As I write this, it’s the most wonderful time of the year. For a non-compete lawyer, that is.
Part of my law practice is counseling people who have signed non-competes with their employers. I’ve done this dozens of times in the past five years alone. And I’ve learned a lot about what’s important in such cases.
I know what you’re thinking. “The most important thing is to hire a lawyer to review the non-compete!” I mean, yes, that’s a good idea, but that’s not what I’m talking about.
Or you’re thinking “is the non-compete enforceable?” Again, an important question. I covered it in my very first blog post What a Litigator Looks For in the Typical Non-Compete. But it’s probably not as important as you think, as we will see.
Some of you are thinking more practically: “The key question is whether you can afford the retainer.”
You’re getting warmer.
The overarching lesson I’ve learned from counseling people who have non-competes is that the practical issues are more important than the legal issues.
So let’s look at the most important practical issues for employees who have non-competes and want to quit their jobs.
Can you afford to do something else?
The most basic practical question is whether you realistically have the option to do some other kind of work.
If you plan to quit and do a different job, then the non-compete may not be an issue.
Just be careful. Sometimes a non-compete will be worded so broadly that it covers even that job you think doesn’t compete with your current employer at all. That will raise issues of enforceability, but the point is not to assume that. Review the language of the non-compete carefully, preferably with the assistance of a lawyer, of course.
If you conclude your new career doesn’t violate the non-compete, go for it.
But in most cases, for most people, changing careers and doing some other kind of work just isn’t an option.
I’ll use myself as an example. Put aside for the moment that lawyers generally can’t have non-competes (for legal ethics reasons). Suppose I had a non-compete that said I couldn’t practice law for two years. Could I do something else for two years?
No way. I mean, if I had to do it, I guess I would find a way, but there’s no other job I would be qualified for that would pay near as much.
Most people are in the same boat.
So let’s assume you want to quit and continue doing the same kind of work, just somewhere else.
What kind of employee are you?
The next question I’m going to ask is what kind of employee are you?
To simplify, let’s consider three types.
The first is Sally Sales. She’s a “customer-facing” employee who initiates, develops, and maintains relationships with customers or clients. In other word, she acquires goodwill with the customers on behalf of her employer.
Sally Sales also knows stuff about customers, like who they are, who makes the decisions for them, what they buy, and how much they pay. The stuff she knows is arguably confidential information and might even include trade secrets. Think of a trade secret as confidential information on steroids.
We could further break down this type into people who get customers in the door versus people who keep the customers happy once they’re in the door. And there are hybrids of both, to varying degrees. But you get the basic idea.
The second type of employee is Charlie Coder. Charlie debugs the software, or tests the drill bit technology, or calls the trucking company to find out where the lumber shipment is, or whatever. You get the idea.
The important thing about Charlie is that he’s not “customer facing.” Maybe he comes into contact with customers occasionally, but he doesn’t develop goodwill with customers. They’re not going to follow him if he goes to some other company.
The third type is Barbara Bigshot. She’s in the “C-suite.” She’s the CEO, or CFO, or COO, or whatever. Or she might just be an “Executive VP.” The point is that she has a senior management position.
Barbara doesn’t necessarily have relationships with particular customers, but she knows who all the customers are. And she knows—or has access to—all of the company’s information, including its double super-secret “strategic plans,” which every company seems to think it has.
Once I know if you’re a Sally Sales, Charlie Coder, or Barbara Bigshot, I will have a much better feel for the level of difficulty of the non-compete assignment.
Charlie Coder will be the easiest. The main purpose of a proper non-compete is to protect goodwill with customers. If you don’t have goodwill with customers, it will usually be difficult (but not impossible) for the company to persuade a judge to stop you from working for a competitor.
The company can still argue the non-compete is necessary to protect its confidential information, but that is typically a less compelling argument.
Barbara Bigshot will be harder. In her case, the confidential information argument has more weight. Even if she doesn’t have personal relationships with specific customers, she knows all the secret sauce, the company will argue.
And Sally Sales is probably the hardest, at least potentially. Sally definitely has goodwill with customers, and protecting that goodwill is the primary purpose of her non-compete.
Does that mean Sally’s screwed?
Well, it depends.
Do you need customers to follow you?
The key question for a Sally Sales is whether she wants or needs to take her customers with her. This is another key question I ask clients right off the bat.
Sometimes the client will tell me she’s fine leaving her customers behind and prospecting for new ones. That makes the assignment easier. As a general rule (of course there are exceptions), a non-compete should not prevent an employee from going to work for a competitor and developing business with entirely new customers.
But in most cases, it’s not a viable option for Sally Sales to leave her book of business behind. She spent years building it. It might be the whole reason the new employer wants to hire her.
Which brings me to the next practical question.
Will your new employer stand behind you?
Let’s assume Sally Sales works for We’re Like a Family Here, Inc. She has longstanding relationships with about 20 customers and expects those customers to follow her to her new employer, Sharp Practices, LLC.
That raises the level of difficulty. As a general rule, if you have a non-compete, it means you can’t take your customers with you. I call that Wolfe’s First Law of Texas Non-Compete Litigation.
There are exceptions, of course, so it’s more of a rule of thumb than a law, but “Wolfe’s First Rule of Thumb” didn’t have the same ring to it.
Anyway, let’s assume Family Here objects and is willing to litigate. That means Sally will probably have a fight on her hands.
Typically it will start with a nasty-gram from Family Here’s lawyer to Sally, with a copy to Sharp Practices. Or maybe a separate demand letter will go to Sharp Practices.
That presents Sharp Practices with a question: how badly do we really want Sally Sales working here?
Clients often ask me how companies typically respond to such demands. The answer is that there is an entire spectrum.
Some companies will drop you like a hot potato the minute some lawyer even whispers the word litigation. To be honest, I don’t have a lot of respect for those companies. But I get it. Litigation ain’t cheap.
Other companies will react to the demand letter by saying “go f*** yourself, we’ll hire whoever we want, and we’ve got lawyers too.”
The majority fall somewhere in between. In many cases, the new employer will at least try to work something out with the old employer before abandoning the new hire.
The important thing for Sally Sales to understand is that she will have little or no control over that decision. (This is assuming her employment with Sharp Practices is at will, which is the case almost all the time.)
Sally also needs to understand that she’s not going to get a binding contractual commitment from Sharp Practices to continue to employ her even if there’s a non-compete lawsuit. I do a lot of these cases, and I don’t think I’ve ever seen that happen.
Usually, the best that Sally can do is to try to get some kind of informal commitment from Sharp Practices that if there is a lawsuit, Sharp won’t immediately throw her overboard. Or at least get a sense of how they are likely to react.
If Sally doesn’t get a good vibe about this from Sharp Practices, she may want to think twice about accepting their job offer.
Similarly, she needs to consider the vibe from her current employer, Family Here.
How aggressive will your former employer be?
A related question I ask clients: how aggressive do you think the company will be about enforcing your non-compete?
Sometimes the best indication is looking at what the company did when other people with non-competes left. Did they send a demand letter? Did they follow through on their threat to file a lawsuit? How aggressively did they pursue the lawsuit?
Keep in mind, the company’s past failure to enforce a non-compete with a similarly situated employee does not necessarily mean it won’t aggressively try to enforce yours. (Note to self: topic for future post.) But having that information is better than nothing.
Another important indicator is the state of the relationship with the employer. Was it a toxic working environment? Is there already bad blood? Or are you on good terms with them?
In my experience, there are three basic scenarios where Family Here is likely to get aggressive.
The first one is related the issue raised earlier: Is Sally going to take her book of business with her? And how valuable is that book? There’s nothing quite like immediately losing a big chunk of your revenues to put a company on high alert.
The second scenario is where it’s really not about the money. It’s personal.
That’s why I named the hypothetical employer “We’re All Family Here.” Many companies, especially those run by their founders, take it very personally when an employee leaves. They consider it a betrayal. Some have almost a mafia mentality about it. “Never go against the family” etc. I had a case like this go all the way through a jury trial.
I call the third scenario Bureaucratic Arrogance. You get this more with bigger companies.
In this case it’s not really personal for the company. But the VP for Sally’s division has to answer to the Executive VP, who answers to the CEO, who answers to the private equity firm, etc. Somebody will want to know why the non-compete everybody has to sign wasn’t enforced in this case. This is our policy. I had a bench trial this year in a case like that.
And the big law firm that represents the big company is happy to have the billable hours from a non-compete lawsuit, but let’s not get into that here.
Let’s assume one of these scenarios, or some variation, applies to your situation. You have a non-compete. You want to leave. You want to work for a competitor. You’d like to take customers with you if you can.
That leads to the final practical question.
Can you afford the hiring tax?
This is another way of asking if you can afford to litigate. I explained the “hiring tax” concept in Biden Executive Order Raises Key Question: Should Texas Abolish Its Hiring Tax?
The idea is that if a company wants to hire away Sally Sales—or Charlie Coder or Barbara Bigshot—it can probably do it, but it’s going to pay a price, usually in the form of litigation fees and a settlement.
This is really the nitty-gritty. If a client with a non-compete can afford to litigate, I can probably get that client a decent result.*
*Every case is different, and it depends on the specific facts and circumstances of each case, of course.
If the client can’t afford to litigate, then it’s going to be rough sledding.
Again, I know what you’re thinking. “How do I know if I can afford it if I don’t know how much it’s going to cost?”
I’m tempted to respond that if you have to ask, then you can’t afford it. But that’s a little too strong. It is a fair question.
I try to answer it at my appropriately titled YouTube video How Much Does a Texas Non-Compete Lawsuit Cost? Check it out if you want to know more.
But I’ll sum it up with another rule of thumb. If you had to write me a check right now for $10,000, would that be a hardship for you?
If the answer is yes, then you probably can’t afford to litigate.
Govern yourselves accordingly.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm (zachwolfelaw.com). Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020, 2021, and 2022.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.