Lessons to Learn from a Nail Salon case
In my previous post, “Understanding Non-Compete Agreements,” I opined that it often makes very little business sense for a small business owner to go to court to enforce a non-compete agreement.
Many small business do not have “trade secrets” or “proprietary business information” or “confidential clients.” For the vast majority of small businesses, the legal costs associated with enforcing non-compete agreements is probably better spent on other, more important business expenses such as rent, marketing, wages, and taxes.
A recent New Jersey case decided in January 2013, Truong LLC v. Tran, gives us some insight to how far some small business owners are willing to go to enforce non-compete agreements no matter the cost.
This is a case involving a small business owner who operated two nail salons in northern New Jersey. Two of the nail salon employees had signed a non-compete agreement at some point during their employment. The non-compete agreement prohibited these two employees from working within twenty-five miles of where the nail salons were located for a period of two years.
After working for Truong LLC for several months, both employees resigned. Soon thereafter, one of the employees opened “Anthony’s Nails,” a competing nail salon within five miles away from his ex-employer’s nail salons. Additionally, the other employee who resigned began working for “Anthony’s Nails.”
To make a long story short, Truong LLC filed a lawsuit against both employees and sought a preliminary injunction to stop “Anthony’s Nails” from operating. Truong LLC alleged that the employees had “confidential customer lists.” At the injunction hearing, the employees refused to concede the reasonableness of the terms of the non-compete agreement. For reasons that aren’t clear, the lower court granted the injunction and ordered the employees to comply with the terms of the non-compete agreement.
The ex-employees appealed, and the appellate court reversed.
The appellate court’s reversal is not at all surprising. Upon review of the facts of the case, the appellate court held that Truong LLC had failed to satisfy its burden that it would prevail on the merits. Furthermore, the appellate court found insufficient evidence to support Truong LLC’s argument that the 25 mile restriction was reasonable.
But the most important part of the appellate court’s decision comes near the end of the opinion, where it addresses the issue of the alleged confidential customer list:
[A] complete bar on competition appears unnecessary to protect the confidential customer lists. Rather, a ban on solicitation may adequately protect [the company's] interest in barring exploitation of its confidential customer list. If [employees] successfully solicit plaintiff’s customers, the solicitation presumably will be evident when the customers do not return to [the company's] salons…. [The company] did not present evidence that its repeat customers are so numerous that it would be impractical to identify defectors, and then determine what caused them to shift their business.
Reading between the lines, it is clear that the appellate court has no interest in eliminating competition or interfering with the free market.
This case is nothing new for lawyers who work on non-compete agreements. It certainly was not a surprise to me.
But for small business owners, it is instructive for a number of reasons.
First, it reminds small business owners to carefully weigh the costs of litigation to enforce the non-compete agreement. If the costs of litigation outweighs the benefits of enforcing the non-compete agreement, it might not be worth pursuing.
Second, it reminds small business owners that lower courts sometimes make mistakes in their decisions. Regardless of who wins at the lower court, the losing party can still appeal. An appeal means that both sides can reasonably expect to spend a significant amount of money in legal fees.
Third, it reminds small business owners to understand that the courts are not in the business of eliminating competition. The terms of any non-compete agreement must be reasonable and must be tailored to serve legitimate business interests.
Fourth, it reminds small business owners to be cognizant that in some cases non-solicitation agreements may be more appropriate than non-compete agreements.
Fifth, small business owners should not expect that all ex-employees will go away quietly.
None of this is to suggest that enforcement of non-compete agreements is always ill advised. Nothing could be further from the truth. The question of whether an enforcement action should be taken must be evaluated on a case by case basis. For example, a business that is involved in a novel scientific project or manufacture of a patented product should consult with an attorney to discuss enforcement of a non-compete agreement.
If you are a New Jersey employee who is being threatened with an enforcement order, or if you are a New Jersey employer who seeks to enforce a non-compete agreement, feel free to contact me for a consultation.