Restrictive covenants, such as noncompete and non-disclosure agreements, are commonly used in employment contracts to protect a company’s business interests. However, employers often struggle to find the balance between sufficiently protecting those interests and conserving resources. Surely, it would not be a wise financial decision to file a lawsuit against every employee who joins a competitor. We recently examined whether inconsistent treatment when modifying restrictive covenants may constitute retaliation under Title VII. Selective enforcement poses other practical issues for both employers and employees.
The Employer and Employee Perspective
For employees, a key consideration when contemplating joining a competing business is whether the current employer has pursued litigation against other employees who have left for competitors. Employees may be lulled into a false sense of security if other employees have left without issue. When they leave, they may be surprised to find themselves on the receiving end of a cease-and-desist letter or lawsuit.
For employers, selective enforcement may present a hurdle to clear to succeed in litigation. A court may consider whether the employer has a legitimate business interest in stopping an employee from working for a competitor if it was lax in enforcing the covenant against other employees.
Whether on the employer or employee side, it is important to be aware of the concept of selective enforcement. It is also important to know how it may be raised in restrictive covenant litigation.
What is selective enforcement?
Selective enforcement occurs when an employer is inconsistent in its enforcement of restrictive covenants in its agreements against departing employees. It is a defense that argues the employer should be precluded from enforcing its restrictive covenants because it has failed to do so consistently and has ignored similar violations in the past. Often, the defense of selective enforcement is raised when an employer only sues employees who join a particular competitor, but permits others to join other competitors without issues.
Is selective enforcement a valid defense to restrictive covenant litigation?
Selective enforcement has not yet been adopted on a large scale, but certain courts have recognized the defense. Moreover, external factors such as the COVID-19 pandemic may impact the adoption of the selective enforcement defense by more courts.
Estee Lauder Cos. Inc. v. Batra
The Southern District of New York is one court that has recognized the defense of selective enforcement. In Estee Lauder Cos. Inc. v. Batra, Estee Lauder sought a temporary restraining order against a departing senior executive. 430 F. Supp. 2d 158 (S.D.N.Y. 2006). His agreement contained worldwide non-competition and non-solicitation restrictions for 12 months after his departure. When he joined another skincare company as the Worldwide General Manager, Estee Lauder filed suit.
The court weighed the balance between Estee Lauder’s interests and the restrictions in the executive’s agreement. In particular, it considered Estee Lauder’s need to protect its confidential information and trade secrets. The court found that Estee Lauder’s “general behavior surrounding the enforcement of restrictive covenants suggests that such a length of time [of 12 months] is generally unnecessary.” Id. at 181.
Specifically, the court noted that similar covenants against other former Estee Lauder management were not enforced for the full term. In many instances, the covenants had been shortened by several months or more. It also found that the employee at issue had himself been offered a reduction in the term of his covenants. Therefore, the court found that due to Estee Lauder’s selective enforcement and past practices, a shorter term was sufficient to protect its alleged trade secrets. In this case, the court declined to enforce the covenants against the former executive for the full 12-month term and shortened them to five months
Surgidev Corp. v. Eye Tech., Inc.
A Minnesota district court similarly acknowledged the defense of selective enforcement. In Surgidev Corp. v. Eye Tech., Inc., Surgidev sued four former officers who had joined Eye Tech. 648 F. Supp. 661 (D. Minn. 1986). The agreements at issue contained five- and ten-year post-employment restrictions on the employees. The court found that Surgidev had waived its rights under the agreements because the “evidence overwhelmingly establishe[d] that Surgidev ha[d] permitted its employees, including key sales and marketing personnel, to leave Surgidev and take employment with competitor companies.” Id. at 698.
The court listed 28 other employees who had been permitted to move to competitors without issue over the years. It also noted that Surgidev itself had hired from competitors. Surgidev acknowledged that it had never attempted to prevent an employee from leaving and accepting employment with a competitor. Therefore, the court found that, “it would be inequitable to permit plaintiff to now rely on a non-compete agreement which it has so blithely ignored in the past.” Id. In this case, the selective enforcement defense was warranted by the employer’s previous lack of protection of its alleged interests.
Minnesota Mining & Manufacturing Co. v. Kirkevold
In contrast, an older Minnesota district court case found the selective enforcement defense did not apply. Minn. Mining & Manufacturing Co. v. Kirkevold, 87 F.R.D. 324 (D. Minn. 1980). The court found the employer had not waived its right to enforce the covenants because the employee was in a management position. Moreover, his new position would implicate the information he learned at his former employer. The court held that there could be no waiver because “to hold otherwise would effectively place employers in the precarious position of being compelled to enforce all such restrictive covenants with respect to all its former employees, which might encourage attempts to restrain trade, and which might undermine labor relations.” Id. at 336.
Minnesota has since banned noncompete agreements entirely, effective July 1, 2023.
HR Staffing Consultants, LLC v. Butts
More recently, the District of New Jersey declined to adopt the selective enforcement defense in HR Staffing Consultants, LLC v. Butts. No. 2:15-3155, 2015 WL 3492609 (D.N.J. June 2, 2015).
In Butts, a preliminary injunction was granted against the former employee. The injunction prevented him from working as executive director for a client of his former employer. His agreement with the former employer contained a 12-month post-employment noncompete obligation. Butts argued that his former employer had waived its right to enforce his agreement. Specifically, he argued the former employer had a preferred staffing services agreement with the new employer. Therefore, Butts argued the former employer consented to his new employment. Butts also pointed out that other employees had departed to work for the new employer.
The court refused to endorse Butts’ selective enforcement argument. It found it was reasonable for the former employer to “exercise some selectivity when incurring the trouble and expense of enforcing the non-compete provisions.” Id. at *11. Specifically, the court found it was reasonable for the former employer to seek to enforce Butts’ restrictions because he was a high level, valuable employee. Therefore, the court found it was a good use of the company’s resources to pursue litigation against him. On the other hand, it may not make sense to do so against lower-level employees who had access to less information. The court acknowledged that higher level employees may be more at risk for restrictive covenant litigation.
Considerations for the Court
In determining whether to embrace the defense of selective enforcement, courts may consider numerous fact-specific circumstances. Below are a few considerations that may come into play:
- Intent of the parties. Courts may look to the agreement itself to determine the parties’ intent in including the restrictive covenants at issue. Or, it may look to the circumstances surrounding its execution. Considerations may include whether the employer has consistently enforced similar covenants in the past for employees in similar positions. Also, it may consider whether the employer has shortened the duration of the covenants. If the employer has selectively enforced the covenants, the court may find the parties did not intend them to be construed according to their plain meaning. In these instances, the selective enforcement defense may be more likely to succeed.
- Reasonable justification. In determining whether the selective enforcement defense is valid, courts may look to the circumstances surrounding the employer’s consistency (or lack thereof) in enforcing similar covenants in the past. This may include looking to the positions of the employees who departed. One consideration is whether covenants for those in the same or similar positions have been consistently enforced. Also, courts may look to the level and type of information to which the departing employees had access. Finally, they may consider extenuating circumstances such as a lack of resources or budgetary constraints to enforce covenants against all departed employees. This may include whether the employer experienced a mass exodus of employees. In these instances, it may be difficult to pursue claims against all of those employees at once.
- The legitimate business interest(s) at risk. Courts may also look to the employer’s purported business interest it seeks to protect by enforcing the covenants. Restrictive covenants are used to protect a business’ legitimate business interests. Thus, the alleged legitimate business interest raised by the employer will impact whether its selective enforcement is justifiable. If the departing employee had a high level of access to information that could be used at his new employer, the selective enforcement defense may be less likely to succeed. On the other hand, if the business interest at issue has no bearing on the employee’s new employment or no reasonable relation to the covenants the former employer is seeking to enforce, the defense may be more readily adopted. Similarly, if others have departed for competitors with knowledge of the same information and the company has done nothing to try to protect that information, a court may find that the information is no longer protectable.
The selective enforcement defense is still under development and its application is not widespread. However, there are certain takeaways that can inform both former employers and departing employees regarding the likelihood that such defense will be successful against a claim to enforce restrictive covenants in employment agreements.
- If an employer has selectively enforced its restrictive covenants over the years, that may allow the employee to argue that the alleged legitimate business interest is not actually in need of protection.
- The burden to show that a former employer has waived its right to enforce restrictive covenants can be high. Courts tend to find waiver in extreme cases, such as In that case, the court noted at least 28 other employees who had been permitted to leave without issue. Only the four officers sued in that case had been pursued to enforce their post-employment obligations. Moreover, some agreements provide that waiver or modification may only be done in writing signed by the two parties. If this is the case, courts may be less likely to find that an employer has waived its rights to pursue claims for breach of the restrictive covenants based on conduct.
- Waiver may be more likely to be found where a former employer has different agreements with different post-employment obligations. The agreements would contain different covenants depending on the employee’s positions and/or responsibilities. This may include where the employment agreements contain restrictive covenants of different durations, or where the former employer has agreed to shorten the duration or rarely, if ever, sought to enforce a covenant for its entire duration.
- Waiver may also be more likely to be found where the former employer has failed to enforce restrictive covenants against numerous employees, including high-ranking executives, who left to work for the same or similar companies around the same time.
- Some jurisdictions consider waiver only in the context of the relationship between the individual employee and the former employer. In other words, it is not relevant to the analysis whether the former employer has waived certain rights with regard to other former employees. Instead, courts only consider whether the former employer had waived any rights in dealing with the specific employee at issue based on their course of conduct.
- A former employer does have some flexibility in deciding when to seek to enforce covenants. This is due to the cost and time involved in this type of litigation and the discrete number of resources a company has. Courts may consider that higher-ranking employees are more likely to be pursued through litigation given their level of access to information and competitive advantage. Other factors may include if the departing employee assisted in all transition efforts, returned company property, complied with the former employer’s expectations, and alerted the former employer that he would be joining a competitor. Also, if the departing employee does not pose a threat to ongoing client and employee relationships, courts may give the benefit to the employer and not require the employer enforce the covenants simply to ensure consistency in enforcement.
- Former employers may be better positioned to argue against selective enforcement if they contemporaneously record their reasons for not pursuing certain employees who go on to a competitor. Thus, thorough documentation and record keeping may be useful to defend against a selective enforcement argument.
- Selective enforcement is based on principles of equity. Therefore, courts are ultimately concerned with fairness to all parties. This can change drastically depending on the unique circumstances in each case. COVID-19, for example, greatly impacted employee relations. Many employers were forced to furlough or lay off employees. This led to concerns with whether it was equitable to enforce covenants against former employees who had been forced to leave due to the pandemic. Financial constraints also impact whether it is feasible (or wise) for employers to seek enforcement of covenants through litigation against all former employees.
The defense of selective enforcement can play a crucial role in actions to enforce restrictive covenants in employment agreements. While its applicability may vary depending on the jurisdiction and case-specific circumstances, it is important to be aware of this defense in navigating these legal disputes.
Employers should strive to maintain consistent enforcement practices to mitigate the risk of this defense being successfully raised in litigation. Employees should be aware of how the employer treats enforcement of their restrictive covenants. They should also consider how litigious the employer is when weighing their future employment options.
Whether you are an employer wondering how your historical enforcement of restrictive covenants may impact your ability to proceed on a new claim or an employee wondering whether you can successfully raise the selective enforcement defense, we are here to help.