Boxed in By the
Bottom Line:
Noncompetes and Other Restrictive Post-Employment
Agreements
Nan Knight
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Scenario one:
Jane is a Senior Research Chemist working for
a multinational petrochemical corporation. As
a part of a team developing a breakthrough "supermolecule"
that may provide the answer to oil spill cleanups,
she believes that she is a valued employee. She
is dismayed when management asks her to sign an
agreement stating that she will not work for another
petrochemical corporation for at least 2 years
after terminating her current employment. What
does it mean? Is the company about to let her
go? Should she sign?
Scenario two:
Bob just received his MSc in organic chemistry
and has been offered a sales position at a company
he has long admired. His scientific background
will be valuable in working directly with a broad
client base. When filling out his employment papers
on his first day at work, however, his HR representative
says that he is required to sign a noncompete
and nondisclosure contract that restricts his
employment elsewhere. Can he ask for time to think
about it? What if the job doesn't work out? Will
he still be hired if he doesn't sign?
Scenario three:
Lydia has worked as a clinical trials liaison
for a pharmaceutical corporation for 11 years
in positions of increasing responsibility. She
has accepted a position with another pharmaceutical
company. Although she previously signed no noncompete
agreements, when she prepares to finalize her
resignation, she is told that she must sign a
noncompete before receiving her promised severance
pay and vested pension. Does she have to sign?
Is the company punishing her for leaving? Does
she have other leverage?
Jane, Bob, and Lydia each have come face-to-face
with one of the most troublesome and controversial
aspects of employment in the 21st-century workplace.
For many companies, especially in the sciences,
knowledge and intellectual property have become
the most valuable assets. "In the past few
years, the life and death of companies has hinged
much more on ideas," says Shannon Miehe,
an attorney and legal editor for Nolo.com,
a legal resource Web site. "And protecting
those ideas sometimes means placing specific restrictions
on when, where, how, and with whom their employees
work."
The result has been a radical upswing in the
numbers of employees asked to sign noncompetition
and nondisclosure clauses as a condition of employment.
A typical noncompete clause might ask that an
employee promise that he or she will not work
for a similar company in a specific geographic
region during a finite amount of time after leaving
a current position.
Many employees balk at what they see as signing
away the possibility of better jobs. And the courts
often agree with them, says Miehe, author of Noncompete
Agreements: Retain Key Employees and Your Trade
Secrets (Nolo Press; 2000) and
How to Create a Noncompete Agreement (Nolo
Press; Fall 2001). "Many courts look unfavorably
on terms and conditions that restrict the employee's
right to earn a living." Regulations, laws,
enforcement, and standards vary widely by state,
so that decisions about signing such agreements
are difficult.
Although some experts believe these wide variations
among states and industries will ultimately bring
an end to such agreements, others point to recent
court cases in which noncompetes were rigorously
enforced. In June 2001, a former Avant! engineer
was sentenced to a year in jail for funneling
trade secrets between companies. In a few cases,
courts have even indicated a willingness to support
companies against departing employees and their
new employers when no such agreements were signed
at all.
Learn the language. How does the savvy employee
approach a noncompete or other "restrictive
covenant" when it's presented by a new or
even long-term employer? The key, as always, is
to be armed with a working knowledge of the various
implications of such an agreement, a range of
potential strategies, and well-thought-out career
goals.
"The word 'noncompetes' is often used as
an umbrella term for restrictive clauses and agreements
that are legally quite different," says Miehe.
The main types of restrictive clauses include:
- Nondisclosure clauses: These are designed
to maintain the confidentiality of private information,
which can range from trade secrets to personal
details from customer databases.
- Nonsolicitation clauses: These are
intended to prevent an employee from taking
key customers or clients, either to another
company or to start a new competitor.
- Noncompetition clauses: These place
specific restrictions on working for companies
that make use of the same information or skills
as the employee's current company.
- Nondisparagement clauses: These require
that the employee say nothing negative about
the company (whether it's true or not) and often
include wording that prohibits disclosure about
internal politics, gossip, or other potentially
embarrassing information.
- Noninterference clauses: These bar
the employee from encouraging other employees
to leave the company. Both nondisparagement
and noninterference clauses may also include
wording by which the employee agrees not to
sue the company.
The first two are much easier to enforce, says
Miehe, because they deal with the transfer of
specific and identifiable proprietary information.
"Noncompetition agreements are sometimes
seen as a safety net for nondisclosure and nonsolicitation
agreements," she says. "If the employee
sticks to the restrictive terms of a noncompete,
it's a lot harder to be in a position to either
give away important information or use the company's
client base." Nondisparagement and noninterference
clauses are often included when a company has
specific fears about a bad relationship with an
employee or about the possibility of a wholesale
workforce exodus to a competitor.
Look beyond the legalese. Five kinds of densely
worded legal restrictions on where and how you
can work in the future are probably five more
than you ever wanted to know a lot about. Especially
if you're about to start a new career, this may
seem like one more set of dotted lines that require
your quick attention before beginning a promising
job. Legal experts advise you to step back and
take the long view, asking the following questions:
- Why does this company at this time want this
type of restriction placed on your future employment?
Is it reasonable?
- How is this likely to affect or restrict your
long-term goals? Given everything you know about
yourself, this company, and the general field
in which you work, does it seem likely that
you can live with the terms of a noncompete
or other restrictive agreement?
Answering these questions requires that you look
at what you're being asked to sign from two perspectives:
the company's and your own. Moreover, you'll be
better prepared to make a decision about signing
if you know a little more about where experts
believe such agreements may be headed in the future.
Protecting Workforce, Secrets, and Client Bases:
How Management Views Noncompetes
Noncompete clauses began to appear in the 1950s,
with owners attempting to protect themselves from
unfair competition. In the 1980s and 1990s, noncompete
clauses became more common as a protection for
medical practice groups that wanted to prevent
physicians from leaving and taking their patients
to a new practice. Most recently, the technical
workforce shortage, especially in dot.coms and
other high-tech endeavors, has led to a proliferation
of noncompete and nondisclosure agreements and
an escalation in enforcement and legal action.
For employees and potential employees, these
agreements may seem unnecessarily restrictive.
But for many companies, they represent a safeguard
against theft of ideas and loss of workforce in
a vital economy.
In general, companies use noncompete, nondisclosure,
and other restrictive agreements to try to prevent:
- The spread of trade
secrets or confidential information:
This is among the oldest restrictions on future
employment and the one most honored by the courts.
Apart from asking employees to sign an agreement
that they will not divulge proprietary information,
companies also are protected by the Uniform
Trade Secrets Act. Employees and competitors
can be held to the standards of the Act and
its state-by-state equivalents whether or not
they have signed specific agreements.
- The flight of employees
to competitors: In the recent tight labor
market, this became especially important for
many businesses. Even when the departing employees
gave away no trade secrets, they left job openings
that were costly to fill and affected the entire
company's productivity. Many of the legal actions
that ensued were brought against the "raiding"
companies. In 1997, Wal-Mart sued Amazon.com
for hiring away 15 top information-technology
specialists. The result for Wal-Mart employees
was that the company began to ask that more
of its higher-level workers sign noncompetes.
- The loss of
client and customer bases: When an employee
has good working relationships with outside
parties, such as suppliers or customers, the
loss of that employee means an automatic setback
in time and effort as a new employee rebuilds
those relationships. Even more compelling is
the need to make sure that the employee is not
able to transfer these relationships to his
or her new company.
- Leaking information about the company's inner
workings: Sometimes information that is not
strictly a trade secret can be even more valuable
(or potentially damaging). A company that is
undergoing an internal shakeup or turmoil or
has longstanding management problems does not
want competitors to know about potential weak
spots. Companies look for ways to prevent ex-employees,
especially those who left the company with bad
feelings, from gossiping about everything from
the personal habits of managers to the dollar
amounts of annual bonuses.
- Employees leaving to start a competing company:
Every company has an interest in making sure
that the skills and knowledge an employee acquires
stay in-house. Losing valued employees is bad
enough, but preventing them from forming competitive
concerns is even more important to a company's
continued success. However, employees who want
to start their own businesses are protected
by a number of federal and state laws that support
entrepreneurship. Even with a signed noncompete
agreement, such employees must simply wait for
the stipulated amount of time before beginning
the new business. Smart companies often find
a way to assist ambitious employees in beginning
new concerns with the stipulation that the type
of business or targeted client be slightly different,
so that the two companies are not in direct
competition.
- Lawsuits by former employees: Many companies
require that, at separation, employees sign
away their right to sue the company. Sometimes
this is because the company has reason to believe
the employee is already contemplating legal
action. Such signing is almost always accompanied
with the offer of something of value (extra
severance pay, extension of health benefits
for a few months). Some state courts have held
that even with a signed document and the receipt
of compensation for signing, employees cannot
be held to this agreement if the company has
acted illegally toward them in the past.
Who should sign?
Not every employee will be required to sign a
noncompete or other restrictive agreement. Every
company has to decide which of its employees should
be presented with such agreements. You are most
likely to be asked to sign such an agreement if
you are one of the following:
- Employees who work in research and product
development
- Engineers, scientists, and others engaged
in product design and invention;
- Employees who do creative work such as branding,
trade names, and advertising;
- All sales and service employees who work directly
with customers on the actual substance of what
the company produces;
- All clerical or processing staff who might
encounter details of experimental, creative,
or inventive work; and
- Anyone with enough information to start a
competitive company or similar business.
Who decides which restrictive agreements are
needed?
If you work for a large corporation, in-house
legal staff and a cadre of consulting attorneys
take care of drafting, executing, and advising
on enforcement of noncompetition clauses. "Most
of our members have their own attorneys,"
says Cynthia Bookout, spokesperson for the Consumer
Specialty Products Association, with members that
include a number of large chemical companies.
"These become in-house decisions and really
don't come up as the subject of industry-wide
conversation." Each corporation has its own
set of agreements, which may differ depending
on the state in which the employee will work and
the position he or she may hold. Consistency among
similar employees, however, is important. If 17
scientists have the same job description and the
same responsibilities, the company should make
sure that any restrictive agreements they sign
are similar. Charges of discrimination have been
brought when employees could show that signing
requirements were inequitably enforced.
Noncompete agreements are important for many
smaller businesses. If you're going to work for
a small company, you may be surprised to see language
that not only prevents you from sharing trade
secrets but that restricts your ability to change
jobs. For many smaller companies, the competitive
edge may lie entirely on the shoulders of a few
skilled employees. Losing these employees to a
competitor could mean the end of the company.
Many smaller companies look to print and Web sites
to begin to structure restrictive agreements,
turning to legal advisors to finalize the wording
and structure plans for enforcement. You can see
samples of the kinds of online advice your company
may be consulting at sites such as Business
Owner's Toolkit .
Careful wording
One of the reasons that the wording of noncompetes
and other restrictive agreements is becoming increasingly
complicated is that more and more employees are
consulting expert advice and hesitating before
signing. A growing body of literature, including
a do-it-yourself Web site, breakyourconcompete.com,
assists employees in interpreting, negotiating,
and sometimes circumventing the original intent
of such agreements. One of the results is that
most such agreements today are structured for
"partial enforcement," meaning that
even if one part is found by the courts to be
unreasonable, the employee can still be held to
the terms of the rest of the agreement.
To enforce or not to enforce?
Especially for employees' enjoying the warm welcome
that usually accompanies signing on for a new
job, it's impossible to believe that this friendly
company would ever enforce what seem like obscure
legal formalities. Think again! Companies are
pursuing former employees with increased vigor,
even in states where the courts traditionally
have been reluctant to enforce noncompetes.
Legal experts note that once a company decides
to include restrictive clauses for employees,
it should be ready to enforce them consistently.
Miehe says, "If a company is selective about
enforcing these clauses, then its chances will
not be as good when the matter come before a judge."
The court might take such random enforcement as
an indication that the company really did not
take such agreements seriously (and therefore
that they were not vital to the company's success)
or that the agreements were being used as retribution
to go after a specific employee. Neil Caesar,
an attorney who writes extensively on healthcare
workplace issues, agrees, advising companies that:
"Your ability to enforce a noncompete clause
will directly relate to how consistently you enforce
it
a noncompete provision should be only
as restrictive as you are willing to enforce,
and then should be enforced vigorously."
The Standard of Reasonableness
From the perspective of employers, then, noncompetes
and other restrictive agreements are means of
guarding against a host of threatening events
and business practices. Understanding this perspective
can help you as an employee to identify what your
company believes is really important about you
and your work. Ultimately, though, you--like the
courts-need to hold up these agreements to a standard
of reasonableness. Is the company asking you to
sign away more than you're willing to give? Are
you giving up rights that legally should be yours?
These and other questions, as well as tips for
dealing with noncompetes, are included in Part
2 of this series. Part 3 looks at the future
of restrictive employment clauses and revisits
Jane, Bob, and Lydia to assess the potential impact
of the agreements they're asked to sign.
Nan Knight is a freelance science writer and
editor whose credits include Smithsonian exhibits,
Discovery Channel Web sites, and a wide range
of publications on radiation in medicine.
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