As explored in Part I, the non-competition law landscape is becoming more complex as recent legislative developments reflect increased scrutiny of covenants. Several states have recently enacted laws prohibiting or restricting non-competition. Federal regulations that would limit or prohibit non-competitions are also in their infancy. And recent case law, particularly during the pandemic, reflects an increased willingness of courts to examine the impact of non-competition on employees. This trend of increased scrutiny of the enforceability of non-competition, coupled with the rise of remote working, makes it all the more important for companies to review the “reasonable efforts” put in place to protect their trade secrets.
Not only is non-competition law getting stricter, but the legal landscape is quite diverse. Among our neighboring states alone, the applicable laws are far from uniform. In Michigan, non-competitions are limited to a period of one year. In Kentucky, maintaining a job is not considered a sufficient consideration. And in Illinois, there’s now a partial ban, along with other requirements, like a notice period. 820 ILCS 90/20. None of these restrictions from our neighboring states exist under Indiana’s non-competition regime, where reasonableness is the prevailing standard.
The inventory is also far from static. More than 30 states have introduced bills in recent years to change existing non-competition laws, with 22 of those states passing some form of change. This diversity of law cannot necessarily be easily overcome with a choice of law provision. Several states, such as California, have laws that prohibit choosing a law other than the law of their state.
The case law also reflects an increased willingness of courts to scrutinize covenants carefully. For example, in 2021, a Texas court issued a temporary restraining order against an employer preventing him from contacting a former employee’s new employer about his non-compete agreement. Although the court based its decision on several factors, these considerations included the belief that the non-competition restrictions were too broad and that pursuing cease and desist letters would cause the employee “imminent and irreparable” because it would be difficult “to find work in his field of expertise. Garcia vs. USA Industries, Inc.No. 2021-09178/Court: 133 (Harris Co., Texas, February 15, 2021).
This resulting patchwork of non-competition laws is becoming more relevant to more employers as more employees transition to remote work, often across state lines. Not only are employers adopting work-from-home policies, but many are also implementing work-from-anywhere policies. Many large US employers allow many of their employees to work from anywhere in the continental United States. To see “9 companies that are moving to WFA (Work From Anywhere)” (owllabs.com). Indiana-based companies are following suit. To see “Indy tech company creates remote work policy for employees” (wrtv.com).
When employees can “work from anywhere,” the analysis of which state law applies or the appropriate geographic or temporal scope for a non-competition clause to be rendered becomes more difficult. For geographical non-competition, the traditional analysis may no longer be appropriate to the circumstances. In a recent headline-grabbing dispute, Groupon (in Illinois) and Yelp (in Seattle) fought a dueling lawsuit in two different jurisdictions over the applicability of a non-competition based in the ‘Illinois for a Washington-based employee. See Groupon, Inc. vs. Shinno. 21 C 6082, 2022 WL 60526, at *2 (ND Ill. January 6, 2022); Yelp, Inc. vs. Groupon, Inc., No. 21-2-16087-1 SEA (Superior Court, King County, Washington, December 8, 2021). With the increasingly dispersed workers of a “home office” and growing concern about the impact of non-competition on employees, more fights like these seem likely.
For a company concerned about protecting its trade secrets, this set of laws is important. Under state and federal laws, a basic requirement for trade secrecy is to show that a company has made reasonable efforts to maintain secrecy. See, for example, 18 U.S.C. § 1839; Indiana Code § 24-2-3-2. Non-competition clauses are a tool often used to protect trade secrets. But as these laws continue to evolve and become more difficult to navigate with predictability, companies should consider focusing on alternative reasonable efforts measures.
An alternative is a confidentiality agreement or a non-disclosure agreement. These contracts are less about competition and more about protecting underlying trade secrets and confidential information, which courts are more likely to respect as a protectable interest. These contracts also avoid many of the pitfalls of a non-compete agreement while still establishing reasonable efforts to protect trade secrets. Companies will want to consider tailoring these agreements to ensure that their most valuable information is clearly and adequately covered.
Another alternative to a non-compete agreement is a garden leave agreement. These agreements, usually of shorter duration than a non-competition clause, provide for a period during which the employee does not work but remains paid and/or employed. The term comes from the United Kingdom and refers to an employee who takes care of his garden at home. The agreement does not prohibit employment with a competitor after the expiration of gardening leave, but provides for a period during which there will be no competition. This achieves some of the same goals as non-competition, but through a different mechanism that can avoid many of the concerns associated with non-competition.
Finally, companies should focus on non-contractual measures, including training, policies, physical security, and IT security to protect their trade secrets. Again, companies may want to review these policies to ensure that their trade secrets are clearly and adequately covered. Employers should also be sure to take into account that many employers are working from “anywhere” as these new challenges are also heading to the courts. For example, the Delaware Court of Chancery found that a company failed to take reasonable steps to protect its trade secrets because it failed to take reasonable steps with respect to Zoom meetings — using the same code for several meetings, without requiring a participant password, not using the waiting room to filter participants and not prohibiting sharing. Smash Franchise Partners, LLC vs. Kanda Holdings, Inc.., CV No. 2020-0302-JTL, 2020 WL 4692287, at *15 (Del. Ch. Aug. 13, 2020), amended, (Del. Ch. 2020), and released in part, (Del. Ch. 2020).
With the non-competition legal landscape uncertain and remote working the new normal, companies would be well advised to review their trade secret protection plans.•
Ryan Hurley is the Co-Deputy Litigation Practice Group Leader of Faegre Drinker Biddle & Reath and a partner in the firm’s Indianapolis office. Harmony Maps is a litigation partner with Faegre Drinker in the Indianapolis office. The opinions expressed are those of the authors.