Top Four Considerations for Employers Seeking to Enforce Restrictive Covenants During a Global Pandemic

The global coronavirus pandemic has had a multitude of effects on how employers conduct business and manage their workforces. But as employees start to return to work, employers must be mindful of how to address those who leave and potentially violate their noncompetition agreements. As we settle into the “new normal,” the Restrictive Covenant team with Faegre Drinker’s Labor & Employment group has identified four considerations for employers seeking to enforce restrictive covenants and protect trade secrets.

Review Existing Confidential Information Policies and Non-Compete Agreements

Remote work arrangements have become common in response to state mandates and public health recommendations. As a result, the lines between home and work life have blurred, creating an easy opportunity for employee theft, misappropriation and misuse of trade secrets and confidential information.

For example, employees working on their own devices or in less-secure environments may not feel as concerned about being caught transferring sensitive documents to their personal systems. Or sensitive and confidential information that previously would have been conveyed in a controlled manner via in-person meetings or secure systems at the workplace may be available to surreptitiously take a screenshot or record. In short, employees have more autonomy lately than may have been the case a few months ago, which could present greater potential for mischief.

Employers should take stock of their security measures, bring-your-own-device policies and confidentiality agreements to ensure that they cover these situations. Further, assuming those documents are in order, it is advisable to remind employees of their obligations to maintain the confidentiality of proprietary information and the consequences for breach.

Similarly, employers should consider reviewing their existing noncompetition agreements in light of changing business models. Employers should consider how the language of their non-competes correlates to the new direction of the business. Most jurisdictions that permit non-competes require that they are tailored narrowly to address the legitimate business interests of the company. Such business interests may have changed as the pandemic progressed, implicating the enforceability of restrictive covenants. A well-drafted non-compete will be narrowly tailored enough to survive scrutiny, but have language that will provide flexibility for a company to evolve over time.

Understand the Enforceability of Non-Competes in the Context of Reduced Hours and Furloughed Employees

The pandemic has led to skyrocketing unemployment. As employers consider what a reduced workforce looks like for their business needs – whether an across-the-board reduction in pay, a temporary furlough or a more permanent layoff – they should consider how the alternatives may affect their non-compete agreements. Employers should be mindful that, depending on the jurisdiction and the initial consideration for such contractual restrictions, changes in an employee’s role may threaten the enforceability of such agreements.

For example, in one recent case in the District of Massachusetts, a court held that an employee was no longer bound by his non-compete agreement because his compensation and job responsibilities had been reduced in the period between signature and enforcement. The court joined others in holding that a material adverse change may render a restrictive covenant unenforceable. Changes in an employee’s work arrangements due to the pandemic may implicate this issue.

Moreover, depending on the jurisdiction, contractual obligations may prove unenforceable if the employee is laid off, or if the employment relationship is terminated through no fault of the employee. Either by legislation or court rulings, in a minority of states (for example, Massachusetts and Washington) involuntary termination without cause or in the context of a reduction in force precludes enforcement of a non-compete, absent additional consideration.

Thus, employers should consider carefully how the jurisdictions in which they operate handle changes in employment when addressing the enforceability of non-competes. This issue (among others) should be considered carefully when determining how to implement a downsizing, for which employees and in which locations.

Consider the Current Climate in Forming Enforcement Strategies

Those employers who can enforce their restrictive covenants might nonetheless consider whether they should. In certain jurisdictions, public policy is a factor as to whether a non-compete will be enforced against an employee. As unemployment reaches historic figures, a court may be wary of placing additional restrictions on employee mobility. And a jury, almost by nature unpredictable, might be influenced by these external factors as well.

Additionally, from a practical and logistical perspective, many courts are operating on skeleton staff and have limited their dockets accordingly. Courts presented with “emergency” motions may be skeptical. Although not a non-compete case, a recent case in the Northern District of Illinois federal court is illustrative. In Art Ask Agency v. The Individuals Corporations, Limited Liability Companies, Partnerships and Unincorporated Associations Identified on Schedule A hereto, No. 1:20-cv-1666 (N.D. Ill. March 9, 2020), the plaintiff sought an emergency order for copyright protection. The Court was blunt in determining that the issue was not a “genuine emergency” and that the “world is facing a real emergency. Plaintiff is not.” – assertions picked up by media outlets nationwide.

To be sure, there are issues that require immediate attention. Since the pandemic began, courts have granted preliminary injunctions and temporary relief in the context of departed employees working for competitors. See e.g., Upserve, Inc. v. Hoffman, C.A. 1:19-CV-00593-MSM-LDA (D.R.I. Apr. 28, 2020); Office Depot, Inc. v. Babb, No. 20-cv-80407 (S.D. Fla. Mar. 19, 2020). Employers may wish to balance these concerns against the environment and the “optics” that aggressive action may implicate.

Be Mindful that Government Watchdogs Are Still at Work

While some government agencies have reduced staff or shifted resources toward addressing the COVID-19 pandemic, the Antitrust Division of the Department of Justice and the Federal Trade Commission’s Bureau of Competition are continuing their mission. In April, the agencies issued a joint statement noting that they will continue to investigate and use their civil enforcement authority to challenge unilateral anticompetitive conduct in labor markets, including wage-fixing and anti-poaching agreements.

In recent years, governmental actions challenging anti-poaching agreements and the use of non-compete agreements against low-wage workers or employees of franchises have made headlines. The Federal Trade Commission has recently challenged non-compete restrictions in the context of the sale of a business, which is typically more broadly enforced. Employers therefore should not assume that the enforcement mechanisms of government agencies are asleep at the switch.

As always, employers that are considering implementing restrictive covenants, and those who have not revisited the language in existing agreements for some time, should be cognizant of how these agreements would hold up under government scrutiny.