April 30, 2020 Practice Points

Tips for Handling Non-Compete Agreements During Times of High Unemployment

In light of the unprecedented COVID-19 crisis, many employers are asking whether they can enforce non-compete agreements against employees who are laid off as a result of the pandemic.

By Erik Weibust, Jeremy Cohen, Marcus Mintz, and Jasmine Stanzick

We are monitoring the coronavirus (COVID-19) situation as it relates to law and litigation. Find more resources and articles on our COVID-19 portal. For the duration of the crisis, all coronavirus-related articles are outside the Section of Litigation paywall and available to all readers.

Since the economy began its nosedive as a result of the COVID-19 pandemic, tens of millions of employees have been laid off in the United States. Based on research estimates that suggest as many as 20 percent of U.S. employees are subject to non-compete agreements, this means that millions of employees who are subject to non-compete agreements were terminated in the last few weeks alone. These numbers undoubtedly include high-level employees who were not necessarily let go for performance reasons but rather due to business necessity. If these employees obtain new employment with an opportunistic competitor, they could pose serious threats to former employers because of their access to confidential information and customer relationships.  

Here are some steps employers can, and should, take to protect their confidential information and customer goodwill, and to preserve their rights until the crisis passes:

  1. First, employers should assess the current legal landscape for restrictive-covenants generally in the states where affected employees are located, or where their employment agreements require claims to be brought. The answer to whether an employer can enforce non-compete agreements against employees who are laid off, like many issues in this area of law, depends on the state, and in some instances how much the employee earns. For a recap of recent trends, and which states permit enforcement of non-competes against discharged employees, we encourage you to review the 2019-2020 edition of Seyfarth Shaw’s 50 State Desktop Reference.
  2. Second, prior to taking any action against a departing employee during a time of high unemployment, companies should consider the actual risk that the former employee poses by working for a competitor, potential alternatives to a lawsuit, and the public relations ramifications of filing a lawsuit during the pandemic.
    1. Consider drafting an effective cease and desist letter, reminding would-be misappropriators of the risks they face in breaching their contractual, statutory, and common law duties, and making it clear that the company is taking the issue seriously notwithstanding the current crisis.
    2. Conduct an investigation, including a forensic examination of the departing employee’s company-issued devices, e-mail, and cloud accounts, and monitor the employee’s social media activity. Note that these are good practices even when an employee leaves on good terms, and there is no reason to suspect misappropriation has occurred.
  3. Third, companies that are genuinely and immediately harmed by trade secret misappropriation and breach of restrictive covenants should still consider seeking injunctive relief, particularly if the activity is causing significant harm to their business.
    1. Whether to request an emergency injunction during the current COVID-19 crisis will largely depend on the facts of the case—the more egregious an employee’s conduct, and the more serious the threat to a company’s trade secrets, goodwill, or customer relationships, the more likely a company will feel compelled to enforce a non-compete against a laid off employee (and the more likely a court will take it seriously under the current circumstances and consider granting injunctive relief). If an emergency injunction is not appropriate, damages are always an available, if not immediate, remedy.
       

Erik Weibust, Marcus Mintz, and Jeremy Cohen are partners with Seyfarth Shaw in Boston, Chicago, and New York. Jasmine Stanzick is an associate in the firm’s Chicago office.  


Copyright © 2020, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).