Question of the Day: Effect of COVID-19 on Non-Competes

May 21, 2020

By Pamela Abbate-Dattilo and Kendra D. Simmons

Question

How is COVID-19 affecting disputes over non-competes and other restrictive covenants?

Answer

Perhaps somewhat surprisingly, the frequency of non-compete filings in some states, including Minnesota and Iowa, has remained steady during the COVID-19 pandemic. New cases continue to be filed, and existing cases continue to press forward.

While some employers are naturally occupied with the more immediate issues COVID-19 presents for their workplaces, it is worthwhile to consider and prepare for the effect that this pandemic will have on restrictive covenant enforcement, especially as employers continue layoffs or even anticipate rehiring in the near future. Setting aside that non-compete laws vary significantly by state, we have set forth some general principles here.

1.  Don’t forget about an employee’s restrictive covenant when you do a layoff!

During a layoff or reduction in force, severance offers are often made in exchange for a release of claims. Often, employer-drafted “separation agreements” forget to acknowledge and reaffirm a laid-off employee’s existing restrictive covenant.

If an employer intends to enforce its restrictive covenants after a layoff, best practice is to acknowledge and reaffirm the restrictive covenant in the separation agreement and provide a copy of the restrictive covenant to the departing employee. This likely eliminates the potential argument that the separation agreement superseded all prior agreements—including a restrictive covenant. Of course, pay attention to your state’s law on whether restrictive covenants are enforceable in the event of a layoff in the first instance.

2.  Consider whether a new agreement is required.

As furloughed employees are called back to work—or as laid off employees are offered re-employment—be careful about assuming that a prior restrictive covenant is still in effect. Employers should consider whether there was a break in employment, or whether there was an explicit or implied mutual agreement to terminate all prior agreements, including a restrictive covenant, at the time of the layoff or furlough.

Best practice is to have a furloughed employee reaffirm his/her prior restrictive covenant when returning to work, so there is no confusion as to whether that agreement is still applicable. If there was a break in employment, then a new restrictive covenant should be signed as a condition of re-hire.

3.  Consider making changes to future covenants.

As discussed in a prior Question of the Day, employers should consider what changes, if any, should be made to the language of their employment and other agreements to address future pandemics, including a possible resurgence of COVID-19. For restrictive covenants, potential changes may include excluding events like a layoff from triggering post-employment obligations under the agreement (to the extent this result is not already dictated by law in your jurisdiction).

Re-hiring also presents an opportunity for employers to reevaluate and modify the geographic or temporal restrictions of their non-competes to reflect what is necessary to protect their legitimate business interests under the changing circumstances.

4.  Recognize that COVID may affect the way courts view and analyze the enforceability of restrictive covenants and plan accordingly.

We do not yet have a plethora of case law shedding light on how courts may treat the enforcement of restrictive covenants in the post-COVID era. But the practical realities and rising unemployment across the country may change how courts view the legitimate business interests to be protected by restrictive covenants and the balancing of interests when enforcing a non-compete—especially in the situation of mass layoffs if a large number of affected employees who are put out of work and looking for subsequent employment are restricted by these covenants.

We anticipate that courts will be more receptive to enforcement of non-solicitation provisions (of customers and employees) than strict non-compete provisions (which prohibit working for a competitor altogether). There are, however, certain industries and certain job classifications that warrant a broader non-compete.

Carefully consider whether to continue using a non-compete clause, and whether your agreement communicates—to the employee who signs the agreement, to the court or to anyone who picks up the agreement—why such an agreement is necessary to protect your legitimate business interests.

5.  Evaluate all the circumstances before deciding whether to pursue enforcement of a restrictive covenant.

Whether due to decreased budgets, other practical concerns or the potential change in the way courts approach non-competes in this current climate, employers would be wise to do a deeper analysis before pursuing an injunction or other legal remedy to enforce a restrictive covenant under current circumstances and the period immediately following COVID-19.

Additionally, access to the courts for immediate injunctive relief has become complicated by the partial closure of courts around the country. A backlog of cases and hearings is now resulting, meaning that an employer may have to wait weeks or months to get in front of a judge on a non-compete enforcement action. But that does not mean that employers need to throw in the towel on enforcement. Mediation or arbitration could be proposed to the departing employee in the event of a dispute, in lieu of litigation.

In many instances, both the employer seeking to enforce the agreement and the employee seeking to evade the agreement have a mutual desire to find a speedy, cost-efficient resolution. That can often be achieved in arbitration. However, absent an arbitration provision in the restrictive covenant, the employer and employee have to mutually agree to submit the dispute to arbitration.

6.  Watch out for additional legislative action on noncompetes.

Recent years have seen a crusade by legislators, at both the state and national levels, against non-competes. Those who see themselves as protective of workers’ interests may see COVID-19 as an additional reason—and ammunition—to further restrict these agreements.

Be prepared for the possibility of these changes by strengthening confidentiality/trade secret protection agreements, which have generally not been the target of these legislative initiatives.

7.  Tighten up confidentiality/trade secret agreements.

Remote work has increased ten-fold since the COVID-19 pandemic began. Remote work increases the risk that confidential and trade secret company information ends up on an employee’s personal devices, in hard copy at an employee’s home or in some other non-secure place.

Employers should tighten up confidentiality and trade secret policies, remote work policies, electronic security measures, email monitoring, labeling of electronic documents as “confidential,” employee training on confidentiality and procedures for ensuring all confidential and trade secret information has been returned when an employee leaves the company.

If you have questions about best practices for enforcing non-competes, revising your current non-competes or hiring an employee with a non-compete with his/her former employer, contact your Fredrikson & Byron Employment & Labor attorney.


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