Here’s another reason why enforcing a non-compete can be so darn expensive

I’ve litigated many battles between companies over trade secrets and non-competition and non-solicitation agreements. The tie that binds them all is that these cases are expensive to prosecute and defend.

When these cases advance to court, most are about one thing: getting an injunction to stop a former employee from doing something the client doesn’t like, e.g., working for a competitor, poaching clients/employees, or using confidential information.

How does that happen?

Among other things, if I represent the plaintiff (the former employer), I need to convince a judge not only that my client is likely to prevail in the lawsuit but that, absent immediate injunctive relief, my client will suffer irreparable harm.

Injunctive relief is supposed to be an “extraordinary remedy,” which courts should grant sparingly. This lofty standard means I need a lot of good evidence to prevail. We’re talking documents, deposition testimony, live testimony, forensic evidence, and maybe an expert. And I need everything quickly, or, in theory, my client suffers so much harm that it won’t recover. So, these cases get expensive to litigate on either side of the “v.” We’re taking a full-blown trial in a few weeks or months.

But many people don’t realize that the cost of victory — that’s right, winning– can take an added toll on the bank account.

Rule 65 of the Federal Rules of Civil Procedure permits a court to issue a preliminary injunction or a temporary restraining order. But there’s a catch. It can do so only if the movant gives security in an amount the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.

That’s the infamous “bond” referenced in most restrictive covenant agreements. The injunction bond is a deterrent to rash applications for interlocutory orders; the bond premium and the chance of liability on it causes the plaintiff to think carefully beforehand. Usually, the companies that draft the restrictive covenants try to contract out of providing any bonds altogether to get injunctive relief. But with Rule 65 lurking (and other comparable rules in state court), good luck enforcing that.

So, how much of a bond are we talking about?

This recent precedential decision from the Third Circuit Court of Appeals is illuminating. It involved a company that obtained a preliminary injunction to stop a former employee from allegedly misappropriating trade secrets for use with a competitor. At the district court, the plaintiff met its burden to obtain an injunction, and the court issued it. However, the court required the plaintiff to provide a $500,000 bond.

Half a million dollars. Holy crap! And, on appeal, the Third Circuit concluded that the trial judge may have been too chintzy!

Why? Because if the court mistakenly forbids an employee from working for a competitor, the injured parties (the employee and the competitor) have no action for damages absent that bond. On the one hand, the bond limits the liability of the applicant. On the other hand, the court needs to set it high enough to make the defendants whole if they later prevail. That process requires some delicate balancing. Therefore, district courts must engage in a case-specific analysis that accounts for the factual circumstances of the parties, the nature of the case and competing harms, and the scope and potential impact of the injunction.

In this case, the court basically eyeballed it and came up with $500,000, rejecting the defendants’ request for a $21.5 million bond since that amount “seem[ed] astronomical by comparison.” The court sensed that the defendants intentionally inflated their number to get the court to split the baby at a higher bond amount. But frustration with a party did not relieve the district court of its obligation to engage in a case-specific analysis, looking at potential harm from the injunction. So, the appellate court sent the matter back to the district judge to reevaluate.

In any event, you should know that between the attorney’s fees and costs (like an enormous bond), enforcing a restrictive covenant can fast become a 5, 6, or 7-figure endeavor. Yeah, that’s right.

Even if you win.