Nicole D. Galli, Law Offices of N.D. Galli LLC

Businesses have adapted quickly to subdue the spread of COVID-19 and "flatten the curve," adopting "work from home" policies and other social distancing measures. Though many businesses continue to operate, for many it is not "business as usual." Some companies have been forced to furlough and even terminate employees in order to maintain fiscal health and ensure their businesses survive. Many aspects of the "new normal" raise concerns about trade secret protection. One obvious area are the risks posed by remote work, which has led to an exponential rise in cyber threats and an increased risk for "human error" as companies and employees attempt to provide adequate protection for their company's trade secrets and other confidential information in their home settings. In addition, the increased possibility and likelihood of employee mobility—due to either the COVID-19 furloughs and terminations or concerns employees may have about their jobs being at risk even if currently still employed or perhaps having been forced to take a cut in pay—also creates increased risk to a company's trade secrets.

One tool that companies often rely upon to protect trade secrets are noncompete agreements, i.e., an agreement between an employer and an employee that for a period of time post-employment, an employee will not work for a competitor of the former employer. Generally speaking, to be enforceable these agreements have to meet a number of basic requirements— the restrictions have to be reasonable in time (limited to typically one but sometimes as many as three years), geography (usually limited to the area in which the individual was employed or in which the business operates), and scope (for example, taking a completely different job than the old one with a competitor may not merit restriction). In addition, the agreement has to further a legitimate business interest—protection of trade secrets being the most obvious, but other interests may satisfy this as well, such as protection of goodwill, customer and supplier relationships, and the investment in training that an employer made in the employee.

Beyond the basics, the enforceability of noncompete agreements varies greatly state by state, with each state having its own rules and guidelines for enforcing noncompete agreements. Three states, California, North Dakota and Oklahoma, will not enforce any noncompete agreements. Illinois, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island and Washington have banned noncompete agreements only for low-wage workers. Even among states that generally permit noncompete agreements, there are many variations that can lead to different outcomes for enforceability. For example, some states follow a "red pencil" rule, where if the provision violates state law, the entire provision is void. Other states allow for some level of modification—such as "blue pencil" or striking of the offending language—or "reformation" allowing judges to rewrite the provision to a permissible scope (which is used by a majority of the states). There is also the "purple pencil" approach, which is a hybrid of "red pencil" and reformation—the court must strike the provision unless the language of the agreement demonstrates a good faith intent to have an enforceable restriction. There are other variations state by state as well. All these variations invariably can lead to a result where an agreement with identical language could be enforceable in Nevada, but just over the border in California be completely disregarded. Or alternatively, a provision could be stricken in a "red pencil" jurisdiction but reformed in a jurisdiction like Massachusetts.

Early this year, due to concerns about the varying results and possible chilling effects on the labor market, even in jurisdictions where noncompetes are unenforceable, the Federal Trade Commission (FTC) held a hearing and sought written comments on the effect of noncompete agreements on the labor market. As was explained during the introductory remarks at the hearing, noncompetes operate at the intersection of employment, intellectual property, antitrust and consumer protection law. In essence, noncompete agreements can be (although seldom are) analyzed as a vertical restraint on trade in the labor market. Indeed, some commentators at the hearings postulated that they should be analyzed as such, or at least reviewed under various consumer protection statutes.

At the FTC hearing, commentators testified about the perceived negative impacts of noncompetes on workers, especially low-wage workers. First, some commentators pointed to data that suggests that employees universally believe noncompete agreements are enforceable by courts, regardless of the enforceability in the particular jurisdiction in which the employee was located. For example, Evan Starr, an assistant professor of management and organization at the University of Maryland Robert H. Smith School of Business referred to his research in his remarks that suggested over 40% of all respondents believed his noncompete was enforceable, even in states where that was not the case, and, further, this number increased to over 50% when only looking at respondents without a college degree. In addition, Starr indicated that his research also suggests that noncompetes are prevalent even in jurisdictions where they are unenforceable. For example, his indicated that his research shows that in nonenforcing states like California, many companies use noncompetes even though they are unenforceable and they are 25% more likely to remind employees of them in exit interviews than in other states. Why this is the case is not proven, but some contend that this occurs because companies know that, although these agreements will not be enforced by court, an employee's belief that these agreements are enforceable will create the same result as if they were.

At the hearing, Federal Trade Commissioner Rebecca Slaughter also emphasized that noncompetes are typically no longer individualized, bargained for agreements but rather they are "restrictions unilaterally imposed upon workers by their employers." Also, Jane Flanagan, a visiting scholar at the Illinois Institute of Technology Chicago-Kent College of Law, testified that in her former role as chief of the Workplace Rights Bureau of the Illinois Attorney General's Office of Illinois conducting investigations and lawsuits, she discovered noncompetes were implemented blindly across "the entire workforce with little to no differentiation for individual differences in pay, job duties, or exposure to confidential information." She noted that one childcare facility required identical noncompetes for groundkeepers, landscapers, maintenance staff, classroom workers, teachers and administration.

Orly Lobel, the Warren distinguished professor of law and director of the employment and labor law program at the University of San Diego Law School, another commentator at the hearing, also observed that there are other options besides noncompetes to protect legitimate business interests, such as trade secrets. In this regard, she noted that California is a hot bed of trade secret litigation, even though noncompetes are unenforceable there, thus creating a different kind of deterrent effect on employees moving to competitors and starting a competing venture to using a former employee's trade secrets in their new employment.

To be sure, many of these concerns are valid and should be addressed. Indeed, many states are already addressing these concerns and undoubtedly, should agreements implicated by these concerns see the light of day in court, most judges would likely find agreements of the kind criticized at the FTC hearings troubling. Whether there is truly a need for FTC or Congressional intervention— and whether that intervention will occur and what it will look like—remains to be seen (for example, a number of bills are pending in Congress that address these concerns such those banning noncompetes for low-wage or nonexempt workers, and similar bills are pending (or have been enacted) in dozens of states).

What does all of this have to do with the impact of COVID-19? In addition to the scope of the restriction and the employer's legitimate interests being protected, courts also look at the interests of the employee and the public interest. Both interests are implicated by the impact of COVID-19 on individual workers and the overall health of the economy. With so many workers being furloughed or terminated and others having concerns that their employment is in jeopardy or having experienced significant pay cuts, it is likely that at some point during or after the pandemic a segment of workers will move to new positions, many out of economic need. In the face of high unemployment, the economy overall benefits by laid-off workers being hired in new positions. When this occurs, then, companies and courts may need to grapple with some of the same kinds of issues being considered by the FTC, in addition to the general policy of whether noncompete agreements should be enforced against workers whose prior positions were negatively impacted or jeopardized by COVID-19. (Of course, in some states, such as Massachusetts, noncompete agreements cannot be enforced against workers who are laid-off or otherwise terminated other than for cause). In addition, the impact of COVID-19 (and a potential change in administration) may accelerate the likelihood FTC enforcement actions against some of the perceived abuses of noncompetes that were discussed at the hearing (as often FTC hearings such as this are a precursor to enforcement actions). And where the likelihood of FTC enforcement increases, the likelihood of increased class actions follows.

In today's climate, now more than ever employers looking to enforce noncompete agreements as well as employers hiring new workers and looking to enter into noncompete agreements with them, need to understand not only whether the agreement in question can be enforced, but whether it should be enforced. Employers also need to think carefully about whether the potential backlash (either in terms of adverse publicity or potential FTC enforcement) is worth it. If the employee has access to trade secrets or plays another pivotal role in the company such as being responsible for customer relationships, then the need to use and enforce noncompetes is likely clear. Studies show that, historically, the vast majority of trade secret misappropriation is by insiders—typically employees and former employees—and so the threat to a company's trade secrets is very real.

But, even then, employers need to be sure that they have all their ducks in a row and can meet the specific requirements for enforceability in their jurisdiction. In this regard, companies need to think carefully about the potential weight courts may give to the employee's and public's interest due to the pandemic, especially when seeking a preliminary injunction. For example, even if one is in a state where noncompetes can be enforced against furloughed workers, one could see a court wondering how important a particular employee really was to the business if he or she was furloughed? Does the employer really have a legitimate interest that needs protecting? And given how hard it is likely going to be for unemployed workers to find new positions, one can also see a court giving more weight to the employee's and public's interest in an unemployed worker finding a new position, in spite of a noncompete. There is also the practical issue of whether a court will even entertain an enforcement proceeding right now—in many states, noncompete enforcement does not rise to the level of "essential" legal matters that courts will consider—and the likelihood that cases will move very slowly once shelter in place restrictions are lifted. In short, enforcement in the time of COVID-19 is tricky, at best, impossible at worst.

Given that, a final word of practical advice of trade secret protection. If you do have workers who have access to your trade secrets and they have not been let go, make sure that you stay close with them and reassure them about both the long-term health of your business and the longevity of their positions. The last thing an employer would want in this scenario is for a valuable, key employee, perhaps one being counted on to help the company weather the pandemic, to take a new opportunity because of concerns about the viability of their current position. Even an enforceable noncompete agreement is little comfort in that situation. And if you had no choice but to furlough key workers with trade secret knowledge, remind them of their duties to your company if you have not already, stay in touch with them, and if they find new positions, work with them and their new employer if at all possible to ensure your interests are protected without having to go to court to enforce your noncompete. Too much is uncertain right now to rely on enforcement of your noncompete agreements, alone, to protect your interests.

Nicole D. Galli is the founder and managing partner of the Law Offices of N.D. Galli, a boutique law firm with offices in Philadelphia and New York that protects businesses' key strategic assets through corporate transactions and governance measures, intellectual property counseling and commercial litigation. Contact Galli at at [email protected] or 215-525-9583.

Shoshana Mahon is a 3L student at Drexel University Thomas R. Kline School of Law and a co-op intern with the firm.