COVID 19: Impact on Non-Compete Litigation

For the past 30+ years, many companies in America have abused non-compete agreements. A non-compete agreement in connection with the sale of a business is perfectly reasonable and serves a legitimate business purpose. But employee non-compete agreements? Most such agreements have a clear and unlawful goal: eliminate competition, restrict employee mobility, and suppress wages. In the midst of the current COVID19 crisis, the situation has reached a breaking point.

The following are my observations regarding how the COVID19 crisis will (and should) impact non-compete litigation.

Discretionary (Frivolous) Non-Compete Lawsuits

Anyone objective observer recognizes that many non-compete lawsuits we hear about are frivolous. Corporate lawyers have been incredibly successful at portraying non-compete enforcement as a business necessity. The argument goes like this:

If we don’t enforce every non-compete agreement, then all of our employees will leave. They will raid the business. They will steal all of the company’s clients and remaining workers. Then you will go bankrupt. You must use incredibly restrictive agreements and enforce them aggressively. You need these agreements to survive.

Many companies fall prey to this trap. All it takes is a general counsel who is (a) a generalist or primarily transactional lawyer; (b) does not have specialized experience in non-compete litigation; and (c) is afraid of making a business-side mistake. They buy it.

Another factor at play: A certain type of corporate leadership is particularly susceptible to this pitch. The hothead. The megalomaniac. The CEO or owner who says: “I made you what you are! I taught you the business! Now you’re going to compete against me? How dare you! I own you!”. You would be surprised how many non-compete cases are nothing more than grudge matches and personal vendettas. Spending $300,000+ to pursue a personal vendetta is a bad business decision. But it happens all the time.

As for the corporate lawyers selling this theory, their motivation is obvious: Non-compete enforcement is a massive revenue stream for big law firms, especially in certain states (e.g. Florida, Texas, etc.).

But the reality is quite different: Any company that cannot survive without employee non-compete agreements should not be in business. It’s really that simple. And although corporate lawyers tout the benefits of non-compete agreements and non-compete enforcement, the reality is quite different. For the moment, let’s put aside questions of enforceability or legality. Instead, consider the actual impact to the business. In the vast majority of non-compete cases, the cost of the litigation and the disruption to the company’s business far outweigh any threatened harm (e.g. breach of the non-compete). But most corporate lawyers don’t tell their clients that— because they view non-compete litigation as a cash cow.

That’s going to change. I fully expect large companies will continue to litigate non-compete cases where there is substantial money on the line (e.g. $5 million+). Or where there are C-level executives involved. But on the flip side, I expect that many companies will revisit their non-compete enforcement paradigm in all other instances. Let me shorthand it: Spending $150,000 and disrupting client relationships to chase someone over $250,000 of possible lost revenue sounds like a terrible business decision. Companies are going to scale back non-compete enforcement efforts to instances where there is at least a plausible argument that enforcement (whether fair or not) would benefit the business in a significant and concrete fashion. Discretionary spend on frivolous non-compete cases is gone. That’s going to put some lawyers out of business.

States and Unemployment Benefits 

Millions of Americans are now seeking unemployment benefits. From a policy standpoint, it is absurd that certain states would rather pay someone unemployment than overturn a non-compete agreement so that person can go back to work. But certain states practically worship non-compete agreements. This is where state-by-state differences become critically important.

Let’s take New York as an example. New York courts strongly disfavor employee non-compete agreements and routinely refuse to enforce them. In the current environment, I suspect New York courts will move even more in that direction (i.e. against non-compete enforcement in the employment context). I cannot imagine any New York court applying New York law and keeping someone unemployed to enforce a restrictive covenant.

Now let’s go to the other end of the spectrum: Florida. There are plenty of judges in Florida who – I believe – will be more hesitant to enforce non-compete agreements in the midst of this crisis. But I suspect there are also plenty of judges who would continue to enforce non-compete agreements like its business as usual. For the past decade, I have advocated for wholesale non-compete reform (and even a total ban on employee non-compete agreements). I still maintain that position. But at a minimum, a non-compete agreement should never be enforceable if it results in someone applying for unemployment benefits.

Balancing the Equities: Harm to the Individual 

Most states consider harm to the employee or the employee’s ability to earn a living. But in some backwards, draconian legal regimes, that does not matter. Under Florida law, for instance, state courts are prohibited from considering potential harm to the individual resulting from non-compete enforcement. Once again, that is madness. It shows you just how dysfunctional the system is.

Again, this is rare. But if someone is facing a possible non-compete lawsuit in Florida, there are a few possible options (depending on the jurisdictional facts):

  1. Remove from state court to federal court if there is diversity.
  2. Sue first in federal court if there could be diversity but removal would be impossible (e.g. company is out of state; employee is in state and therefore a forum defendant and cannot remove).
  3. Sue first in another state if possible.
  4. Demand arbitration if possible.

Remember: In federal court, the Federal Rules trump everything else on matters of procedure. And under Rule 65 (preliminary injunctions), the court must consider harm to the individual. Beyond this, courts in states that strongly disfavor employee non-compete agreements will sometimes refuse to enforce foreign law that they consider repugnant. That actually happened. A New York court called Florida non-compete law repugnant and refused to apply it.

Jonathan Pollard

Jonathan Pollard is a competition lawyer based in Fort Lauderdale. He has extensive experience litigating complex non-compete matters. He has appeared in or on the New York Times, Wall Street Journal, Bloomberg, PBS News Hour, The Guardian, Fund Fire, and more. His office can be reached at 954-332-2380.