Employers routinely rely on restrictive covenants, such as non-compete agreements and non-solicitation agreements, to remain competitive and protect important confidential information and trade secrets. However, in the past year alone, many states have restricted or completely banned non-compete agreements, and at the federal level, President Biden has encouraged the Federal Trade Commission to limit or ban them. At the same time, many employers are also experiencing higher than normal rates of employee turnover and resignation. With the current situation becoming more complicated, what can businesses do to make sure their agreements remain effective and enforceable in 2022?

1. Be Aware of the New Restrictions and Changes Regarding Restrictive Covenants

While some states generally allow non-competition restrictions, other states are taking a more stringent approach. In 2021, Colorado, Illinois, Nevada, Oregon, and Washington, D.C. passed or enacted new laws restricting non-compete agreements, and several other states considered non-compete legislation. For example, the District of Columbia followed California’s lead in banning non-competes as of April 1, 2022. Nevada also instituted a complete ban on non-competes for hourly employees.

As of January 1, 2022, the Illinois Freedom to Work Act (IFWA) prohibits employers from entering into non-competes and non-solicits with employees who earn $75,000 or less and $45,000 or less, respectively. Illinois employers are now required to counsel employees to consult with an attorney before entering into a non-compete or non-solicit and give employees at least 14 days to consider signing a non-compete or non-solicit. IFWA also requires at least two years of work with the employer after signing a covenant not to compete or a covenant not to solicit or other consideration adequate to support an agreement not to compete or not to solicit. This consideration can consist of a period of employment plus additional professional or financial benefits, or merely professional or financial benefits adequate by themselves. However, the new law is not completely clear on what professional or financial benefits will be deemed by courts to be sufficient consideration. For more on the IFWA, a summary is found here.

Similarly, Oregon passed a new law prohibiting employers from enforcing non-competes against employees who are classified as nonexempt and/or earn $100,533 or less per year, unless the employer has agreed in writing to pay the employee during the post-termination restricted period in accordance with the law. In addition, Oregon now requires employers to limit non-competes to 12-months post-termination.

Further, a new Colorado law voids any noncompete agreement that restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer, with certain exceptions, including for the sale of a business and the protection of trade secrets.

Employers with employees who work in these states or districts will want to review their agreements to make sure the provisions are still enforceable. Non-competes should be written to be lawful in the state where the employee lives and/or works. More importantly, going forward, employers will want to examine what venue and choice of law is appropriate for their agreement.

States differ as to how their courts will enforce a non-compete agreement. Some permit judicial modification (“blue-penciling”) of restrictions, while other states refuse to modify unduly broad restrictive covenants and will simply not enforce them. To mitigate this uncertainty, employers should include choice-of-law and forum-selection provisions in their non-compete agreements. Doing so gives clarity to both parties about where and how the agreement is to be enforced.

With many employees now working remotely, venue and choice of law are key in determining whether the agreement will be enforceable at all. Unless these terms are specifically agreed to in the agreement, a company may end up litigating non-compete matters in an unfavorable state.

2. Gather Evidence and Act Immediately

Once an employer learns an employee is leaving the company for a competitor, they will want to take immediate action to enforce the non-compete agreement. The longer an employer waits, the more likely it is that confidential information or other trade secrets may be shared by the former employee. Further, key evidence may be lost or destroyed if immediate action is not taken to preserve it. Once the damage done, it is often hard to reverse.

Employers will want to gather and preserve any evidence as quickly as possible. Technology frequently provides solid evidence of the employee’s efforts to unlawfully solicit customers or employees or otherwise violate provisions of the non-compete agreement. Email correspondence, online messages, social media, and other electronic records can serve as documentary evidence of a former employee’s violations. Messages or computer data may show that an employee has solicited other employees or customers to join a competitor or has downloaded company confidential information to a thumb drive.

Employers seeking enforcement of a non-compete should apply for injunctive relief in the form of a temporary restraining order or preliminary injunction as soon as they become aware of violations. If granted, the judge can prohibit a former employee from working for a competitor, soliciting the employer’s customers, and/or disclosing the employer’s confidential information while the litigation is ongoing. Further, the longer an employer delays taking action, the more likely a court is to question whether the employer runs a serious risk of irreparable harm if the violations are not immediately stopped.

3. Strategize with Legal Counsel About Enforcing Your Agreements

Engaging in non-compete litigation can be costly and can result in disruptions to normal business operations. However, unless an employer regularly enforces their non-competes, employees likely will not take the non-competes seriously.

To try to mitigate the costs of the litigation, employers will want to consider including provisions in their agreement allowing for recovery of attorneys’ fees and costs upon prevailing.  However, be aware that certain states, such as Illinois, dictate that the employee can recover if the employee prevails. Further, former employees may not have the resources to cover costs and attorney’s fees. As such, employers will want to consider whether there is evidence to include the new employer as a co-defendant in the lawsuit. State common law claims, such as tortious interference, may provide for liability against the new employer.

Employers will also want to discuss what type of discovery may be necessary for enforcement of the agreement. In certain circumstances, targeted or expedited discovery may allow the litigation to resolve sooner than typical. Further, acting quickly with discovery can make sure that certain evidence and devices are preserved that might otherwise be lost without acting quickly.

Overall, with the ongoing changes to state laws and the push at the federal level to restrict non-competes, employers need to continually revisit the provisions contained within their non-compete agreements to make sure they remain enforceable. If the need arises, employers should act immediately to enforce the non-compete and consult with their counsel to determine the best strategy for doing so.