Insight

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

IN PARTNERSHIP

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

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

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

Millennials


by Joanna Barsh, Lauren Brown, and Kayvan Kian

Burden, blessing, or both?

Millennials

Paid Leave


by Best Lawyers

Eight attorneys from across the country weigh in.

Paid Leave

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

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

Legal Trends in the Modern Workplace


by Emma R. Schuering and Meghan H. Hanson

Employees are reevaluating their jobs and the workforce, including issues like pay equity, forced arbitration, paid time off, discrimination and other such policies as they continue to navigate a post-pandemic work life.

Legal Trends In the Workplace Post-Pandemic

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

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

Trending Articles

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Combating Nuclear Verdicts: Empirically Supported Strategies to Deflate the Effects of Anchoring Bias


by Sloan L. Abernathy

Sometimes a verdict can be the difference between amicability and nuclear level developments. But what is anchoring bias and how can strategy combat this?

Lawyer speaking in courtroom with crowd and judge in the foreground

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

The Push and Pitfalls of New York’s Attempt to Expand Wrongful Death Recovery


by Elizabeth M. Midgley and V. Christopher Potenza

The New York State Legislature recently went about updating certain wrongful death provisions and how they can be carried out in the future. Here's the latest.

Red tape blocking off a section of street

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Is Premises Liability the Same as Negligence?


by Jeremy Wilson and Taylor Rodney Marks

In today's age, we are always on the move, often inhabiting spaces we don't own. But what happens when someone else's property injures you or someone you know?

A pair of silhouetted legs falling down a hole with yellow background

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background

Beyond the Billables


by Michele M. Jochner

In a recently conducted, comprehensive study, data reveals a plethora of hidden realities that parents working full-time in the legal industry face every day.

Women in business attire pushing stroller takes a phone call