Will COVID-19 Change the Way Courts Enforce - Or Not - Non-Compete Agreements
Is now a time to think a bit differently about an old topic? Let’s see. This short article does not make that decision for your business or client. It does provide the reasons to consider it.
Until the aftermath of COVID-19 passes through the American workforce, businesses experiencing coronavirus-related economic hardships will face difficult decisions. These include whether to furlough or layoff employees—an already challenging question. Given the current evolving state of the economy and job market, mindful businesses will want to consider the effect of terminating employees who are subject to non-compete agreements. Will COVID-19 change the way courts approach their enforcement? We think it could, and here’s why.
Oversimplifying a bit, but synthesizing accurately, a court examining a non-compete agreement faces two questions. First, the court must decide whether the non-compete agreement is enforceable. Second, if it is, the court will determine if the non-compete agreement should be enforced after balancing the prevailing equities between the presenting employer and employee. As to the first question, again generally speaking, a non-compete agreement is enforceable if it is (i) supported by adequate consideration, (ii) reasonably needed to protect an employer’s legitimate business interests, and (iii) reasonably tailored in time, place, and scope of conduct to accomplish the business protection purpose.
But how a court typically decides if it should “enforce” an “enforceable” non-compete agreement adds a different and additional analysis. It starts almost exclusively by addressing an employer’s temporary restraining order or injunction motion seeking to require the employee to honor her or his contractual promises.
In Tennessee, similar to many states, courts have historically used a four-factor test to determine if early injunctive relief should be granted to an employer seeking to enforce a non-compete agreement:
(1) the threat of irreparable harm to the employer if the injunction is not granted;
(2) the probability that the employer will succeed at trial on the merits of its underlying claim that the non-compete was breached;
(3) the balance between the harm to the employer if injunction relief is denied and the injury that granting the injunction would inflict on the employee; and
(4) the public interest.