A Further Discussion Of The Potential Consequences Involved In Violating A Noncompete Agreement

In past posts I've discussed the lackadaisical attitude that a lot of people seem to have towards noncompete agreements. I've noted that that's a dangerous attitude because, contrary to common belief, noncompete agreements are very enforceable in Iowa and judges usually do so. But I haven't spent much time summarizing the potential consequences of violating a noncompete agreement. The consequences can be greater than people realize.

Employers will often begin a noncompete battle by sending a "cease and desist" letter to former employees that they believe are violating a noncompete. That letter is frequently from a lawyer for the former employer. Usually the letter simply demands that employees stop what they're doing that violates the noncompete agreement. Occasionally the letter includes a demand for monetary compensation from the employee in addition to cessation of the conduct that violates the noncompete agreement. Employees can do what they want in response to such a letter, including ignore it, but if they don't fully comply with the letter the employer always has the option of filing suit.

The next step after a cease and desist letter (or the first step if the employer decides to skip the cease and desist letter and go straight to court against the former employee), is court action against the former employee. That lawsuit will always include include a claim for injunctive relief against the former employee. An injunction is a court order commanding the former employee to stop any activities that violate the noncompete agreement. Injunctions are very common in noncompete cases.

Employers may also seek money damages against the former employee for violating the noncompete agreement. Those damages may be determined in different ways. If the former employer lost a customer to the former employee because the employee was competing against the former employer in violation of the noncompete agreement, the employer can seek the lost profits incurred by losing to the business to the employee who wasn't supposed to be competing. Another money damages possibility is liquidated damages. Those come in different forms; one common liquidated damages provisions requires the former employee to pay a set amount of money to the former employer for each breach of the noncompete agreement, regardless of whether the employer's actually lost customers because of the employee's unlawful competition.   

The document that a noncompete agreement appears in frequently includes an attorney fee provision that allows the employer to recover attorney fees and litigation expenses if the employer successfully sues the employee for breach of the noncompete agreement. That's extra money that the court will add on to the employer's recovery at the end of the case if the employer wins it. In a knockdown, dragout court fight over a noncompete agreement, the employer's attorney fees can exceed $100,000, so this is something that employees need to think very carefully about choosing to violate a noncompete agreement.

Of course, those are just the legal consequences to an employee for violating a noncompete agreement. A violation can have real world consequences too. In particular, if a former employee's started a competing business and has to shut it down because of a noncompete agreement, that person loses any money that went into the business and will have to lay off employees.

Finally, it's worth observing that former employees aren't the only ones who can get in trouble if a noncompete's violated. So can that person's current employer. If the current employer knows about the noncompete agreement and employs that person anyways, thus helping the violation of the noncompete agreement with the former employer, the new employer's probably committing tortious interference with contract (the noncompete agreement between the employee and the employee's former employer). A successful claim for interference with contract by the former employer against the new employer exposes the new employer to a money judgment for compensatory damages and possible even punitive damages. That's why the current employer often receives a cease and desist letter too and a warning that continued employment of that person will be considered tortious interference with contract. 

Harley Erbe