Litigation between Competitors with Mirror Restrictive Covenants: A Formula for Prosecution

By Anenson, T. Leigh | Stanford Journal of Law, Business & Finance, Spring 2005 | Go to article overview
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Litigation between Competitors with Mirror Restrictive Covenants: A Formula for Prosecution


Anenson, T. Leigh, Stanford Journal of Law, Business & Finance


Introduction

Lawsuits that concern the proverbial "cherry picking" of choice employees are commonplace in today's competitive business environment.1 The typical case concerns competitor suing competitor after one business hires the employees of the other in violation of the restrictive covenants in their employment agreements.2

An unexplored strategy in prosecuting such cases includes ascertaining the existence and enforcement of similar restrictions by the defendant company.3 Contracts containing non-compete clauses have traditionally bound sales persons in certain fields, but now are becoming increasingly popular for all employees industry-wide.4 In fact, "non-compete clauses are often a necessity for employers where they are an industry standard."5 As a result, after unlawfully acquiring new employees subject to restraints on their employment a company may require them to execute restrictive covenants under similar terms and conditions as their former employer.6 Discovery of this important fact has several advantages that may be exploited to secure a successful outcome.7

Companies utilize post-employment restrictions in order to prevent competitors from gaining an unfair competitive advantage by misappropriating confidential information and customer relationships for their own benefit.8 Nevertheless, restrictive covenants limit competition by impeding the dissemination of information and the economic mobility of employees.9 Consequently, restrictions against competition in employment agreements have been regarded as "restraints of trade" and may be avoided on grounds of public policy.10

The first line of attack for any company defending against a claim for the unlawful solicitation of the sales employees of a competitor is to challenge the validity of the non-competition covenants agreed to previously by its employees.11 The presence of an equivalent agreement will prove useful to either prohibit the challenge to the enforceability of the post-employment conditions or to assist in upholding their validity.12 The hypocrisy of the defendant company may also be employed as part of the prosecutorial arsenal to provide proof of the underlying business tort claims at trial.13

The remainder of this article will study these tactics in the context of a competitor versus competitor non-competition case. Parts I through V will analyze the following avenues available when two businesses bind their employees to restraints with the same or similar terms: barring any challenge to the reasonableness of the restrictive covenants pursuant to equitable principles precluding contradictory positions or as a judicial admission, introducing the inconsistency as evidence or impeaching the credibility of the competitor through an evidentiary admission, and using the identical covenants to establish evidence of an industry standard or to otherwise support the underlying claim and damages.

I. Equitable Defenses

When two competitors require their employees to execute identical postemployment restrictions, maxims of equity may preclude the defendant from claiming that the same temporal and territorial provisions in the plaintiff's contracts should be stricken. The equitable defenses applicable to litigants in this situation are estoppel and "clean hands."14 Developed by judges more than two centuries ago, these principles of fairness are now applied routinely to defeat the assertion of contradictory positions in courts of law.15 While ignored in all but a few noncompetition cases in which competitors have had comparable restrictions, the role of equity in overcoming unethical business practices has been universally employed in cases of unfair competition.16

The doctrine of equitable estoppel is recognized as an extension of the duty of good faith and fair dealing in contracting that comes into effect by "asserting an interpretation [of a contract] contrary to one's own understanding.. . .

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