Addressing Unilateral Fee-Shifting Agreements in Restrictive Covenant Litigation

In all but a small handful of states the law does not imply reciprocity in these types of provisions. Outside of those jurisdictions (assuming the provision is not ambiguous) courts across the country have found that one-way fee shifting agreements do not violate public policy and are enforceable.

You are asked to represent an individual who left her former employment for a position with a new employer while subject to an employment agreement containing post-separation restrictive covenants, including noncompetition provisions. The employee has been served with a complaint, along with a motion for temporary restraining order to prevent her from working for the duration of the suit. Upon your initial review of the employment contract you observe the following fee-shifting provision: “Employer is entitled to recover reasonable attorney fees and costs in any litigation brought to enforce the terms and conditions of this agreement.” In other words, your client is subject to a unilateral fee-shifting provision where the employer is entitled to fees in the event it prevails, but the employee may not recover fees for a successful defense. Surprisingly, in all but a small handful of states the law does not imply reciprocity in these types of provisions. Outside of those jurisdictions (assuming the provision is not ambiguous) courts across the country have found that one-way fee shifting agreements do not violate public policy and are enforceable.

The consequences of this provision can be significant. Even in cases where the employee has been on the job a matter of days, damages are minimal or nonexistent, and you believe the restrictive covenants are likely unenforceable, the threat of an award of attorney fees can be a game-changing disincentive to fight back. Your client may have solid defenses, but ones that will require substantial discovery and that will only increase the overall cost—and risk—of litigation. If unsuccessful, your client ultimately may be tagged with the fees and costs from both sides. This results in a highly imbalanced bargaining position at the outset of the case, and is made more acute in cases where your client’s new employer is not providing a defense. When the risk of loss does not just place your client’s job in jeopardy, but threatens personal financial ruin, the cost of litigating may be too great for your client regardless of the strength of their defenses.

And even if your client decides to pursue a settlement strategy and there appear to be a reasonable set of working conditions to which both sides could agree, the employer may still demand in settlement the fees it incurred in taking its initial actions to enforce the agreement— potentially tens of thousands of dollars. Clients caught in this scenario may feel as though they have no viable options.

Some commentators have advocated for a statutory solution, arguing that unilateral fee shifting provisions are against public policy and should be read as reciprocal. See “Unilateral Attorney’s Fees Clauses: A Proposal To Shift The Golden Rule,” 61 Drake L. Rev. 85.) Often, unilateral fee-shifting incentivizes hyper-aggression in the advantaged party while disincentivizing meritorious defenses. Those criticisms make sense particularly in cases involving rank-and-file employees who are often presented with employment agreements at a time when they have little to no bargaining power. Absent a legislative solution, attorneys faced with this problem often must present clients with difficult choices. Some clients will be hard-pressed to understand why they should even consider a settlement strategy and feel strongly they have a winnable case. But when confronted with a possible six-figure attorney fee award, even the most resolute litigants may have second thoughts. While demonstrating the ability and resolve to mount a vigorous defense is often necessary to position the case for a favorable settlement, attorneys should explore whether there may be ways to mitigate potential damages, including through stipulated interim relief. Counseling individuals and companies caught in this scenario can present one of the most challenging aspects of restrictive covenant litigation.
 

In federal court, one often-overlooked tool in the defense counsel’s toolkit is the Rule 68 offer of judgment. In cases where the employer’s settlement demands are unreasonable in comparison to the most likely outcome of the case, a defendant may be able to diminish the employer’s leverage through this procedural device. Rule 68 provides that a party may serve on its opponent an offer to allow judgment to be entered on specified terms, which if accepted must be entered by the court. Where such offers are rejected, Rule 68 provides that “if the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made.” While “costs” does not automatically include attorney fees, the Supreme Court has held that costs do include fees in cases involving claims that are subject to statutory fee shifting provisions. See Marek v. Chesny, 473 U.S. 1, 9-12 (1985) (“Rule 68 was intended to refer to all costs properly awardable under the relevant substantive statute or other authority. In other words, all costs properly awardable in an action are to be considered within the scope of Rule 68 “costs.””) It may be possible to argue that the same rationale supports including attorney fees in Rule 68 “costs” in claims subject to contractual fee-shifting. See generally Kempner Mobile Electronics v. Southwest Bell Mobile Systems, (N.D. Ill. Apr. 19, 2005).

A carefully crafted Rule 68 offer should accurately capture a realistic estimate of the injunctive relief likely to be awarded against your client, as well as include the plaintiff’s attorney fees and costs accrued to date. An earnestly made Rule 68 offer may give pause to the hyper-aggressive plaintiff looking to make an example of the former employee. If the offer is rejected, it can provide a counterweight to the leverage created by the unilateral fee-shifting provision of the contract. With a credible argument that fees will not be recoverable, the plaintiff’s calculus in determining how aggressively to litigate must now take into account the likelihood of both prevailing and achieving a result that is more favorable than the terms of the Rule 68 offer. Any less favorable result may eliminate the most significant financial recovery available to the employer, particularly in cases that largely concern injunctive relief.

In the right scenario, this approach may ease the imbalance often created in cases involving unilateral fee shifting. Restrictive covenant litigation often involves representing emotionally charged clients, particularly for an employee whose ability to earn a living in his chosen profession is at stake. Feelings of resentment between the parties may influence the tactics of both sides in ways that can feel similar to a divorce. While being sensitive to these realities, lawyers should be prepared to discuss with their clients the ramifications of fee shifting and to consider creative solutions such as the above at the earliest stages of the litigation before fees become the primary driver of the case.

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