No secrets in non-compete litigation
I just read the 5th Circuit’s opinion in a fascinating business tort case, Wall v. Alcon labs. Normally, I don’t spend much time with opinions written by Federal courts outside of the 4th Circuit, simply because they rarely apply to my Virginia cases and clients. But Wall is different.
Mr. Wall left his employer after many long years, claiming he wanted to retire. Days later, he inquired about his retirement benefits. When his company asked him about his future plans, he told them he would not be in competition with Alcon but was joining a start up company in the same industry called Otonomy.
Alcon believed the new position was in violation of his non-compete agreement, and denied Mr. Wall his retirement benefits. Wall sued claiming he was entitled to his benefits under Federal law, regardless of breach.
Interestingly, the Court agreed with his ex-employer Alcon and found the denial of benefits was appropriate.
So what are the universal lessons gleaned from this rather typical scenario:
1. Litigation is always risky. Clearly, Mr. Wall would not have sued if he thought his chances of losing were slim.
2. Everything comes out in litigation – no secrets remain! It also came out in litigation that Mr. Wall had signed a new contract with Otonomy five months before he “retired” from Alcon. Part of that agreement with Otonomy was their written commitment to pay $50,000 of his attorneys fees should he get sued for breaching his non-compete. The court found this timeline did not support Mr. Wall’s claim for retirement.
3. Don’t expect your stock, severance and retirement benefits remain should you breach your contract. While courts will examine your rights under a case by case scenario, there is no hard fast rule that you are entitled to anything should you breach your contract. So don’t count those chickens before they hatch.
4. “Competition” may not mean what you think it does. Mr. Wall sure didn’t think the new company was in competition with his old. The court however, disagreed.
5. Think carefully whether the risk is worth it. I love litigating non-compete cases. My clients however, seldom do. I therefore have taken the approach that litigation is typically a bad idea and will try to paint all of the worst case scenarios for my clients who are considering a jump with a restrictive covenant at play. If Mr. Wall had realized (a) he could lose his retirement; (b) he would have to pay tons in attorneys fees because $50k wasn’t going to cover it, and (c) that he may spend years tied up in litigation – do you think he would have made the leap?
I certainly doubt it.
e Months before he made his “retirement” announcement at Alcon he signed a contract with another company in the same industry (Otonomy). , namely e, he has a few great lessons I want to share with my fellow Virginians.