is unenforceable in whole or in part, it can issue an injunction prohibiting enforcement of non-compete, or at least the unenforceable portion.  For example, in Keener v. Convergys Corp., 342 F.3d 1264, 1269-1270 (11th Cir. Ga. 2003), a Georgia federal appellate court upheld an injunction that prohibited enforcement of non-competition agreement within Georgia, since it violated Georgia law. However, the court modified the trial court’s injunction of the non-competition agreement’s prohibition against competing in Ohio, whose law allowed enforcement.

Irreparable Harm

Once court have found that non-competition agreement are unenforceable in whole or in part, they have also found that the harm caused to the employee was irreparable.  Irreparable harm included that:
Since the costs to the employee of lost employment opportunities is difficult or impossible to quantify, a court cannot remedy the harm by ordering the employer to pay money damages. The harm is thus irreparable and qualifies the employee for an injunction.

The Public Interest and Substantial Harm to Others

Employers opposing preliminary injunctions prohibiting enforcement of a non-competition have so far either conceded that a failure to enforce the non-competition agreement would not harm others or have failed to identify such harm. 

Balancing of the Harm

Courts have held that the harm to the employee caused by enforcing overly broad or invalid restrictions outweighed the harm to the employer caused by non-enforcement.  In each case, however, the employer had not proven that the employee had access to trade secrets.  Moreover, to the extent that the non-enforcement might harm the employer’s interest in protecting its trade  secrets, the courts noted that the states’ trade secrets acts provided the employer protection against misappropriation. Finally, courts should recognize that enforcement of an invalid or overly broad non-competition agreement will harm the public by reducing competition and its benefits.

Significance of Injunctions Barring Enforcement

An injunction has the tactical advantage of a speedy hearing, which the court must schedule within weeks of granting a TRO. In contrast, a party seeking only money damages must wait for a trial on the merits, which may take a year or two.  The availability of an injunction barring enforcement of an invalid non-compete lets the employee go to court first, which lets the employee select the forum. If the parties could enforce the non-compete in two or more states, the employee can pick the better state by filing suit for an injunction barring enforcement.  

No court has yet to consider a competitor's right to seek an order barring the former employer from interfering with the competitor's ability to hire employee free from the enforcement of an invalid non-compete.  However, the competitor's injury is nearly identical to that suffered by the former employee. Therefore, competitors probably have standing to file suit to seek an injunction.

Limits on Injunctions Barring Enforcement

Courts will not prevent employers from enforcing valid non-competition agreements or portions thereof.  In addition, courts may refuse to issue an injunction preventing a party from going to court in another state. For example, an employer could argue that a court should limit an injunction prohibiting it from enforcing an agreement to the geographic boundaries of the court's jurisdiction and allow other courts to decide whether to enforce the agreement under their laws. In other words, an employer could oppose an injunction barring enforcement as an injunction prohibiting another court from issuing an injunction.  In the proper case, a court may find this argument persuasive.

Employees seeking an injunction barring enforcement of an invalid non-compete can reduce the risk that the court will treat it as an injunction against an injunction by obtaining an actual offer of competing employment and framing the harm that it will prevent as interference with the employee's prospective employment relationship.   

Key cases

posted by Neil Klingshirn  |  Jan 24, 2010 1:07 PM [EST]  |  applies to Ohio