September 15, 2020 Articles

How to Enforce Non-Competes and Protect Competitive Intelligence During COVID-19

Must-have tips for protecting confidential information

By Maria Kreiter, Nina Beck, and Zach Willenbrink

As a direct result of the 2019 novel coronavirus (COVID-19) pandemic, employers nationwide have had to make the excruciating decision to terminate, furlough, or lay off employees, some of whom may be subject to a non-compete agreement. These layoffs are often a business decision based on the economic crisis rather than the employee’s performance. Enforcement of non-compete agreements against laid-off or terminated employees can be difficult in any environment, but in the current climate of mass layoffs and high unemployment, employers may face an even steeper climb.  

In addition, the temptation for employees to misappropriate confidential information and trade secrets may also be at an all-time high. The economic downturn means employees may have a greater incentive to misappropriate competitive data the employee believes will be valuable at a future job. Meanwhile, employee loyalty and morale may be in short supply due to anticipated pay cuts or layoffs. Combined, these conditions create a perfect storm of risk for employers that need to take extra care to protect their competitive intelligence.

Enforcing Non-Compete Agreements in the COVID-19 Environment

Before seeking to enforce a non-compete in the current environment and, preferably, before deciding to terminate or lay off an employee subject to such an agreement, employers should consider the following:

First, is your organization’s non-compete enforceable under state law?

States apply different, often very stringent, tests for determining whether a non-compete agreement is enforceable. For instance, under Wisconsin law, courts are to construe restrictive covenants liberally in favor of the employee, and a non-compete must

  1. be necessary for the protection of the employer,
  2. provide a reasonable time restriction,
  3. provide a reasonable territorial limit,
  4. not be harsh or oppressive to the employee, and
  5. not be contrary to public policy.

In a period of economic crisis and layoffs, courts may be apt to apply already employee-favorable rules of construction in a manner that favors unenforceability. During the pandemic, or in normal times, enforceability is a threshold issue that must be analyzed before threatening or pursuing a claim against the employee.

Second, is a non-compete enforceable against laid-off or terminated employees?

Depending on the state, even if your non-compete is generally enforceable under state law, it may not be enforceable against an employee who was laid off or terminated. Some states do not allow employers to enforce non-competes against employees who were laid off or terminated without cause. In other states, the nature of, or circumstances surrounding, the termination is just one non-dispositive factor in the enforceability analysis.

Third, have you demanded compliance?

If you are concerned that a departing employee will breach or has breached his or her non-compete, you should send a written demand that the employee honor his or her agreement as a preliminary matter. Even if a demand for compliance is ignored, the court will want to know that you attempted resolution and made efforts to enforce your rights before filing suit.

Fourth, can you avoid litigation by meeting the terminated employee halfway?

In recognition of these unprecedented times, you may wish to work with the terminated employee and his or her new employer to implement necessary and reasonable limitations that allow the employee to keep his or her new job and avoid the need for court intervention.

Whether or not you are even willing to consider such an agreement hinges first and foremost on whether you can live with partial enforcement of a non-compete for any given former employee. In addition, if a compromise can be reached, make clear you are not waiving the right to enforce the restrictive covenants to other employees—lest other departed employees later claim waiver based on a fact-specific, COVID-19 accommodation.

Last, are you likely to obtain injunctive relief?

Assuming your non-compete is enforceable and you need to pursue an enforcement action, consider how swiftly you need to act to protect your business’s interests. If harm caused by the breach of a non-compete will be “irreparable”—i.e., a harm for which delayed relief will be futile, such as when sensitive information is at risk of disclosure—you may want to seek an injunction at the outset to prevent the departed employee’s new employment. However, courts weigh irreparable harm to the employer against hardship to the employee when addressing requests for injunctive relief.

During the COVID-19 pandemic, expect that employees will argue particularly acute hardship due to job scarcity, even in the face of an enforceable non-compete. This same argument should be expected even where the employer does not seek emergency relief but nevertheless pursues its former employee for damages resulting from the breach of a non-compete. The current pandemic clearly bears on the likelihood of success and ultimately may be dispositive, whereas the same case would be won by the employer in different times.

Even in this environment, though, employers should not hesitate to seek enforcement where there is tangible evidence of misappropriation or other harm, such as prohibited solicitation of customers or an employee departure that involves the taking of sensitive data. That evidence will greatly enhance the possibility of achieving injunctive relief, as courts should, in any environment, seek to deter harmful contractual violations and intentional wrongdoing.

Protecting Confidential Information and Trade Secrets

Protecting competitive intelligence is also key at this time. A few simple steps can help prevent or, in the worst case, limit the fallout from a departing employee’s theft. If you have valuable competitive intelligence and are planning terminations or layoffs, plan in advance as follows:

First, obtain control over sensitive data.

In the lead-up to an employee’s layoff or termination, obtain any necessary credentials to log in to accounts that the employee controlled. For example, if the employee ran your cloud-based client management software, ensure you also have access to the platform, including any data logged by the employee. As soon as the departure is effective, restrict the employee’s access to all data. Typically, the quickest and most effective way to do this is to have an information technology (IT) administrator take control of the employee’s accounts.

Second, demand the return of confidential information and trade secrets.

Issue a written demand to the departing employee to return all employer-issued property, including confidential information and trade secrets, and remind the departing employee that he or she cannot retain or use any copies. If such obligations are already included in the restrictive covenant agreement, or if “confidential” and “trade secret” information is defined in the restrictive covenant agreement, specifically reference those provisions in the demand.

Third, investigate suspicious behavior.

If you suspect a departing employee of wrongdoing, consider examining the departing employee’s predeparture activities. This can be accomplished with the assistance of your IT team or, alternatively, with the assistance of an outside vendor specializing in e-forensic investigation. Look for any abnormal or suspicious behavior, such as the copying of files, use of a personal jump drive, or even simply unusual access of sensitive files.

Fourth, implement an immediate hold on the departing employee’s tech.

If there is suspicion or evidence of theft, all the devices used by the employee should be kept as is, and not repurposed or reassigned to another employee. Preservation is necessary because any deletions, wiping, or further use of the devices will impede e-forensic analysis (which is often required in litigation).

Last, take action.

If you discover theft, take action. At a minimum, make a written demand for the return of your stolen data and consider putting the employee’s new employer on notice of the theft. Courts remain open and most do not take kindly to data theft, even in the COVID-19 environment. While you may be able to recover information through informal self-help, it is critically important that you swiftly act to shut down known theft, including involving the courts when necessary.

Maria Kreiter is a shareholder, and Nina Beck and Zach Willenbrink are associates, with Godfrey & Kahn, S.C., in Milwaukee, Wisconsin.

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).