The answer depends on which state the employee is in, as each state has its own laws regarding the enforceability of non-compete agreements. In a minority of states, an employee’s reason for termination of employment makes no difference as to whether his or her non-competition agreement is enforceable. For example, in Texas or Georgia, it does not matter if the employee quits, is laid off, or fired “for cause” – the non-compete agreement is likely to remain enforceable as long as it is reasonable and meets other criteria. In a few states, like California or Oklahoma, the reason for termination does not matter because those states do not enforce non-compete agreements.
In 15 states, the reason for termination does matter. For example, New York courts typically refuse to enforce non-compete agreements of employees who were terminated, as opposed to those who left of their own free will. In Washington, a recently-passed statute prohibits employers from enforcing non-compete agreements against employees who were laid off unless certain conditions are met. A few other states, like Illinois or Indiana, will enforce non-compete agreements against the fired employees, but not if the employer acted in “bad faith” in firing them. Additionally, several states, like Maryland, will consider how soon after signing a non-compete agreement the employee is fired. If it is within a short period of time, the employee’s non-compete may become unenforceable.
In the majority of states, however, the courts are either split as to whether the reason for the termination of employment affects the non-compete agreement’s enforceability or there is no definitive guidance from the courts on that issue, leaving the door open for employees to argue that it is inequitable to enforce their non-compete agreements against them if they were laid off or fired.
CONCLUSION: Companies that have multi-state operations should always consider what effect an employee’s termination of employment will have on that employee’s non-compete agreement. For example, in those jurisdictions where the reason for the termination will be scrutinized in court, it may be important to carefully document what led to the employer’s decision to terminate a particular employee so as to establish lack of “bad faith” on behalf of the employer.
Further, in those jurisdictions where an involuntary separation has the potential of invalidating an employee’s non-compete agreement, companies should make sure they have other measures in place that will continue to protect their goodwill and business interests in case the non-compete restraints become invalid, such as customer and employee non-solicitation and confidentiality provisions.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.