Non-Compete Agreements and COVID-19
Many employers currently are reviewing the requirements they must meet when re-opening their businesses. Employers should be careful not to overlook another critical issue as they head back into their workplaces – the enforceability of restrictive covenants against employees they laid off or who quit because of a significant change in pay structure.
Courts have always been reluctant to enforce overbroad restrictive covenants such as those prohibiting the solicitation of customers with whom the employee had little or no contact. In light of COVID-19, courts may be even more reluctant to enforce even apparently reasonable restrictions. Consider, for example, a salesperson who is subject to a non-solicitation covenant but who was laid off due to the COVID-19 economic downturn, or an R&D employee subject to a non-compete covenant who quit when her pay was cut significantly. Will a court still enforce even reasonable restrictive covenants under these circumstances? Or, will a court be more inclined to tip to the side of leniency with COVID-19 as a backdrop?
Virtually all states require employers to prove the same basic elements in order to enforce a restrictive covenant:
(1) A substantial likelihood of success on the merits;
(2) The employer has an inadequate remedy available at law and will suffer irreparable harm if the employee is not restrained;
(3) Enforcement of the restrictive covenant at issue and under the circumstances is not against the public policy of the state; and
(4) The balancing of equities between the parties weighs in favor of enforcement.
In the typical pre-COVID-19 case, success mainly hinged on the strength of elements (1) and (2). Element (1) centers around the protectability of the information at issue, requiring proof the employer actually shared confidential/trade secret information with the employee and the employer took specific measures to keep the information confidential. Element (2) requires that the employer prove in a detailed and thoughtful way that, absent a temporary restraining order or injunction, the employer will suffer irreparable harm for which money is an insufficient remedy (e.g., good will impacted, reputation harmed, domino effect of clients moving their business).
After COVID-19, however, courts may pay more attention to elements (3) and (4). Even if the court finds that the employer has protectable information consistent with elements (1) and (2), the court may decide public policy favors an employee who, through no fault of her own, lost her job or had her pay reduced due to a reduction in force caused by COVID-19.
These common scenarios highlight once again the importance of employers (1) resisting the urge to overreach when drafting their agreements, (2) ensuring they are truly focused on “protectable information,” and (3) avoiding unreasonably restricting employees. In considering whether to enforce a restrictive covenant against a former employee at this time, employers would be wise to:
Review applicable state law to determine the enforceability of their restrictive covenants;
Analyze the “reasonableness” of their restrictions in light of the applicable state law, including the temporal and geographic scope of the restrictions;
Thoughtfully assess and evaluate the real trade secret/confidential information to which the employee actually had access;
Itemize the trade secrets/confidential information to which the employee had access and rank that information in the order of importance to the company with a brief explanation of why it is important;
Consider whether there is a real risk the employee may use the trade secrets/confidential information to the detriment of the company;
Identify whether COVID-19 played any role in the employee leaving employment and analyze how that might impact a court’s decision;
Weigh the likelihood of success in enforcing a restrictive covenant simply with the backdrop of being in a current or post COVID-19 world;
Determine and document the irreparable harm which could result from the employee violating the restrictive covenant.
COVID-19 undoubtedly has had severe consequences for employers and employees. One which could easily be overlooked but should be evaluated is the protectability of employers’ trade secrets and confidential information.