Are Noncompetes Enforceable During the COVID-19 Pandemic?

As the coronavirus crisis continues and employers make difficult decisions about laying off or furloughing workers, they may want to review their noncompete agreements and decide if it still makes business sense to enforce them.

Employers generally use noncompetes to discourage employees from taking valuable trade-secret information to competitors. "Plenty of employers are continuing to enforce noncompetes and other restrictive covenants," observed Eric Tate, an attorney with Morrison & Foerster in San Francisco. "In some respects, given the prevalence of work-from-home arrangements, employers could argue that concerns about protecting information are greater."

Employers should note, however, that all employment laws have a societal component, he said, and judge's decisions are affected by what's going on in people's day-to-day lives.

"The optics that are always in play will be viewed in light of the current situation," noted Paulo McKeeby, an attorney with Reed Smith in Dallas and Houston. "Judges are going to be very reluctant to keep people out of work in this environment, particularly if they are out of work due to a layoff or furlough."

Here are some points about noncompete enforceability that employers should keep in mind.

State Laws Vary

Employers should note that noncompetes and other restrictive covenants, such as confidentiality and nondisclosure agreements, are governed by state law and court decisions.

So how enforceable are noncompetes if employees have been laid off or furloughed? "Different states handle them in different ways," explained Damian Cavaleri, an attorney with Hoguet Newman Regal & Kenney in New York City.

In Massachusetts, for example, noncompetes are unenforceable against nonexempt workers and employees who are fired without cause.

In California, noncompetes are altogether banned except for in a few limited circumstances. 

In Illinois, noncompetes for lower-wage workers are void, but white-collar professionals may be subject to such agreements.

In Washington, a laid-off employee must be compensated during the noncompete period. "Even when the statute doesn't expressly state it," Tate said, "employers should remember that judges are human, too, and they may be more likely to enforce the agreement if the employee is receiving compensation."

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Lauri Kavulich, an attorney with Clark Hill in Philadelphia, noted that more states are enacting laws that limit restrictive covenants.

In the last two years, a number of states have enacted laws affecting restrictive covenants and more states may follow suit. "What might have been the law in 2018 may not be the law in 2020," Kavulich said.

Even if a company operates nationwide, she noted, the employer must craft a state-specific restrictive covenant agreement in accordance with state laws. "Further, the length of time of the restrictive covenant, geographic area and definition of the industry must be reasonable for the covenant to be enforceable."

McKeeby mentioned that historic rules regarding the reasonableness of an agreement's geographic scope may not fit the current work-from-home arrangements that many businesses have adopted due to the COVID-19 pandemic.

Balancing Act

Many state laws allow employers to use restrictive covenants if they have a legitimate business interest that needs to be protected—such as trade secrets or customer lists—and the agreement is narrowly tailored to protect that interest.

Noncompetes are generally still enforceable, but employers need to be cognizant of how COVID-19 has changed things, Cavaleri said. "Employers need to ensure they have a legitimate business interest they are trying to protect."

Businesses may have a greater need to control proprietary information and prevent its misuse during the pandemic, he noted, because employers may have less oversight when employees are working from home. But employers need to be careful not to prevent former employees from finding work during an economic downturn.

"Focus on trying to negotiate with employees to find a resolution that works for all parties rather than rushing to the courthouse," Cavaleri suggested.

In a noncompete lawsuit, the enforcing company will typically file a preliminary injunction to prevent the employee from working for a competitor. A judge will weigh the potential harm to the parties and consider whether granting the preliminary injunction is in the public interest.

"If an employee is laid off, most likely the court will find that the public interest favors the employee being able to work, even if it is in the same line of business," Kavulich explained.

For instance, a federal judge in Pennsylvania recently rejected an employer's argument that employees on an open-ended furlough during the pandemic are still employees, even if the employer is paying for their health care. The judge also found that the employees would suffer greater harm if the preliminary injunction was granted than the company would suffer if it was not.

"The judge cited the unemployment statistics and found that the company's decision to lay off workers—and the fact that if the injunction was granted they would be forced out of work when the country is facing the highest unemployment rates in more than seven decades—weighed against the public interest," Kavulich noted.

Practical Tips

Employers should carefully draft and review their noncompetes for compliance with state law and recent court decisions.

Make sure there is adequate consideration for the contract, Kavulich said. "The employer must ensure the agreement is either presented at the time of initial employment or that something of value is given in exchange for the agreement."

Tate said employers should consider which roles in the organization might merit a noncompete. "There's a trend against enforcement with low-wage earners," he noted. "Don't try to be overreaching," he warned. The agreement should be narrowly tailored, because employers can't always count on a judge to "blue pencil" or remove only the unenforceable parts of an agreement.