Compelled to Compete

Courts and legislatures—and now the White House—are taking an increasingly dim view of noncompete employment agreements, a development the pandemic has quickened. What can employers do to protect their confidential information?

Protection for Employers Beyond Noncompetes
Ashish Mahendru

Ashish Mahendru

September 20, 2021 07:00 AM

This article was originally published in our 2022 Summer Business Edition: The Litigation Issue.

Employers beware: If the federal government gets its way, the noncompete agreement signed by the employee vital to your company’s success might be toast. President Biden recently issued an executive order tasking the Federal Trade Commission with enacting rules to limit or outright prohibit noncompetes nationwide.

Even if the feds don’t act, you might still be out of luck. Many states have passed laws curtailing such agreements in recent years, and the pandemic markedly boosted the chances that a court will not enforce yours. In light of all this, bet-the-company thinking requires employers to take proactive steps to ensure their confidential and trade-secret information is adequately protected by methods other than just noncompetes. Your company’s survival may depend on it.

Most states have similar criteria for enforcing noncompetes: The restrictions they contain must be reasonable and necessary to protect the legitimate interests of the employer. Stifling competition is not a legitimate interest; protecting confidential and trade-secret information is.

Historically, it was easy to convince courts that an employer had at least some confidential information worth protecting via a noncompete. Such information traditionally includes the identity of customers, vendors, and employees, business plans, pricing data, techniques, market research, and the ubiquitous yet ambiguous concept of “know-how.” Virtually every business—from tech giants to your local sandwich shop—has at least some proprietary information that could qualify as confidential under the law, and employers and their lawyers seize on this to enforce noncompetes against employees of all ranks.

In just the last five years, many state legislatures—no doubt responding to the perceived overuse and overenforcement of these agreements—have curtailed their enforceability through legislation. California and North Dakota have banned them altogether. Others, such as Massachusetts, have made them burdensome for employers to enforce by, among other things, requiring them to pay employees a portion of their salary for the duration of the agreement, restricting the pool of employees to which noncompetes can apply, and prohibiting enforcement when the employee is let go through no fault of his or her own. It’s a safe assumption that many other states will enact similar legislation in the coming years.

The pandemic further eroded the enforceability of noncompetes, although this time it was the judiciary, not legislatures, that showed newfound reluctance to enforce them. A number of state and federal courts declined to enforce these pacts between 2020 and this year for reasons directly related to COVID-19. It’s not difficult to see why: Millions of Americans were laid off and struggled to make ends meet. Employers who needed staffers had a hard time finding them. It was easy for courts to reject an employer’s argument that it had a “legitimate business interest” in putting a former employee out of work by enforcing a noncompete against someone it voluntarily laid off, or to conclude that an employee’s interest in feeding his or her family during a pandemic far outweighed whatever interests the employer was claiming.

Noncompete Article Imagery

The federal government, spurred by COVID-19’s effect on both employees and the economy (and likely influenced by states’ shifting attitude toward noncompetes), announced its intention to curtail them further through his executive order to the FTC. The White House also released a fact sheet stating that “tens of millions of Americans—including those working in construction and retail— are required to sign noncompete agreements as a condition of getting a job,” making “it hard for them to switch to better-paying options” and purportedly dragging down the economy as a result.

The president’s desired regulation is likely to face stiff opposition from both political and industry foes, and it’s unclear when—if ever—the FTC will adopt such rules, assuming it even has the authority in the first place.

Regardless of whatever action the federal government takes, employers should expect ever- increasing reluctance on the part of judges and state legislatures to enforce noncompetes and must bet on other means to protect their business in the long term from the threat of misuse of their confidential information and trade secrets. Employers with legitimate information in need of protection should ensure that their workers sign robust, carefully drafted confidentiality agreements at the outset of their employment, and not rely on haphazard documents pulled off the internet or thrust upon employees after they’ve been on the job (an occurrence likely to affect the agreement’s enforceability, a situation this writer has seen far too many times).

Employers should also take thorough steps to “off-board” employees at the conclusion of their employment and confirm, through forensic reviews if necessary, that they have returned or deleted any confidential information in their possession. Even the most well-intentioned employee can, and often does, have trade-secret company data all over his or her personal electronic devices.

Taking just these few commonsense steps can ensure that an employer can bring viable breach-of-contract and misappropriation of trade secrets claims against an employee who intentionally misuses confidential information. Indeed, although employers often use noncompetes as the preferred (albeit heavy-handed) method of protecting their information, the truth is that typically, they can adequately protect their secrets through these already existing legal remedies that will not be affected by subsequent noncompete legislation.

Employers must bet on other means to protect their business in the long term from the threat of misuse of their confidential information and trade secrets.”

As long as courts are willing (and authorized by law) to enforce noncompetes at least to some extent, employers should invest the time and money to have their existing agreements scrubbed for enforceability. Many noncompetes are vastly overbroad as written, and in the author’s experience it is the exception, not the norm, for a court to enforce a noncompete without at least some significant modification. This can lead to drastic consequences for the employer, aside from losing the protection of the agreement—including shifting attorneys’-fees provisions and absolute bars on damages.

Employers would therefore be wise to proactively draft or rewrite their noncompetes as narrowly as possible. Courts are far more likely to enforce agreements—even during the pandemic and attendant legislative crackdown—when employees are shut out from only a small slice of the market and not from gainful employment entirely. They should also ensure that their noncompetes are supported by adequate consideration, as more and more courts are invalidating these pacts because they were thrust upon workers in the middle of employment with no additional compensation or other satisfactory consideration.

Overall, it remains to be seen whether the federal government will follow through on President Biden’s wish to promote competition and stimulate the economy through the elimination or limitation of noncompetes. But reluctance on the part of courts and state legislatures to enforce them is only growing. With the company’s very future potentially at stake, employers should invest the time and resources to stay ahead of this rapidly evolving area of the law—and protect their confidential information and trade secrets through alternate means, or at least carefully tailored noncompetes.

As founder of the Houston-based law firm Mahendru P.C., Ashish Mahendru has built a legal specialty navigating complex disputes between business partnerships before state and federal courts. He focuses his practice on business and commercial litigation, employment litigation, high-stakes commercial contingency cases, contract and partnership disputes, trade secrets and non-competes.

Related Articles

Phoning It In

by Alyson M. St. Pierre, Ashley C. Pack and Crystal S. Wildeman

It’s not easy for employers to weigh requests from employees to work from afar, even in the wake of the pandemic. Considerations include COVID-19, vaccinations, the Americans with Disabilities Act and the nature of the job itself.

Employer Considerations for Teleworking

Look Out Below

by Mary Jo Larson

Employee 401(k) and other pension plans that include company stock can be a financial minefield. What’s a responsible fiduciary to do to lessen the risk of a plummeting share price—and the risk of a subsequent “stock-drop” lawsuit from aggrieved workers?

Navigating Employee 401(k) and Pension Plans


by Joanna Barsh, Lauren Brown, and Kayvan Kian

Burden, blessing, or both?


Paid Leave

by Best Lawyers

Eight attorneys from across the country weigh in.

Paid Leave

Look for the Zoom Label

by Anne R. Yuengert and Matthew C. Lonergan

Will the virtual platforms that got such a boost during the pandemic replace how you interact with your employees, unions, and lawyers?

Virtual Platforms Replacing Work Interactions

Discovery in the Time of COVID-19

by H. Barber Boone

The pandemic has affected the vital process of legal discovery in ways both good and bad. Which changes are likely to become widely accepted in the years ahead?

The Impact of COVID-19 on E-Discovery

Busting a Trust

by Joseph Marrs

The rules governing trusts and asset distribution are often much more flexible than many might assume. Here’s a primer.

Rules Governing Trusts and Asset Distribution

The Next Chapter

by Patrick M. Shelby

Among its uncountable other disruptions, the pandemic upended U.S. bankruptcy procedures. Congressional relief, legislative changes, amended legal provisions: What lies ahead for those looking to file?

COVID-19's Impacts on Bankruptcy Procedures

Meeting Halfway

by Julia B. Meister

To resolve family and business disputes including wills, trusts, estates and more, mediation is often a more effective, gentler and cheaper option than litigation.

Mediation to Resolve Wills, Trusts, Estates

Can Employers Legally Require Their Employees to Get a COVID-19 Vaccine?

by Candace E. Johnson

With the COVID-19 vaccine more widely available now, many employers are asking if they can require employees to receive the vaccine and what risks are involved in doing so.

Can Employers Legally Require Vaccines?

Biden Targets Non-Competes, But They Still Have Their Place

by John Ettorre

Limitations on non-compete agreements are increasing, aided by an executive order by President Biden in July.

Biden Targets Non-Compete Agreements

Evolving Marijuana Laws and the Workplace

by Tess P. Anglin

How can employers enforce statutes that differ from state to state?

Red image of a marijuana leaf

Employers Must Soon Use Yet Another New I-9 Form

by Fisher Phillips

New document could be liability trap for unsuspecting employers.

Begin Using the New Form Now

The Other Shoe Drops—The NLRB’s “Contingent Workforce” Activism Continues

by Timothy C. Kamin

The NLRB will now permit a single bargaining unit to include employees who are solely employed by an employer along with other employees who are jointly employed by that employer and a staffing provider, all without the consent of either employer.

Employee Activism

Withstand the Ban

by Jeffrey A. Calabrese and Kirby Black

With the recent Federal Trade Commission’s announcement proposing a complete ban on noncompete agreements, we offer advice to companies moving forward.

Figure out of frame signing a non-descript contract

Noncompete Extinct

by Mark W. Bakker

The Federal Trade Commission has proposed a blanket ban on noncompete agreements that could radicalize post-termination protections afforded to employers.

Dark figure walking up red staircase to open door

Trending Articles

A Celebration of Excellence: The Best Lawyers in Canada 2024 Awards

by Best Lawyers

As we embark on the 18th edition of The Best Lawyers in Canada™, we are excited to highlight excellence and top legal talent across the country.

Abstract image of red and white Canada flag in triangles

The Long, Short, Thick and Thin of It

by Avrohom Gefen

“Appearance discrimination” based on employees’ height and weight is the latest hot-button issue in employment law. Here’s a guide to avoid discrimination.

Woman stands in front of mirror holding suit jacket

Trailblazing Titans of the Industry: Announcing the 4th Edition Best Lawyers: Ones to Watch® in America

by Best Lawyers

Best Lawyers honor and celebrate these talented, innovative newer lawyers who are trailblazing their way to victories in courtrooms across the country.

Connected web above map of the U.S.

Announcing the 2023 The Best Lawyers in America Honorees

by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Pearls of Wisdom: Celebrating 30 Editions of Best Lawyers’ Rankings

by Best Lawyers

In celebration of our landmark 30th edition, Best Lawyers’ leadership explains how the world’s original and most trusted legal awards maintain their esteem, integrity and reputation for excellence among the top legal entities and their clients.

Best Lawyers logo for 30th edition release with gold glitter in background

Vanguards of Victory: Best Lawyers: Ones to Watch in Canada 2024

by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in Canada™ has been announced, and the lawyers showcased by these awards are rising to the challenge each day as advocates for clients all across the country.

Blue and black background with small squares connected by lines

Best Lawyers: Ones to Watch in America for 2023

by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

Announcing the 2023 The Best Lawyers in Canada Honorees

by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots


Thomson Rogers: Toronto Personal Injury Lawyers

by Thomson Rogers

Since establishment in 1935, Toronto-based firm Thomson Rogers has consistently delivered results for their clients struggling through complex litigation.

Top of a Staircase Featuring Two Large Black Doors with Bookshelves and Chairs on Each Side

The Best Lawyers in South Africa™ 2023

by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag


How Long Does a Felony Stay On Your Record in California

by Peter Blair

A felony can remain on your record for life in California. Some felonies qualify for expungement. Learn how to remove a felony conviction from your record in California.

Hand setting bird free out of a guarded fence

What the Courts Say About Recording in the Classroom

by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Incendiary Behavior

by Lyssa A. Roberts and Rahul Ravipudi

California’s future will see more frequent wildfires caused by faulty equipment. Litigation tied to recent Golden State infernos shows the way forward.

Mountain range with glow of wildfires behind it

Announcing the 2022 Best Lawyers® in the United States

by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

The Upcycle Conundrum

by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

Famous Songs Unprotected by Copyright Could Mean Royalties for Some

by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?