Non-compete agreements in an improving job market
Back in the day non-compete agreements only applied to executives or people with access to a mass of intellectual property. Today a staggering number of employers simply use non-competes in an attempt to block all kinds of workers from getting a job without their permission. The practice has been described by some as “sounding close to indentured servitude” and these days even hairdressers and nannies have found that their employment agreements sneaked in wording that claims to ban them from working for competitors for a year or two after leaving their job.
Intellectual property and trade secrets are increasingly seen as the heart of competitive advantage and the concern about losing that information rightly drives many employers nuts. Consequently, the use of non-compete agreements to protect that information seems to be expanding.
Purpose and rationale behind a non-compete agreement
It’s devastating to lose key intellectual property to competitors, and it is also illegal for competitors to steal that property, whether they walk into your office and remove the file or hire one of your employees who then reveals all. Suing someone who steals your secrets is a reasonable thing to do, although it is time-consuming and expensive.
A non-compete agreement tries to head off the concern that former employees might spill secrets to a competitor by preventing them from even going to work for a competitor. Non-competes outline who you can work for after leaving your current employer. If it’s drawn too tightly, it makes it impossible to earn a reasonable living.
The thing to remember about the theft of intellectual property, though, is that there has to be a buyer or there cannot be a seller. No employee can go to work for a competitor and pass along trade secrets unless a competitor hires them. What noncompetes try to do is threaten employees with big enough penalties that they will not give in to the offers of competitors to come work for them.
Non-compete agreements clearly are private sanctions, not legal mandates, and one reason why employers impose sanctions on their employees who leave rather than waiting to sue competitors for stealing trade secrets is because the former is so much cheaper and easier to do.
The more restrictive the harder to enforce
The problem is that the courts that have to enforce non-compete agreements aren’t very interested in what is cheap and easy. They have been increasingly reluctant to enforce noncompete agreements. They more or less don’t do so in some states, such as California, in part because they work by punishing the weakest party in the three-part dance of employer-potential hire-competitor. It doesn’t matter whether those agreements are signed voluntarily or not—although if you really need the job, how one defines “voluntary” gets tricky—courts in every state tend not to enforce very restrictive non-compete agreements because they start to violate constitutional provisions against slavery.
But here’s the thing about non-compete agreements, many of the employers who impose them on their employees are or have tried to hire current employees from competitors. That doesn’t mean they are trying to steal secrets, of course, but it does mean they are engaged in a hiring practice that they are preventing their own employees from using.
Defense Attorneys, LinkedIn, Social media
Employers who are going to court to enforce a non-compete and prevent an employee from leaving to work for a competitor are increasingly confronted by defense attorneys who outline for the judge all the recent hires the employer has poached from their competitors. The information is readily available in places like LinkedIn. This looks like hypocrisy to the judges—not surprisingly—and they are tossing the cases out.
If the agreements are legally valid then the newly unemployed worker can’t work in their field of expertise without moving away from where they live but many times they are not legal.
One argument put forward suggests that non-compete agreements can assist employers to enforce wage suppression because their employees feel that they will be out of work if they leave, while others complain that non-competes stifle competition because employers can’t hire the best talent if they have been shackled with a non compete agreement.
Stifling economic recovery / growth? Massachusetts, California, Texas…
While non-competes have been spreading like mold for several years there has recently been a kickback against the practice.
In 2014 the Massachusetts Governor proposed banning many non-competes because the technical community has been losing start-up money to California (in California many noncompete agreements are illegal / invalid).
Texas went one stage further with a court ruling that threw out a non-compete on the grounds that it was ‘against public policy’ to block skilled professionals from working freely in local communities (ie: the non compete restricted the community from choosing whom THEY wanted to service their needs’. It’s early days but the Texas ruling may gain traction in other states and in other non compete disputes across Texas.
Increasingly, disagreements over the agreements are ending up in court
Thomas Geoghegan (Illinois) filed a class-action lawsuit against an AAA contractor over a non-compete agreement with roadside mechanics. “What’s the trade secret to changing a tire?” he reported. “It’s abusive. It’s a way of keeping employees under control”
Self-help remedies don’t work and should be avoided if you are an employee taking a new job where you think you are subject to an old non compete agreement. Laying low; avoiding meetings/conferences, severing links to co-workers do not negate a non-compete and lead to problems in the end.
It makes sense that an On-Site Property Manager can’t conspire with a competitor to oust the existing Management Company and then benefit from a lucrative contract to run the same community. Lawyers may pose the question: “What legitimate trade secret or Intellectual Property is protected by blocking a Property Manager from taking a job at another community?”
To be legally enforceable non-competes usually have to be for short periods of time, cover restricted geographical areas and protect genuine trade secrets or intellectual property rather than just give an employer a monolopy and reduce their recruiting/employment costs by shackling employees to their desks.
Where a non-compete agreement may fail the legally enforceable test is that it may prove hard to prove it is protecting a legitimate “protectable business interest” because most employees don’t have access to ‘trade secrets’ or ‘protectable intellectual property’.
Seeking to enforce a non-compete can expose employers to needless litigation and costs because employees can apply to their local court for “declaratory relief” to have the noncompete struck down or modified or even sue for wrongful termination, discrimination and other workplace violations that dissolve the employment agreement and its accompanying noncompete.
Smart employers often take the view that suing your employees for trying to escape is a hurdle to new recruitment and lowers reputation as a place to work.
If you’re a CEO or a senior manager, you may have signed a non-compete agreement, which would limit or restrict your ability to work at a competing company for a pre-determined period of time after leaving your job. But in the last couple of decades, an increasing number of American workers are being asked to sign such deals, including service-sector and low-wage employees.
“We’ve seen them expand to jobs like yoga instructors and camp counselors,” says Orly Lobel, a professor at the University of San Diego School of Law and author of the book “Talent Wants To Be Free,” which addresses the subject.
Take the case of Danny Davies, who worked at a Jimmy John’s sandwich shop. He says when he got hired, he was required to sign a non-compete agreement that limited his ability to work at any other sandwich restaurant.
“They ask everyone to sign it when you get hired,” says Davies, who hasn’t worked at Jimmy Johns since February 2014. And while neither Davies nor his colleagues initially took the agreements seriously, Davies says their views changed once they considered leaving the sandwich shop and finding a job elsewhere.
“I’ve known people that have done this: they start working somewhere…And keep this job secret, just in case,” says Davies, alluding to the concern that the franchise owner of the sandwich shop might pursue legal action against them.
There have been several stories of employees who have been restricted from taking other jobs because of non-compete agreements—from a children’s camp counselor, to a physicist. Jimmy John’s is currently facing a class-action lawsuit over its non-compete agreements.
One of the rationales for requiring the non-competes from lower-wage workers is that they may have received a lot of training in their jobs, and if they leave to work at a competing company, that may be an unfair advantage. But Lobel says non-compete agreements have spread beyond even that thinking.
“I teach cases about welders who receive so little training, but they still can’t move to a competitor,” says Lobel.
Lobel says part of the reason for the expansion of these agreements is a shift in business culture. “Today, it’s really human capital that is what creates value,” Lobel says. “And companies have this impulse that the way they’re going to keep people is by cutting off their outside opportunities.”
“Non-compete law is essentially state law, and it varies somewhat significantly among states,” says Michael Rosen, a partner at the Boston law firm Foley Hoag LLP.
Rosen specializes in non-compete agreements in Massachusetts, which has a relatively permissive non-compete law. Meanwhile, California is one of the most restrictive states. It does not recognize the agreements except for owners of businesses. In the summer of 2014, Massachusetts’ state legislature considered amending non-compete rules, but the initiative failed.
Rosen says there is a place for non-compete agreements in business even for low-level workers, such as those at a high-tech firm with access to confidential code.
“Generally, the legitimate interests that would justify enforcement are…protection of trade secrets or confidential information, and protection of good will,” Rosen says. “But in terms of low-skill areas where confidential information and good will are really not in jeopardy, I think it’s difficult to justify asking folks to sign a non-compete.”
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