Chicago District Judge Issues Primer On Declaratory Judgment Actions Regarding The Enforceability Of Non-Compete Agreements
Last week, Chicago district judge Charles Kocoras dismissed a declaratory judgment action challenging the enforceability of a facially broad form non-compete agreement signed by all employees of the Jimmy John’s sandwich chain. Judge Kocoras held that the dispute was not judiciable because the plaintiffs lacked the requisite “reasonable apprehension” of litigation against them and because they failed to allege that they had actually engaged in conduct that would violate the non-compete (Judge Kocoras’ memorandum opinion also addressed significant joint employer, franchisor/franchisee, and FLSA issues.)
As an initial matter, Judge Kocoras noted that “[t]he Seventh Circuit has not addressed whether a claim for declaratory relief is judiciable in the context of non-compete provisions.” Nevertheless, borrowing from an analogous Seventh Circuit decision involving a patent infringement/declaratory judgment action, Judge Kocoras held that in order to establish the existence of an actual case or controversy sufficient to support a claim for declaratory relief in the non-compete context, the plaintiffs must clear two threshold procedural hurdles. “First, the Plaintiffs must have a ‘reasonable apprehension’ that the Defendants are going to file a lawsuit against them for violating the Non-Competition Agreement. Second, the Plaintiffs must allege that they were preparing to engage or had engaged in conduct that would compete with the Defendants.”
In his Jimmy John’s decision, Judge Kocoras held that the Plaintiffs did not satisfy either requirement. As for whether the Plaintiffs had a “reasonable apprehension” that the Defendants might sue them, Judge Kocoras noted that “Jimmy John’s and the Franchisee Defendants have submitted two affidavits attesting to their intention not to enforce the Confidentiality and Non-Competition Agreements against the Plaintiffs ‘in the future.’” In light of these affidavits and the fact that the Defendants had not taken any prior action to enforce the non-compete agreements against the Plaintiffs in the past, Judge Kocoras held that the Defendants “satisfied their burden of establishing that the challenged conduct will not ‘reappear in the future.’”
As for the second requirement, Judge Kocoras held that the Plaintiffs did not allege with sufficient specificity that they had prepared to engage or had engaged in prohibited activities. For example, Judge Kocoras explained that one of the Plaintiffs “fail[ed] to specify if she applied, was interviewed, or was offered a position [with a prohibited competitor]” and that a mere “litany of possibilities does not amount to a violation of the terms of the Confidentiality or Non-Competition Agreement.”
So, from a strategic perspective, what does this case mean for future declaratory judgment actions regarding non-compete agreements?
Non-compete law remains a creature of state law and most non-compete cases are brought in state court. Hence, the precedential impact of this decision may be limited.
That being said, the decision does provide strategic lessons to both sides in the non-compete declaratory judgment setting. First, the standard for getting a declaratory judgment in federal court may be stricter than that in a particular state court. Defendants may want to consider removing such cases to federal court, if possible, and plaintiffs may be wise to plead in a manner intended to minimize the risk of a successful removal. Second, a federal court plaintiff seeking a declaration that a seemingly overbroad non-compete is unenforceable must plead sufficient facts to show a reasonable apprehension of enforcement litigation. Third, when attempting to defend (or enforce) an otherwise facially overbroad non-compete, it may be prudent to expressly disclaim enforcement of the maximum limitations of the agreement (i.e., to effectively “self modify” the agreement before a court has an opportunity to rule on its enforceability).