It’s Quite Possible COVID-19 Will Impact the Enforceability of a Non-Compete.
The law surrounding non-competition agreements (non-competes, non-solicits, also called restrictive covenants) is well established in most states. These agreements typically seek to protect customer relationships, revenue and trade secrets. The current pandemic is relevant to whether the coronavirus, or COVID-19, can get you out of your agreement because the legal analysis of these agreements is always fact intensive. Typically, the facts focus on when you entered into the agreement (e.g., was it when you accepted the position or was it three weeks after you started working); whether the company that employs you “overreached,” by seeking too much protection from the non-compete; or whether it takes away the employee’s ability to earn a living. With the pandemic, and the unemployment rate in the mid to high teens, there is a strong economic and socioeconomic undercurrent to get people back to work. These agreements keep people from working.
Some Cases are Emerging That At Least Mention COVID-19 Arguments.
In the past few months we’ve seen a handful of cases that have considered COVID-19 in deciding whether to enforce, at the outset of the case, a non-competition or non-solicitation agreement.
Just last month, a federal court in Pennsylvania (the Defend Trade Secrets Act conferred federal jurisdiction), not only denied a sporting goods retailer’s request for a temporary injunction, the court said it didn’t even need to hold a hearing. The Court also denied the plaintiff’s request for expedited discovery to obtain evidence to help its case.
Like most companies, this retailer laid off a bunch of its staff due to the pandemic. The companies’ employees, including a long-time, senior sales representative, signed agreements that said if the company let them go without “just cause” (which loosely means you did something really bad), they were free to compete and solicit as if the agreements didn’t exist.
This senior sales representative, shortly after being laid off due to COVID-19 (the employer’s stated reason on the unemployment pink slip), found a job with a screen printing and embroidery company. After his former employer found out he had joined that company, it sent him a termination letter, contradicting its statement that it had laid him off due to COVID-19. The sales representative had begun soliciting his former employer’s employees and customers, and encouraged other laid-off employees to come work with him and do the same.
The Court said he had done nothing wrong, because his employer voided the agreement when it laid him off due to COVID-19 and the pandemic, which was not “just cause.”
In another federal case in Florida, the parties argued that COVID-19 was one of the factors the court should consider in determining whether to enforce a restrictive covenant contained in a franchise agreement. The case involved two companies in the food delivery business. One was a large company, Delivery.com, that sued to force a much smaller business to on-board to its franchise program. The smaller business had entered into a franchise agreement, but never actually became a Delivery.com franchisee, allegedly because Delivery.com dragged its feet in completing the process.
The Court refused to give Delivery.com an injunction because it didn’t establish a legitimate business interest or irreparable harm under Florida law. The defendant, seeking to avoid an injunction and keep delivering food on its own, argued that the public interest would be harmed because COVID-19 would put restaurants out of business if it couldn’t make local deliveries. The Court noted that Delivery.com had never even delivered one meal in the area where the smaller delivery company had operated for years. The smaller delivery company argued that residents would risk being infected because they would travel to get their own food if it wasn’t allowed to continue its operations without becoming a Delivery.com franchise. The court wasn’t convinced that food delivery was enough of a public interest, even during a pandemic. It’s possible that the court just didn’t want to hang its hat on the public interest issue, but a Florida statute, (check it out here) required it to at least consider “the public health, safety, and welfare” issue.
What If You Have a Non-Compete, But You Quit Your Job Because Your Employer Refuses to Follow PPE Practices?
I have not seen a case yet – which I would’ve expected – where an employee subject to a non-competition or non-solicitation agreement leaves his job because the employer refuses to comply with PPE guidelines or laws, such as executive orders (here is a collection of orders by state), governing employee safety. OSHA for example, has guidelines for workplace safety that address worker safety during the pandemic. You can read those here.
What if the employer doesn’t enforce PPE requirements? And what if the employee asks her employer to comply because she feels unsafe? Maybe she has a CDC-listed health condition that puts her at higher risk of infection. So, the employee leaves to work for a company that clearly violates her restrictive covenant, but that follows PPE requirements.
In that scenario, I think that employee may have a good argument that she shouldn’t be subject to the non-competition or non-solicitation agreement. It may be an “unclean hands” argument. Or it may be the argument (relevant under any analysis) that the employee should be entitled to earn a living, and earn that living safely. If she cannot, because her employer was breaking the law, maybe she has an excuse for not complying with the non-competition agreement.
Ultimately, this pandemic has impacted all areas of employment. And just in three months we’ve seen decisions addressing arguments involving COVID-19.
I think we’re bound to see more.