Part 26 of “The Restricting Covenant” Series: COVID-19 Edition

The global COVID-19 pandemic continues to impact employers and their employees’ work activities in a variety of ways.  Millions of workers have been terminated, laid off or furloughed.  Companies have shifted to remote workforces either partially or completely.  Courts around the country continue to grapple with suspended or stayed proceedings.  This pandemic is presenting some unique challenges and complications to many areas of the law, including restrictive covenant law, as discussed in this COVID-19-themed edition of The Restricting Covenant Series.

Will remote workforces subject to COVID-19 travel restrictions present challenges to enforcement?

Most non-compete and non-solicit agreements have some type of geographic limitation.  The limitation might be defined as a specific territory (e.g., within a county, city or state), or a measurement from a specific location (e.g., within 10 miles of the company’s headquarters).  In fact, many state laws require a non-compete agreement to contain reasonable geographic restrictions.  While working remotely is certainly nothing new, the sheer scale at which many companies have moved their workforces to “work from home,” particularly those who traditionally would not have worked remotely but for the COVID-19 pandemic, will pose some challenges for employers as they seek to enforce boilerplate geographic non-compete and non-solicit restrictions.

Consider the following scenario, which I believe will present itself much more frequently during the COVID-19 pandemic as employers continue to adhere to remote-work and no-travel policies:  An employee has non-compete restriction within a 10-mile radius from her former employer’s headquarters.  She resigns and joins a competitor with offices located outside the 10-mile restriction, but the employee’s home (and home office) is located within the restricted area.  Because of COVID-19 travel restrictions, the employee works from home, including logging on to her new employer’s servers (physically located outside the restricted area) and making calls and attending video-conferences with her new colleagues (who are located inside and outside of the restricted area).  Is the employee violating her non-compete?  Would a court bar the employee from working from her home office?

Just prior to COVID-19, we had a similar situation where an employee had joined a competitor and periodically worked from his home office within the restricted area, but argued that when he worked from home he only worked with clients located outside of the restricted area.  The court did not make a definitive ruling on whether this was a breach but noted, arguendo, that if the court were to find the employee only worked on business outside of the restricted area while working from his home, it “could hardly find that he was soliciting customers within” the restricted area.  Would a mandatory quarantine or travel restriction have tipped the scale in the employee’s favor?  Courts sometimes look for ways to limit the impact of certain restrictions and to try to strike a balance between protecting an employer’s legitimate business interests and allowing gainful employment.  Because some courts can construe ambiguities in agreements against the drafter, employers should review their restrictive covenant agreements to see whether they address remote work situations, and if not, whether to include specific language covering these types of situations.

Will the balancing of harms be viewed differently during the COVID-19 pandemic?

Generally, in a restrictive covenant case when a judge decides whether to impose injunctive or equitable restraints on a former employee’s ability to engage in certain business activity, the court conducts a “balancing of the harms” analysis.  This analysis involves weighing (1) the harm the party seeking the injunction (usually the former employer) is likely to suffer if the injunction is not issued against (2) the harm or hardship to the non-moving party (usually the former employee) if the injunction were granted and the former employee is barred from gainful employment or from engaging in other business activities.

This analysis also considers the “interests of the public.”  The private and public interest factors that courts consider in this analysis vary considerably depending on the industry, job type and skill level of the employee, and the circumstances surrounding the employee’s termination.  For example, in a physician non-compete case, the court might consider whether there is a shortage or surplus of physicians in a particular field as one factor weighing for or against issuing an injunction.  Other courts often consider the reason for an employee’s separation of employment in balancing the hardships.  If an employee voluntarily leaves and joins a competitor, for example, many courts will find that this voluntary decision will not support the employee’s hardship arguments (often noting the self-inflicted cause of the hardship).  On the other hand, if the employee is involuntarily terminated without cause, some jurisdictions, such as New York, might find that the involuntary nature of the termination favors the employee’s hardship arguments.  How will the current COVID-19 pandemic impact a court’s balancing of the harms analysis?

Since the onset of COVID-19 in March 2020, some courts have engaged in the balancing of harms analysis without regard to any new or additional hardships or complications brought on by the pandemic.  For example, on July 9, 2020, a federal judge in the Central District of Illinois temporarily enjoined a former employee from soliciting clients and employees, but reserved decision on whether to prohibit him from working for a competitor altogether until after an evidentiary hearing, noting that enforcement of the non-compete could jeopardize his H-1B status, which the judge found posed a greater harm to him than the potential harm to the former employer.  COVID-19 was not mentioned in that decision even though it was decided in the midst of the pandemic.

At the same time, however, references to COVID-19 are starting to creep into restrictive covenant cases in connection with the balancing of the harms analysis.

  • A federal judge in a restrictive covenant dispute in the Southern District of Indiana, for example, recently took “judicial notice of the broad scale economic disruptions caused by the COVID-19 pandemic that cast doubt on [the former employee’s] employment prospects, as it does for the vast majority of Americans during these challenging times.”
  • On June 15, 2020, a federal judge in the Eastern District of Pennsylvania, while conducting a balancing of the harms analysis, noted the high unemployment rate brought on by the COVID-19 pandemic and the reduced likelihood of finding employment under these conditions.
  • On June 19, 2020, a federal judge in the Southern District of Florida (currently a hotbed of COVID-19 cases) denied a preliminary injunction application against a former employee after holding an evidentiary hearing through Zoom. The defendant, who operated a food delivery business, argued the public interest, in the midst of the COVID-19 pandemic, would be harmed by a preliminary injunction against him.  Specifically, he argued many restaurants would shut down since they relied exclusively on his delivery service, and that forcing him to onboard with a new platform would cause his customers to leave their homes to pick up food from these restaurants or to dine in, contrary to the best interests of the public health, safety and welfare.  Ultimately, the court found the defendant’s COVID-19-related hardship arguments were “unduly speculative” theories unsupported by evidence (such as testimony from a customer about not wanting to switch platforms) and denied the injunction on other more conventional grounds (no evidence of wrongdoing).

These types of novel COVID-19-related hardship arguments surely will continue to pop up as the pandemic persists.  When they do, courts should require verifiable “evidence,” not just speculation or conjecture, if they are to be included in the balancing of the harms analysis.

Are there other COVID-19-related issues related to enforcement employers should  consider?

First, a quick shout-out to my Labor and Employment colleagues’ recent article, “Top Four Considerations for Employers Seeking to Enforce Restrictive Covenants During a Global Pandemic.” Their article discusses four issues for employers to consider when seeking to enforce restrictive covenants and protect trade secrets:

  • Reviewing existing confidential information policies and non-compete agreements
  • Understanding the enforceability of non-competes in the context of reduced hours and furloughed employees
  • Considering the current climate in forming enforcement strategies
  • Being mindful that government watchdogs are still at work.

There is one more restrictive covenant enforcement scenario worth mentioning here – whether to ask furloughed or laid-off employees who are brought back to work to sign a new restrictive covenant agreement or to “reaffirm” in writing their prior restrictive covenant agreement.

Some states such as Massachusetts and Washington have laws that specifically state that a non-competition agreement will not be enforceable against employees whose employment is terminated without cause.  Some states might require additional consideration upon return to work, depending on the state and the circumstances of the departure and return.  In other jurisdictions, individual judges might find that the equities favor employee mobility where the employer did not take all possible steps to document their intent, and the employee’s understanding of that intent, to enforce restrictive covenants upon returning to work.  Even if the agreement is not voided, a court may determine that the non-compete period began to expire upon the COVID-19 furlough or lay-off.

The bottom-line: Do not assume that a restrictive covenant agreement will remain in effect and enforceable if an employee is laid off or furloughed and rehired during the pandemic.

*          *          *

The goal of The Restricting Covenant Series is to provide a concise overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different, including the governing state law.  If legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Be well and stay safe during this COVID-19 pandemic.

 

*The author extends a special thanks to summer associates Franziska Mangot and Adelhajda Sejdinovic for their research assistance during the COVID-19 pandemic.