Antitrust Law Daily Wrap Up, ANTITRUST—5thCir: Attorney Fees, Costs Properly Awarded to Contractors Defending Against Unreasonable Noncompete Agreements , (May 15, 2013)

By Jeffrey May, J.D.

An emergency services provider’s efforts to enforce overbroad non-compete agreements against its independent contractors warranted an order requiring the firm to pay the independent contractors' attorney fees and costs in defending the suit, the U.S. Court of Appeals in New Orleans has ruled. An order imposing sanctions on an attorney representing the provider for filing an "irrelevantly scurrilous e-mail" was, however, reversed (Kenyon International Emergency Services, Inc. v. Malcolm, May 14, 2013, Smith, J.).

Kenyon International Emergency Services, Inc., which provides emergency services for governments and companies that have suffered mass-casualty catastrophes, entered into agreements with independent contractors that contained noncompetition clauses. When Kenyon attempted to enforce the noncompete clauses, they were found to be unreasonable and unenforceable under Texas law. The noncompete agreements did not limit the area, the tasks, or the time that it prohibited the independent contractors from competing with the firm.

Subsequently, the independent contractors sought to recover attorney fees and costs for defending against Kenyon’s attempt to enforce the noncompete agreements. The district court, pursuant to Texas Business and Commerce Code § 15.51(c), awarded attorney fees and costs to the independent contractors.

On appeal, Kenyon argued that, because it did not have actual knowledge of the unreasonableness of the noncompete agreements, the independent contractors were not entitled to fees and costs. However, the independent contractors did not need to show that Kenyon had actual knowledge of the the noncompete agreements’ unreasonableness. Rather, they were merely required to establish that Kenyon "knew at the time of the execution of the agreement that the covenant did not contain limitations . . . that were reasonable." The district court did not abuse its discretion in finding that the independent contractors satisfied their burden.

Even if there was an "actual knowledge" requirement under Texas law, Kenyon’s chief executive officer/former president/majority owner testified regarding his understanding that the noncompete agreements were worldwide, overreaching in scope, and indefinite in time. Based on the testimony, the district court’s conclusion that "Kenyon knew when the agreements were signed that the covenants were unreasonable" was plausible.

Sanctions. The appellate court reversed the lower court's sanctions against an attorney for Kenyon for filing an "irrelevantly scurrilous e-mail" purportedly involving one of the defendants. The lower court had sanctioned the attorney on the ground that the unsealed filing of the offending document was "a vicious, deliberate smear." The attorney contended that the filing was intended to show that that independent contractor was terminated for cause.

The appellate court took issue with the sanction because the attorney was afforded neither notice nor an opportunity to respond. Further, the district court based its ruling on a clearly erroneous assessment of the evidence. Whatever might have been the negative effect on the defendant, the appellate court could discern no improper purpose in the attorney's zealous representation of his client. Thus, the sanctions order was reversed.

The case is No. 12-20306.

Attorneys: Dax O. Faubus (Faubus & Scarborough, L.L.P.) for Kenyon International Emergency Services, Inc. Fritz Barham Lewis, Jr. (Ogletree Deakins, P.C) for Mark Malcolm

Companies: Kenyon International Emergency Services, Inc.

Cases: Antitrust LouisianaNews MississippiNews TexasNews