Third Circuit Rejects Employer’s Attempt to Block Executive’s Move to Rival Despite Non-Compete Agreement

As we have written about previously, an increasing number of states, and Washington, D.C., have limited the circumstances under which employers can bind their employees to non-compete and similar agreements, particularly when low-wage workers (however defined) are involved. The courts, however, are not immune to the trend, as evidenced by the April 21, 2022 decision from the U.S. Third Circuit Court of Appeals, ADP, Inc. v. Levin. In that case, the Third Circuit affirmed a district court’s denial of a preliminary injunction against a senior executive who had resigned from his Chief Strategy Officer position at his prior employer, ADP, to take over the Chief Executive Officer position at rival Benefitfocus.

ADP tried to obtain an injunction from the district court and, after being denied relief there, appealed to the Third Circuit. Although the Third Circuit agreed with ADP that the lower court had made errors in reaching its decision, the appellate court ultimately upheld the decision on different grounds. The court noted that a preliminary injunction is an “extraordinary remedy” and held that the plaintiff’s ability to demonstrate “irreparable harm” was a “gateway factor[] that a plaintiff must establish before a court may proceed with balancing the remaining factors.” The Third Circuit then went on to find that ADP had “offer[ed] only conclusory allegations that it may lose clients, goodwill, or referral business as a result of Levin’s move to Benefitfocus… [and] therefore failed to demonstrate that the risk of future harm was anything other than speculative.”

Although the decision is non-precedential, it is another signal that non-compete agreements are becoming more and more challenging to enforce. In days past, a fact pattern that included (1) a senior executive, (2) who had signed a non-compete agreement with a relatively short (12-month) post-separation tail, and (3) then left his employer to go to a competitor – as its CEO no less – would have presented an encouraging (to say the least) fact pattern for enforcement. Here, however, both the trial and appellate court rejected plaintiff’s arguments under different theories.

Given this case, and the trends generally – which include ongoing activity at the Federal Trade Commission in response to a President Biden Executive Order – employers would be well-advised to carefully consider their strategies for enforcement. On the front end, that includes ensuring that the restrictions are enforceable under applicable state law and are no broader than necessary to meet their need. On the back (or enforcement) end, employers should do what they can to make the case that the irreparable harm caused is real and ongoing, providing details and examples whenever possible. Seemingly gone are the days when an employer could rely on the existence of a non-compete agreement and general facts and circumstances that in years past would have allowed a court to presume the existence of irreparable harm. Employers should also be aware that more and more departing employees (even senior ones), and their new employers, are likely to test the enforceability of these types of agreements, feeling their odds are better now than perhaps ever before.