What’s Worse Than Losing A Non-Compete Dispute? Paying $200K For The Fun Of Losing
No one likes to be wrong, and being proven wrong stinks. And that’s especially true for folks in my profession – we’re not known for being gracious losers.
But even worse than just being proven wrong is having to pay the other side what they spent to prove you wrong. This is a relatively rare thing in the United States: the “American Rule” means that each side pays its own attorney’s fees, unless a contract or statute shifts the winner’s fees to the losing party’s side of the ledger.
But those fees – over $200,000 of them – were shifted to the loser in Stuart Irby Co. v. Tipton, et al., an Arkansas case involving a non-compete clause that the plaintiff said prevented three of its former salesmen from going to work for another business in the electrical supply industry. As we’ve noted, Arkansas can be a tough place for businesses trying to enforce non-competes: for example, its courts won’t rewrite them for the parties if they’re overly broad or otherwise unenforceable.
And that’s how the non-compete clause turned out to be in this case: overly broad and unenforceable, among other things. For starters, the federal court hearing Stuart Irby’s case against its former salesmen granted the salesmen summary judgment because the non-compete clause Irby was trying to enforce actually ran between the salesmen and a predecessor business, not Irby. Even if the non-compete ran between the salesmen and Irby, though, the court ruled it couldn’t enforce it for at least two reasons. First, Irby’s customer list of licensed electricians – its purported reason for the non-compete clause – was not a business secret, it “…was public knowledge. There’s a list of all licensed electricians in [Arkansas] on [the state’s] website,” the court wrote, somewhat casually. Second, the non-compete’s territorial restriction – which allowed Irby’s predecessor business to define what the no-go territory would be – was too broad and vague to be enforced.
So, Stuart Irby lost, and the court granted judgment to his former salesmen on Irby’s claims of breach of contract, breach of fiduciary duty, tortious interference with contracts, and violation of the federal “Civil RICO” act.
And then the real fun began. The three former salesmen, relying on an Arkansas statute that allows the winning party in a breach of contract case to demand its “reasonable attorney fee” from the other side, asked the court to order Irby to pay the $203,892 they incurred to fight off its suit. The court began with the “lodestar” method – figuring out the number of hours reasonably put into the case, multiplied by the reasonable hourly rate – to reach the conclusion that the defendants’ fees were reasonable.
Along the way, the court rejected several of Irby’s arguments, including that more than one lawyer attending a deposition for the defendants was unreasonable (Irby had more than one lawyer at depositions, so it couldn’t credibly argue that point). The court also disagreed with Irby’s argument that lawyer time in excess of 8 hours a day was unreasonable: “Many families might wish their loved ones spent less time at the office, however, I know from personal experience and observations of others, 8 hours a day won’t get it for sho ‘nuff lawyers.” We have no concrete idea what a federal court means when it references “sho ‘nuff lawyers,” but whatever it means, it justified an award in the full amount that the former salesmen asked for.
So, here’s the takeaway for employers from Stuart C. Irby Company v. Brandon Tipton, et al. It can be bad to lose some key employees, and it can be even worse to lose an attempt to enforce a non-compete against them in court. But think carefully about your chances of success before you try that enforcement, and what you’re willing to spend if it doesn’t work out. You may wind up paying your own legal bills and the former employees’ legal bills as well.