In a dispute involving a non-compete agreement with three former employees, the U.S. Court of Appeals for the Sixth Circuit recently upheld a district court decision to award attorneys’ fees to the employer even though there was never any final determination of liability with respect to the non-compete agreement. In Kelly Services, Inc. v. De Steno, Case No. 18-118 (6th Cir. Jan. 10, 2019), a case that originated in Michigan federal court, a staffing agency based in Minneapolis, Minnesota filed a suit alleging breach of contract against three former employees who had non-compete agreements with them and, upon separation of employment, accepted employment with a competitor in alleged violation of those agreements. The notable fact about all three of those non-compete agreements is that they expressly contained language that provided that the employee would pay all attorneys’ fees incurred by the employer “in enforcing this Agreement.”
At the outset of the litigation, the employer obtained a preliminary injunction prohibiting the employees from working for the competitor, and the injunction subsequently lasted for the entire length of the non-compete agreement (one year). The court eventually lifted the injunction retroactively to the date the non-compete agreement expired, and litigation continued with the employer arguing that it was entitled to attorneys’ fees under the non-compete Agreement.
The employees argued that attorneys’ fees should not be awarded because the employer had not prevailed on the merits of the case; rather, it had merely obtained a preliminary injunction. The employer noted that the terms of the non-compete agreement did not require it to prevail on the merits of the case, which is the case with most attorneys’ fee provisions, or even to succeed in obtaining the preliminary injunction. Rather, the standard for triggering the attorney’s fee provision was much lower and only required the employer to incur fees “in enforcing” the non-competes. There was no dispute that the employer actually incurred attorneys’ fees moving to enforcing the non-compete and there was also no dispute that the employer actually obtained relief i.e., obtaining a preliminary injunction prohibiting the employees from working for its competitor for the duration of the non-compete agreement.
The trial court agreed with the employer, and awarded attorneys’ fees because the “plain reading of the contracts” expressly provided for attorneys’ fees and there was no language that indicated that the employer needed to actually prevail before it was entitled to attorneys’ fees.
On appeal, the Sixth Circuit, which is over Michigan, Kentucky, Ohio, and Tennessee, affirmed the award, noting that under state law, an attorneys’ fees provision in a contract is enforceable unless contrary to public policy. The Sixth Circuit did note that there may be limits, and that if an employer attempted to “seek enforcement” with no legitimate basis, or for purposes of oppression or harassment, it might reach a different result. As those factors were not present in this case, the Sixth Circuit did not analyze those issues.
Take Away: Non-compete agreements can be valuable tools to protect an employer’s investment in its employees. However, states vary in the level of protection they actually provide for non-compete agreements. The Kelly Services case, while decided by a federal appellate court, relied upon Michigan contract law to reach its decision. A court applying the law of a different state may reach a different result. At the very least, this ruling may have some employers reviewing their non-compete agreements.
About the Author:
Timothy M. Cary (Associate, Saginaw), at Dickinson Wright, represents employers as both an advisor and a litigator. As an advisor, he counsels clients in the development of employment policies and handbooks, assists in developing strategies to deal with difficult employee issues, negotiates collective bargaining agreements, and helps employers comply with state and federal employment laws including the Americans with Disabilities Act, Fair Labor Standards Act, and Family Medical Leave Act. As a litigator, his practice includes defense of wrongful termination claims, civil rights claims, non-compete and non-solicitation agreements, business torts, and charges of unfair labor practices. He also assists employers in dealing with state and federal agencies. He can be reached at firstname.lastname@example.org.