As explored in Part I, the landscape of noncompete law is becoming more complex, as recent legislative developments reflect increased scrutiny of restrictive covenants. Several states have recently enacted laws banning or limiting noncompetes. Federal regulations that would limit or ban noncompetes are also in the beginning stages. And recent caselaw, particularly during the pandemic, reflects an increased willingness by courts to scrutinize the impact of noncompetes on employees. This trend of increased scrutiny over noncompete enforceability, coupled with the uptick in remote work, make it all the more important for companies to revisit the “reasonable efforts” in place to protect their trade secrets.
Not only is noncompete law becoming more stringent, the legal landscape is quite diverse. Among just our neighboring states, the applicable laws are far from uniform. In Michigan, noncompetes are limited to a one-year period. In Kentucky, continued employment is not considered sufficient consideration. And in Illinois, there is now a partial ban, along with other requirements, such as a notice period. 820 ILCS 90/20. None of these restrictions from our neighboring states exist under Indiana’s noncompete regime, where reasonableness is the governing standard.
The state of play is also far from static. More than 30 states have had bills introduced in the last few years to modify existing noncompete laws, with 22 of those states enacting changes of some sort. This diversity in the law cannot necessarily be overcome easily with a choice-of-law provision. Several states, such as California, have laws that prohibit the choice of law other than the law of their state.
Caselaw also reflects an increased willingness by courts to scrutinize restrictive covenants. For example, in 2021, a Texas court entered a temporary restraining order against an employer preventing it from contacting a former employee’s new employer about his noncompete agreement. While the court based its decision on several factors, those considerations included a belief that the noncompete restrictions were overbroad and that continued cease-and-desist letters would cause the employee “to experience imminent and irreparable harm” because it would make it difficult “to find work in his area of expertise.” Garcia v. USA Industries, Inc., No. 2021-09178/Court: 133 (Harris Co., Texas, Feb. 15, 2021).
This resulting patchwork of noncompete laws is becoming more relevant to more employers as increasing numbers of employees have shifted to remote work, often across state lines. Not only are employers embracing work-from-home policies, many are also implementing work-from-anywhere policies. Many large U.S. employers allow large numbers of their employees to work from anywhere in the continental United States. See “9 Companies Making the Switch to WFA (Work From Anywhere)” (owllabs.com). Indiana-based companies are following suit. See “Indy tech company creates work from anywhere remote policy for employees” (wrtv.com).
When employees can “work from anywhere,” the analysis of which state’s law applies or what geographic or temporal scope is appropriate for a covenant not to compete becomes more difficult. For a geographically based noncompete, the traditional analysis may no longer fit the circumstances. In a recent dispute that made headlines, Groupon (in Illinois) and Yelp (in Seattle) battled in dueling lawsuits in two different jurisdictions over the enforceability of an Illinois-based noncompete for a Washington-based employee. See Groupon, Inc. v. Shin, No. 21 C 6082, 2022 WL 60526, at *2 (N.D. Ill. Jan. 6, 2022); Yelp, Inc. v. Groupon, Inc., No. 21-2-16087-1 SEA (Superior Court, King County, Washington, Dec. 8, 2021). With workers becoming more dispersed from a “home office” and the increased concern over the impact of noncompetes on employees, more fights like these seem likely.
For a company concerned about protecting its trade secrets, this body of law is significant. Under state and federal law, a fundamental trade secret requirement is a showing that a company took reasonable efforts to maintain secrecy. See, e.g., 18 U.S.C. § 1839; Indiana Code § 24-2-3-2. Noncompetes are an oft-used tool used to protect trade secrets. But as those laws continue changing and become more difficult to navigate with predictability, companies should consider focusing on alternative reasonable-efforts measures.
One alternative is a confidentiality agreement or nondisclosure agreement. These contracts are focused less on competition and more on the protection of underlying trade secrets and confidential information, which courts are more likely to respect as a protectible interest. These contracts also avoid many of the pitfalls of a noncompete agreement while continuing to establish reasonable efforts to protect trade secrets. Companies will want to consider tailoring these agreements to ensure their most valuable information is clearly and adequately covered.
Another alternative to a noncompete agreement is a garden leave agreement. These agreements, typically shorter in duration than a noncompete, provide a period during which the employee does not work but remains paid and/or employed. The term originated from the U.K. and refers to an employee being at home tending to his or her garden. The agreement does not prohibit employment with a competitor after the garden-leave term runs but does provide a period during which competition will not occur. This accomplishes some of same goals as the noncompete but through a different mechanism that may avoid many of the concerns relating to noncompetes.
Finally, companies should focus on noncontractual measures, including training, policies, physical security and IT security to protect their trade secrets. Here again, companies may want to revisit those policies to ensure their trade secrets are clearly and adequately covered. Employers should also be sure to account for the fact that many employers are working from “anywhere,” as those new challenges are making their way to courts, too. For instance, the Delaware Court of Chancery found that a company did not take reasonable measures to protect its trade secrets because it did not take reasonable steps with respect to Zoom meetings — using the same code for multiple meetings, not requiring a participant password, not using the waiting room to screen participants and not prohibiting sharing. Smash Franchise Partners, LLC v. Kanda Holdings, Inc., No. CV 2020-0302-JTL, 2020 WL 4692287, at *15 (Del. Ch. Aug. 13, 2020), modified, (Del. Ch. 2020), and vacated in part, (Del. Ch. 2020).
With the legal landscape of noncompetes being uncertain and remote work as the new normal, companies would be wise to revisit their trade secret protection plans.•
Ryan Hurley is the deputy co-leader of Faegre Drinker Biddle & Reath’s litigation practice group and a partner in the firm’s Indianapolis office. Harmony Mappes is a litigation partner at Faegre Drinker in the Indianapolis office. Opinions expressed are those of the authors.