Three Situations in Which Your Non-Competition or Non-Solicitation Agreement May Be Affected by COVID/Coronavirus
By Bryan Tyson
As a result of the global pandemic caused by COVID-19/coronavirus, many employers have implemented layoffs, instituted furlough programs, or terminated employees for lack of overall work. While these steps may be necessary for businesses to survive the economic downturn, the United States Court of Appeals for the First Circuit recently reminded companies and employees to consider the effect these employment actions may have on existing non-competition or non-solicitation agreements.
In Russomano v. Novo Nordisk Inc., 960 F.3d 48 (1st Cir. 2020), Thomas Russomano, a Novo Nordisk employee, signed a non-competition agreement stating he would not work for a competitor for 12 months after termination of employment. In 2018, Novo Nordisk laid Russomano off on a Friday, but then rehired him for a different position the following Monday. In 2020, Russomano quit and immediately went to work for BioMarin Pharmaceutical, Inc., a competitor of Novo Nordisk. Novo Nordisk filed suit and asked the court for a temporary restraining order and preliminary injunction against Russomano and BioMarin to enforce Russomano’s non-competition agreement.
However, the court found that Russomano’s 12-month non-competition agreement began running when he was briefly terminated in 2018, even though the company rehired him three days later. That is, the 12 months of non-competition time was running while Novo Nordisk was paying Russomano during his second stint of employment. Novo Nordisk’s failure to have Russomano sign a new non-competition agreement meant that he was free to compete against his former employer immediately upon quitting.
So how does this affect companies that had to furlough or terminate employees on account of slowdowns related to COVID-19/coronavirus?
Here are three non-compete situations that might be affected:
- If an employee has been terminated, the time period on any non-competition agreement may begin running at the time of termination even though many companies think of this as a “layoff” or “termination for lack of work” versus bad performance or some other reason. Employees subject to a stay-at-home order (without working) who are later terminated may argue the stay-at-home time should count against any non-competition time. Suppose a company wanted to extend the non-competition period or shore up any uncertainties. In that case, it could re-negotiate the non-compete as part of a severance agreement with the employee. Given the importance of customer relationships during these difficult economic times, such a move could prove significant with sales or other customer-relationship positions.
- As in the Russomano case, if a company has laid off employees and then later rehires them, their old non-competes may not be valid with respect to their new position. Under North Carolina law, an employer must provide something to the employee to have an enforceable non-competition agreement. Typically, new employment will suffice. But if the employer does not have the employee re-sign a new non-compete—as in Russomano—the time on the prior agreement may be running while the employee is rehired and working for the same employer.
- Many employees have been furloughed as a result of COVID. This means they have not necessarily terminated, but told not to show up for work and not being paid. Companies may do this because they may not currently work for the employee but anticipate that business may ramp up shortly. Maintaining a relationship with the employee means the company could rehire an experienced employee with institutional knowledge easier than having to go through the hiring process for a brand-new employee. But, if a furlough turns into a termination or stretches for a significant period, the employee may argue that time should be considered part of the non-competition period, leaving the employer exposed to unexpected competition or solicitation of its customers.
While there’s no one-size-fits-all solution for these issues, both employers and employees should consider these issues as part of any termination/furlough program that is implemented. They should also review any employment/non-compete agreements concerning any employees who are rehired after termination or brought back from a furlough. Doing such due diligence could hopefully prevent surprises like that faced by Novo Nordisk in the Russomano case.