The Advisors' Blog

– Lynn Jokela

A recent Akin Gump memo discusses considerations relating to non-compete agreements for companies that might be implementing cost-saving measures during Covid-19.  Depending on state statutes, implementation of certain cost-saving measures may cast enforceability of non-compete agreements in doubt.

For example, some states prohibit enforcement of non-compete agreements when an employee has been terminated through no fault of their own.  The memo also says that given the current economy, some courts may hesitate to enforce restrictive covenants.  Here’s what the memo says about the effect of an employer’s material breach on the enforceability of a non-compete:

An employer may lose its right to enforce a noncompete covenant if the employer is the first party to materially breach the contract housing the covenant. Determining whether an employer’s breach is material will depend on the applicable state law and the specific circumstances and contract at issue, but employers should review existing agreements and take note of any fixed term requirements, compensation and benefits requirements, duties provisions, and termination provisions, such as advance notice and severance. For example, a furloughed employee could argue that the furlough violates the term and/or compensation provisions of the contract. Likewise, an employee whose contractual salary or benefits are cut (e.g., guaranteed bonus, 401(k) match) could claim that the reduction rendered the noncompete covenant unenforceable.

For companies implementing cost-saving measures while also intending to enforce non-compete agreements, the memo suggests getting an employee’s written consent to the proposed action.  Companies should also consider updating severance agreements so they acknowledge and reaffirm the restrictive covenants – this can help eliminate an argument that the severance agreement superseded the restrictive covenants.  On the other hand, if a company doesn’t plan to enforce restrictive covenants, it suggests incorporating a release of the covenants in the severance agreement to guard against an argument of selective enforcement.