Are Courts Actually Enforcing Non-Compete Agreements During the Pandemic?

Originally published by Leiza Dolghih.

The enforcement of non-compete agreements around the country remains strong; however, courts are looking closer at whether employees will suffer “undue hardship” if their non-competes are enforced. Thus, employers should avoid taking unreasonable positions in court and be prepared to explain why enforcing a particular non-competition agreement will not prevent an employee from earning a living.

Earlier this summer, the Eastern District Court of Pennsylvania ruled that an employer was not entitled to an injunction against a former employee who was allegedly violating his non-competition agreement, finding that the harm to the employee from the injunction would be greater than the harm to the employer if the injunction was denied.

Notably, in this case, the court found that the non-compete agreement was not enforceable because, according to its own terms, it did not apply to employees who were terminated by the company without cause. The employee in question was laid off, along with many other employees, making his non-compete unenforceable.  Even though the company argued that the employee was merely furloughed, the language in the termination letter “unambiguously” established that he was terminated.

Balancing the equities, the court emphasized that the equity tipped in the employee’s favor because he held a reasonable belief that his non-compete was not enforceable:

“Here, it was SV Sports’ decision to lay-off Snyder, without any guarantee that he would be rehired, that caused Snyder to seek outside employment. Having worked as a sales manager for a sporting goods retailer for more than thirty years, it was understandable why Snyder, who did not believe his non-compete agreement applied, would seek employment in a field in which he was knowledgeable. In light of the coronavirus pandemic and closing of non-essential businesses, employment opportunities were limited. The harm to Snyder if an injunction is granted is great as he will once again be without a job and income.”

The Court discussed the fact that, due to the stay-at-home orders, many business were still not open, severely reducing the employee’s likelihood of finding a job, especially if he was enjoined from working for a competing company, which was the area in which he had the most experience.  In contrast, the harm to the employer was much less given that it had laid the employee off.

Similarly, a couple of months ago, the Southern District Court of Texas, denied an injunction where an employer – a commercial landscaping company – sought to enforce a non-compete agreement against a former employee.  The court found that there was no evidence that the employee either violated the non-compete or planned on doing so.  When looking at the balance of hardships, the Court determined that the harm to the employee (if an injunction was granted) was much greater than the harm to the company (if the injunction was denied):

Plaintiff is a large commercial landscaping company with offices in eight states. Plaintiff is the fifth-largest landscaping firm in the nation, with over $200 million in annual revenue.  It has not been shown that Defendant’s work for Ferrovial would cause Ferrovial to win future HCFC contracts at Plaintiff’s expense. On the other hand, Defendant earns approximately $70,000 per year and supports a family of five. Defendant will lose his job and be out of work in the middle of a pandemic if an injunction is granted because the two HCFC contracts in issue are the only work Defendant’s new employer, Ferrovial, currently has in the Houston area. Defendant and his family would suffer significant hardship if he were unemployed, particularly under present circumstances. He pays for his eldest child’s college tuition, and Defendant’s wife is in need of surgery for a herniated disc in her spine.

Apparently, the employee’s attorney represented the employee pro bono, which further helped with establishing a case of undue hardship.

This fall, the Middle District Court in Florida, granted an injunction against a former sales employee of a company that manufactured and sold veterinary orthopedic devices when he went to work for a competitor. The restrictive covenant at issue prohibited employee’s employment with any competitor in the industry, in any capacity, anywhere in the world, for two years.  The court held that he company failed to present evidence that such restrictions were justified and instead entered an injunction that prohibited the employee from working in a sales position for his employer’s competitors for one year in US and Australia.

When the court analyzed the balance of harms, it looked at whether “the threatened injury to the former employer outweighed the harm an injunction might cause the employee.”  Even though the employee argued that the enforcement of the injunction would force him into unemployment in a job market made challenging by the ongoing global pandemic, the court rejected his argument and held that where an employee agrees to certain restrictions, he cannot later claim hardship in having to abide by such restrictions, where they are legally valid:

“Although the Court is concerned with [employee’s] ability to support his family during this extraordinarily difficult moment in world history, the Court has endeavored to limit the scope of the injunction in a manner which allows [employee] to continue his employment with Arthrex in some capacity. Thus, the Court finds that the balance of harms analysis weighs in favor of [the former employer].”

CONCLUSION:  While the courts are willing to consider the hardship that enforcement of a non-compete may impose on an employee amidst the pandemic and significantly dwindled job market, the cases above demonstrate that the hardship argument works only when coupled with a non-enforceable non-compete agreement and/or the absence of any wrongdoing by the employee, such as theft of confidential information from a former employer.

Thus, employers who have less than reasonable non-compete agreements or other significant issues that may cause the agreement to be unenforceable, should consider whether pursuing an injunction based on such agreements is likely to be successful and be prepared to address the balance of hardships argument.

At the same time, employees who assume that their non-compete agreements automatically become unenforceable because they have been laid off, furloughed or terminated due to COVID-10, are likely to learn a hard lesson in court, should their former employer chose to enforce their non-compete agreements.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

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