The Impact of COVID-19-Related Factors on Courts’ Enforcement of Employee Post-Employment Restrictive Covenants

Faegre Drinker Biddle & Reath LLP

In the best of economic times, some courts can be reluctant to grant immediate injunctive relief and enjoin an employee from working in order to enforce employee post-employment restrictive covenants. Now that we are in the midst of a global pandemic and an economic recession, that challenge has grown. Current economic considerations are causing some courts to weigh the “balance of harms” on injunctive relief applications in favor of employee defendants who are faced with the difficulty of finding other work in an economic downturn with high unemployment. Nevertheless, our review of recent decisions from around the country indicates that courts remain willing to consider injunction motions on an emergent basis to enforce restrictive covenants, particularly where there is a threat of trade secret misappropriation.

In spite of the COVID-19 crisis, courts around the country generally remain willing to consider injunction motions that involve non-solicitation, non-competition and trade secret misappropriation claims. Many courts are allowing ex parte temporary restraining order applications and temporary injunction hearings to proceed. Generally, these proceedings will not be in person (although some state and federal courts are beginning to allow limited in-person injunction proceedings) and the applications are decided either on the parties’ written submissions or at the discretion of the judge during a telephonic or video hearing. The bottom line is that if employers believe that a former employee’s breach of a restrictive covenant necessitates emergency injunctive relief, courts generally remain willing to hear the matter on an emergent basis.

However, actually obtaining injunctive relief is proving more difficult under the COVID-19 environment because courts are scrutinizing injunctive relief applications very closely to ensure such relief is absolutely warranted in light of the ongoing health pandemic and associated economic recession. Our survey of cases decided since March 2020 revealed that when courts factor COVID-19 health and economic concerns into their analysis, it generally militates against the issuance of injunctive relief. Courts tend to weigh COVID-19 factors as part of the irreparable harm and balance-of-harm analysis (see https://laborsphere.com/part-26-of-the-restricting-covenant-series-covid-19-edition/).

For example, in Yellowstone Landscape v. Fuentes, a federal judge in Texas was “unpersuaded that the threatened injury to Plaintiff from denial of a preliminary injunction outweighs the likely damage that the requested injunction would cause Defendant.” The court noted the economic disparity between the two parties, noting that the plaintiff was a large commercial landscaping company with more than $200 million in annual revenue, while the defendant, who “earns approximately $70,000 per year and supports a family of five …[would] lose his job and be out of work in the middle of a pandemic if an injunction is granted.” The court denied the landscaping company’s motion for a preliminary injunction.

Similarly, in BioConvergence LLC v. Attariwala, a federal judge in Indiana took “judicial notice of the broad scale economic disruptions caused by the COVID-19 pandemic that cast doubt on [the defendant]’s employment prospects, as it does for the vast majority of Americans during these challenging times.”

Also, in Schuylkill Valley Sports, Inc. v. Corporate Images Co., a federal court in the Eastern District of Pennsylvania that noted “not all businesses are open” due to the “coronavirus shutdown,” concluded that the likelihood of the defendant “finding employment at this time is therefore reduced,” and acknowledged that “the unemployment rates over the past few months are the highest in more than seventy years.” In light of these conclusions, the court denied Schuylkill Valley’s request for preliminary injunctive relief.

Nonetheless, the news is not all bad for employers that seek to obtain immediate injunctive relief for an employee’s violations of his or her post-employment restrictive covenants. Courts seem more willing to issue injunctive relief remedying violations of confidentiality and trade secret disclosure restrictions, recognizing that the urgency of preventing the misappropriation of trade secrets remains even in the face of the COVID-19 pandemic. For example, in USI Southwest, Inc. v. Edgewood Partners Insurance Center, the defendant (a vice president in charge of business relationships) left to join a competitor and immediately began poaching the plaintiff’s customers using confidential information. The court granted the preliminary injunction, concluding that the threatened harm to plaintiff — the loss of its customers, goodwill and reputation — outweighed any harm to the defendant. The court acknowledged the current difficulties caused by COVID-19, noting that “the courthouse [was] currently closed and various court employees [had] tested positive” but emphasized the importance of still providing timely relief.

With many employers forced to lay off employees or restructure workforces in response to the COVID-19 pandemic, the importance of post-employment restrictions, and courts willingness to enforce those restrictions, has only increased. Fortunately, courts have responded to employer concerns by continuing to accept and decide applications for injunctive relief. As employers consider whether to seek immediate injunctive relief in a COVID-19 world, it is important to contemplate the impact that COVID-19-related factors will have on the court’s analysis and, to the extent possible, to address those concerns in the application for injunctive relief.

Our team will continue to monitor restrictive covenant cases during the COVID-19 pandemic.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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