Beating a Non-Compete Disguised as a Non-Solicit

Even in areas where California is decidedly pro-employer, such as limiting the enforcement of non-competition and non-solicitation agreements, the result can be litigation so expensive and time-consuming that it creates the same restrictions that law and the courts have tried to prevent.

The company Stearns Lending Inc. recently experienced this dilemma. It prevailed before an Orange County jury in an expensive case that never should have been brought. Stearns was sued by competitor Prospect Mortgage, for allegedly “aiding and abetting” former Prospect employees in violating agreements that they would not solicit or recruit a former co-worker. Prospect asked the jury for more than $10 million plus punitive damages because several former loan officers left Prospect to work for Stearns. The jury found for Stearns. The takeaways from this case are:

• Reliance on the decisive Edwards decision may ultimately protect a business from liability, but it provides no immunity from expensive litigation.
• Putting the onus on employees to disclose their restrictive covenants is important, but providing an avenue for them to present any problems quickly is even more so.
• The general counsel must be proactive in leading management to respond quickly and effectively to any perceived threat of litigation.
• Diligently researching the plaintiff and any similar cases it has brought can be a cost-effective way to learn valuable information.

A non-competition case disguised as one of non-solicitation can be beaten, but it requires diligence, planning and significant resolve by the defendant.