Since the current economic downturn began in February 2020 as a result of the COVID-19 pandemic, noncompete agreements have become increasingly scrutinized nationwide, and courts have become more reluctant to enforce them. A recent case filed in Harris County, Texas highlights this enhanced scrutiny with respect to an employee who was terminated during the pandemic.
In Robert Garcia v. USA Industries, Inc., the district court granted a temporary restraining order (TRO) preventing USA Industries, Inc. (USAI) from taking certain actions to enforce a noncompete clause against Robert Garcia, a former employee of USAI who worked for the company for 12 years as an outside sales consultant. On April 3, 2020, the same month that the unemployment rate peaked, USAI terminated Mr. Garcia due to economic hardship resulting from the pandemic. As part of his termination, Mr. Garcia and USAI entered into a separation agreement that contained a noncompete clause. After Mr. Garcia obtained a new job with a competing company, USAI sent Mr. Garcia’s new employer a cease and desist letter to inform them of Mr. Garcia’s contractual obligations. Mr. Garcia was subsequently terminated by his new employer. In response, Mr. Garcia sought a TRO to prevent USAI from communicating with any prospective employer of Mr. Garcia in an effort to enforce the noncompete obligations in his separation agreement so that Mr. Garcia could obtain employment in the oilfield supply industry, which, at the time, was the only industry in which Mr. Garcia had worked for the last 35 years.
In Texas, “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Tex. Bus. & Comm. § 15.50(a).
The district court granted the TRO, finding that the noncompete provision in the separation agreement lacked adequate consideration to be enforceable and imposed restrictions upon Mr. Garcia that were greater than necessary to protect USAI’s legitimate goodwill expectations. The court further found that, unless USAI was restrained, Mr. Garcia would likely continue to experience imminent and irreparable harm and have trouble finding work in his area of expertise.
Although noncompete clauses are governed by state law, the federal government has also taken an increased interest in limiting the enforceability of noncompete agreements. On July 9, 2021, President Biden issued an “Executive Order on Promoting Competition in the American Economy,” which encouraged the Federal Trade Commission to exercise its rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Further, a bipartisan group of members of Congress have introduced the Workforce Mobility Act, which would effectively eliminate noncompete agreements except in the narrow contexts of the sale of a business or the dissolution of a partnership. Although the executive order does not have an immediate impact on the enforceability of non-competes and the Workfoce Mobility Act is unlikely to pass this term, both actions signal that non-competes are attracting additional scrutiny at the federal level and that there is increasing bipartisan support for their elimination in the employment context.
Given the increased scrutiny surrounding the enforceability of noncompetes, employers should reexamine their noncompete agreements to determine whether they are enforceable, particularly in light of the current pandemic. Employers should also ensure that their noncompetes are supported by adequate consideration and are narrowly tailored in order to protect the employer’s legitimate business interests. In addition, employers should examine whether they legitimately need noncompetes with their employees, or whether their business interests would be sufficiently protected by nondisclosure agreements, nonsolicitation agreements, or other protective measures.