Monthly Archives: November 2008

Reality Check: Costs of Noncompetes: Action vs. Inaction

I have found myself explaining to prospective clients more and more: “Even if you win, you lose.” The cost of defense of a noncompete lawsuit can vary greatly and costs in South Carolina will generally be less than in New York. But, I would think that $10,000 to $20,000 would be normal for my clients. I have been successful for a client that paid me $2500, but that is rare. I have had one case resulted in $40,000 in fees, and I undercharged by about $25,000 (meaning that the legal expenses incurred should have been $65,000). A $100,000 to defend a contentious noncompete case is not out of the question, although it would not be typical. But, even so, noncompetes act as a new business tax, and lawyers are the tax collectors.

There have been cases where opposing counsel’s fees have come to light, and I can honestly say that I have found that larger firms bills are about twice why I have billed my clients.

I have found a couple of strategies that help, particularly in state court: I have been more successful in getting quick resolutions for a reasonable fee when my clients take the initiative. For a flat fee, I will file a declaratory judgment asking the court to declare a non-compete void. I choose the two or three clearest arguments with the least factual dispute. I file a motion for summary judgment 30 days after initiating the action, and in Greenville County, can probably get a 1 hour hearing in 60-90 days. Prepare an affidavit. Make the arguments. Wait 10 to 15 days for a decision.

(Note: The flat fee depends on the complexity of the case, but generally I can get a quick up or down vote on a non-compete for $10,000 or less. My experience is that lost income resulting from a non-compete can be $25,000 to $50,000 a year for some employees. Consider 2 or 3 years. And then, it is unlikely that your market value has kept up with inflation since your noncompete. So, the cost benefit of spending $20,000 to beat a noncompete can often be easily rationalized if you are focused on value not just cost. Of course, each case and client is different.)

So, it is important to find out the costs of action. But, what are the costs of inaction? You should make your decision based upon the value that representation offers. At minimum, it is usually worth a consultation ($265) with an attorney to get help doing a cost-benefit of beating your non-compete.

Open Source

My son just took my old laptop and replaced the Windows XP operating system with Ubuntu, a Linux operating system. Ubuntu is a open source operating system which grants its users a license to run the program for any purpose, to study and modify the program, and to redistribute copies of either the original or modified program. Gone is Windows, and all the programs that run on Windows. Now, the laptop uses only open-source software: Firefox web browser, Evolve email app, and Open Office word processor. An experiment of sorts for him, although I am an interested observer.

Open source software evolves. Many variations. Some are adaptive to other instantaneous changes occurring in hardware and software. It is much easier for a software developer to create new software if he has access to the code in the operating system, and even easier if the software developer can tweak the operating system’s code to improve the integration between the two.

I just mention the idea to make the point that open source is itself a strategy of development, competition, economic growth. Restrictions on the use of knowledge comes in many different forms: Copyright, patents, regulations, licenses, trade secrets confidentiality/secracy agreements, and non-competes. Each of these represents outcomes of the law’s balancing of competing interests.

And even open source markets have rules. However, there is a cost-benefit for every rule, every restraint; the law of non-competes is trending toward being more restrictive, less open. But, at what costs?

Case Study Part II: Stonhard v. Carolina Flooring

In Stonhard, my clients worked for a commercial and industrial flooring company: A multi-national corporation. My clients generated less than .1% to Stonhard’s bottom line. This case presents a picture of a slippery slope, and in more ways than one.

While employed with Stonhard, my clients began a side-business putting epoxy coatings on residential garage floors; however, on a few occasions, they did smaller commercial jobs that their employer almost certainly would not have done; and one or two weekends they supervised a job for a competitor. It was discovered. They were fired. They were sued.

Each of them had a non-compete. However, the non-compete had no geographical limitation, which meant that my clients would be prohibited from opening up a flooring business anywhere in the world. Clearly overly broad: However, it took two years and thirty-five thousand dollars to get a court to rule. So, in most non-compete cases, even if the employee wins, they still lose.

How is that possible? First, the noncompete had a New Jersey choice of law provision. Judges tend to be more familiar with the common law of its jurisdiction, and so injecting another’s state’s law into the equation can cause a conservative judge to move even more cautiously. Not a good thing if you want a court to quickly declare a contract unenforceable. New Jersey seemed to have a more liberal standard for “blue penciling” a non-compete. Blue penciling refers to removing language from a non-compete to render what remains reasonable. Plaintiff argued that New Jersey law permitted a court to insert language as well as remove it.

The South Carolina Supreme Court decided whether re-writing the non-compete, assuming New Jersey law would permit it, violated the public policy of South Carolina. The Court held that our courts will not enforce a choice of law provision if application of such law would violate South Carolina’s public interest. Because rewriting a contract is something our courts have previously rejected, the Supreme Court ruled that the court could not pencil in a geographic limitation so as to render the non-compete reasonable and enforceable.

Case Study Part 1: Stonhard v. Carolina Flooring

When I think of non-competes, the case that comes to mind is Stonhard v. Carolina Flooring. The litigation lasted 2.5 years, which included twists and turns, peaks and valleys. Both sides spent more than a little money, although the Plaintiff easily outspent Defendant by a factor of 4 to 1. I represented the Defendants, and I came to regret having agreed to a flat fee. First, read the decision; it is fairly short and limited too some specific points of law.

Peak: We won our argument before the South Carolina Supreme Court 5-0, and defeated the enforceability of a non-compete.

Valley: My clients eventually settled for a significant sum of money. (The settlement was not confidential and is part of the public record).

Okay, so how do you pay a settlement if you win the case? We only won the claims based upon the non-compete, but there were claims related to breach of the duty of loyalty. This is the first moral of this case: Every employee has a duty of loyalty during employment relationship. The duty of loyalty is essentially a duty not to compete while employed. Competing during employment can lead to liability. Preparing to compete is permissible. What is competitive? What is preparation? The answer can cost six figures.