How does COVID-19 impact the enforceability of non-compete agreements?  Even if enforceable, is that promise still worth enforcing? 

Typically, when an employer chooses to enforce a non-compete agreement with a former employee, that employee has voluntarily left her/his position and has gone to work for a competitor.  The novel coronavirus and COVID-19 pandemic have resulted in mass layoffs, including layoffs of some employees with non-compete agreements.  These circumstances warrant a careful look at whether and when to enforce non-compete agreements. 

A non-compete agreement, or covenant not to compete, can help protect an employer’s goodwill or other business interests after an employee leaves.  Covenants not to compete are governed by a Texas statute, Texas Business & Commerce Code §15.50 (Section 15.50).  Section 15.50 imposes a reasonableness standard in determining whether a specific restraint on an employee’s future employment, for instance, time, geographical area, or scope of activity, is enforceable.

Even though the Texas Supreme Court and Texas Legislature allow enforcement of covenants not to compete, trial courts still look unfavorably on them. This stems from the perceived unfairness of preventing an individual from earning a living, an outlook that may be influential in a court’s decision whether to enforce a non-compete agreement.  

In determining whether a non-compete is enforceable, the following factors should be considered, many of which are incorporated into Section 15.50.  

1. Is the non-compete agreement part of or ‘ancillary to’ a valid employment agreement? Since Texas is a strong employment-at-will employment state, the non-compete must be part of an otherwise valid employment agreement.   
2. Has the employer given adequate ‘consideration’ in exchange for the employee signing the non-compete agreement? The ‘consideration’ cannot be the promise of at-will employment, only. The clearest type of consideration is the inclusion in the non-compete agreement of the employer promising to give an employee confidential information or trade secrets in exchange for the employee’s promise not to compete and not to disclose the information to others.  
3. The geographic reach must be reasonable. 
4. The time frame that the non-compete agreement stays in force after termination of employment must also be reasonable. 
5. The types of activities restricted in the non-compete agreement should be of a similar nature or type that the employee engaged in while employed.   

How will courts interpret these factors when an employee, laid off due to the pandemic, seeks employment with a competitor?  Some states are considering enacting laws to prevent enforcement of non-compete agreements when an employee is laid off due to the pandemic.  Texas is not yet among them.  The Texas Legislature, which meets every other year and is out-of-session until 2021, will not even have the opportunity to consider such prohibitions until next year.   

Texas courts will look to Section 15.50 as well as the standards imposed for obtaining injunctive relief under another statute, Texas Civil Practice and Remedies Code §65.011.  To obtain injunctive relief to enforce a non-compete agreement, the employer would need to show as follows.

1. The employer has an underlying cause of action against the former employee;  
2. The employer has a probable right to recover under this cause of action; 
3. The former employee’s continued actions will cause probable, imminent and irreparable harm to the employer; and 
4. The employer has no other adequate remedy at law. 

Volumes of books could be filled discussing what types of harm courts have characterized as “imminent and irreparable.”  At the heart of many decisions, however, is an evaluation by judges of whether irreparable harm exists and whether that harm is outweighed by the harm to the former employee.  This “weighing” is subjective and fact-specific. Working for a former employer’s competitor may be an employee’s only alternative to collecting welfare or being at the mercy of others’ charity.  Combined with courts’ predisposition to dislike non-compete agreements, the economic consequences of enforcing an agreement against the employee in the COVID-19 era may weigh heavily on a court’s mind and decision.

Legal considerations aside, there is an optics problem further amplified by social media.  Employers should consider the perception that enforcement of a non-compete agreement against a laid-off employee might create with current or former employees.  Easy access to social media assures that those perceptions will be available for current and prospective customers to review, as well. 

It is always a best practice to consult with legal counsel regarding employment-related issues.  The attorneys in our Austin and Dallas offices are available to answer any questions you may have. 

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