AUTHORS: Melanie Courtright, Howard Fienberg and Stuart Pardau
How should the U.S. insights industry approach the “iron triangle” of employment agreements – Non-Competes, Non-Disclosures and Non-Solicits – especially during the COVID-19 crisis?
Employers have become quite knowledgeable about the iron triangle’s applicability, legality and enforceability. Most professionals in the marketing research and data analytics industry, both employers and employees, tend to agree that non-solicit agreements and non-disclosure agreements serve important purposes. Asking a departing employee to temporarily refrain from initiating contact with her/his clients to allow the employer adequate time to transfer client service, is generally reasonable. Similarly, ensuring intellectual and confidential information are protected is a fair and reasonable requirement.
However, what is the rightful place of the non-compete agreement? Is it fair to both employers and employees? Are such agreements ethical? Will they stand the test of time in the courts and law? Most importantly, during a public health and economic crisis, how can and should they be applied?
The questionable legal standing of noncompete agreements
Over the past couple of decades, these restrictive covenants have expanded to cover a wide range of professionals, not just the most senior executives.
As a general proposition, enforcing non-compete agreements, if it is even legally possible, means structuring them with limitations on geography, duration and scope. The more narrow the agreement, the better the chance that the restrictive covenant will be deemed enforceable by a court (e.g., limited to competitors in the same city or state instead of the whole country, or limited to only a few months rather than a few years). Increasingly, the trend is for states to carefully scrutinize non-competes since such clauses can severely restrict an individual’s ability to earn a livelihood.
Long ago, California, for example, prohibited non-competes in the employment context, except in very narrow circumstances. A 2018 law in Massachusetts declared non-compete agreements unenforceable against “employees that have been terminated without cause or laid off.” Maine, Illinois, New Hampshire, and Maryland recently banned them for low-wage workers. Effective in 2020, Washington state placed far-reaching restrictions on the enforceability of non-competes, including prohibiting applicability of such restrictions on any employee earning less than $100,000 per year and limiting the duration of the restriction to no more than 18 months.
In challenging times, the question arises: If someone gets laid-off, can a non-compete provision now be enforced by former employer? Based on current case law, the answer is likely “no.” For example, a court in New York refused to enforce a non-compete agreement against employees who had their employment relationship involuntarily terminated as part of a plant closure (SIFCO Indus., Inc. v. Advanced Plating Techs., Inc. 867 F.Supp. 155 (S.D.N.Y. 1994)). Indeed, at least nine other states -- Arkansas, Iowa, Kentucky, Maine, Mississippi, New York, Pennsylvania, South Dakota, or Tennessee, or in the District of Columbia – have reached similar conclusions.
An overview by Seyfarth Shaw LLP indicates that “28 states permit enforcement of non-competes against discharged employees,” and other states are more nuanced. But given that the trend had already been for courts across the country to look more critically at non-competes in the employment context, it seems plausible that moving forward, an employer’s decision to enforce a non-compete following a termination that was part of a reduction-in-force due to COVID 19 would be carefully scrutinized by courts. Moreover, while non-compete agreements have traditionally been a legal matter for the states, the Federal Trade Commission (FTC) has taken them (negatively) into account in antitrust and merger/acquisition investigations.
“This just doesn’t sit right with many judges when you’re dealing with lower-level employees or where there’s no evidence of misconduct,” according to Thomas P. Gies, a partner at Crowell & Moring. The so-called ‘janitor rule’ has grown in its influence over courts since first deployed in 1974, according to Archer Attorneys at Law, providing “that a court will not enforce a non-compete agreement if it restricts the scope of a future employee’s future employment indiscriminately, unrelated to the legitimate business interests recognized in that jurisdiction.” So, Archer contends that if the agreement “is drafted so broadly that it would literally prevent” the former employee “from working as a janitor for a competitor, the court will disregard the agreement entirely.”
According to Waller Lansden Dortch & Davis, an additional concern for employers is that if they seek to enforce non-competes on employees laid-off during a crisis, the employers may risk any future attempt to enforce any of their iron triangle agreements in that court in the future if the court rules against them now.
Particularly during the coronavirus-spawned economic crisis, when many firms are in danger of laying off staff, courts may reject the enforcement of non-competes, simply because non-competes may prevent employees from the chance of any new work in their chosen field, especially when those employees did not chose to leave their employment.
The Insights Association position: Non-compete agreements are often unenforceable and, particularly in this current COVID-19 crisis, should not be enforced for staff involuntarily separated from their companies/organizations without full compensation.
Of course, this in no way can or should preclude an employer from maintaining all rights, including legal action, against an employee who misappropriates trade secret or other confidential or proprietary information of their former employer. In such an instance, even in the absence of a non-compete restriction, the former employer would have causes of action including trade secret misappropriation, breaches of confidentiality/non-disclosure provisions, and so on.
As we navigate a new world of economic uncertainty and layoffs begin to roll across our industry due to the global coronavirus pandemic, the Insights Association says it is time to reconsider the utilization of non-competes in the marketing research and data analytics industry. IA opposes non-compete agreements absent full compensation because the marketing research and data analytics industry needs to:
- Focus on recruiting the best talent;
- Retain staff and keep those staff satisfied;
- Maintain or grow the size of our industry;
- Keep the great talent we have within our industry;
- Contribute to a nationally consistent policy; and
- Treat human beings fairly.
In the face of this pandemic, the whole industry should lean a little harder to the side of empathy and compassion. How companies respond and act during these trying times will be noted and remembered by large numbers of people in the industry. While the courts of law may have to resolve some of this, ultimately it will be the court of public opinion that will have as lasting and important an impact. In sum, during these trying times it is understandable that we will make mistakes and have lapses of judgment, but we must always strive, to borrow from Spike Lee, to “Do the right thing.”
Most importantly, right now, we need the insights industry workforce working, not on the sidelines or spending their resources to fight non-compete agreements in court.
Before citing a non-compete agreement, employers should pause and ask: What kind of employees do the employers want working at their organizations? Do they want employees who would rather leave, but stay put because of a non-compete? Would they personally prefer working for a company that spends time and resources on contracts and obligations, or a company with the social strength of character that spends that time and resources on being a world-class employer?
This information is not intended and should not be construed as or substituted for legal advice. It is provided for informational purposes only. It is advisable to consult with private counsel on the precise scope and interpretation of any laws/regulation/legislation and their impact on your particular business.