Imperative or Impossible? The Future of Restrictive Employment Clauses

Part I of this series introduced noncompete clauses as a condition of employment and how management views them. Part II offers information on employees’ basic rights and strategies to keep in mind when presented with a noncompete or other type of restrictive employment agreement. This last installment asks whether noncompetes are still useful in a fast-changing world.

With the recent economic downswing and hard times for many high-tech businesses, you might think that companies are easing up on noncompetes and other restrictive employment clauses. Just the opposite seems to be happening, with new and more complicated cases coming to litigation each month. Corporations that once asked employees on an ad hoc basis to sign such agreements now have standard forms that must be signed by every new employee. And employees are fighting back in record numbers.

This is “great for lawyers,” says Stuart L. Adams, Jr., a Louisville, Kentucky, attorney, of the increasing numbers of suits over noncompetes. “There seems to be an endless supply of both employees calling to see if they can get out of one, as well as employers asking to have one drawn up or to improve on one they have recently had struck down in court.” But in an article in Louisville Computer News, Adams voiced his own distress over the standard noncompete agreement, calling it an “anachronism under siege” and a “brain drain.” The variability in terminology, enforcement, state-by-state nuances, and changing standards of practice signal a difficult course for the coherent development of such agreements in the future, he maintains.

On The Plus Side

Some states, such as California, have ruled that certain types of noncompete agreements are not legal. Other states are very unlikely to enforce such agreements–something that most employees have no way of knowing when they sign. Several resources are available for information on your state’s stance on noncompetes, including Covenants Not to Compete: A State-by-State Survey, by B.M. Malsberger, A.H. Pedowitz, and R. Sikkel (Washington, DC: Bureau of National Affairs, Inc.; 1999).

Courts tend to look favorably on employees who have behaved in good faith and harshly on companies that require agreements that restrict future employment unnecessarily. With capable representation and the facts on your side, your chances of coming out on top in such a situation are good.

On The Negative Side

Large corporations, associations, and other business entities have more time, money, and attorneys than you. They can afford to prolong the process of enforcement, spend money on frivolous suits, and tie you up in court. Avoiding such a confrontation, by being careful about what you sign and when, is your best bet.

And the alternatives…

If you can’t stand the idea of signing a noncompete or a restrictive agreement, try an employment situation that doesn’t require one. Most academic positions, from elementary school through universities, do not ask their employees to sign noncompetes. In most cases you only commit yourself for the duration of the academic year. If you teach chemistry at a public high school this year, you’re free to switch to a junior college the next.

The federal government has some restrictions on future consulting for its employees, but, for the most part, these are far less stringent than those applied in the private sector. The CEOs of some of the most successful scientific startups came directly from similar government work.

The future? Answer hazy. Ask again later.

It is highly unlikely that uniform standards will be developed for noncompetes and other restrictive employment clauses, but case law will continue to shape and direct the wording and enforcement of such agreements. As technology evolves, new types of clauses will no doubt be created to cover changing avenues of knowledge “leakage” and worker mobility. For employees, general advice about entering into such agreements will always be shaped by their own specific circumstances.

“First, we’ll call all the lawyers.”
–With apologies to Shakespeare

In devising answers to the opening scenarios, one common theme emerges. Legal advice is essential, whether you’re an employee presented with a noncompete or other restrictive agreement or a company contemplating either the implementation or enforcement of such agreements.

Remember Jane, who was concerned about why her company would ask her to sign a noncompete even though she is a current employee? Jane is right–her company is sending her a message, but it’s not the one she thinks they’re sending. By asking her to sign the noncompete in the middle of the project, the company is making it clear that she’s a valued employee whose skills and knowledge base are essential to continued success. The last thing the company wants is for Jane to leave. She is offered a substantial bonus for signing the document, a practice consistent with the legal necessity of offering something “of value” to employees who sign such agreements. Should she sign? If she plans to stay with the company and her own attorney looks over the agreement and finds that it is not unnecessarily restrictive, she can sign the agreement. If she’s feeling especially confident, she might even try to get the bonus increased or ask for changes in her benefits structure.

In the second example Bob, our sales applicant, was presented with a noncompete agreement on his first day at work that would restrict his subsequent employment elsewhere. Bob needs to think carefully about signing the agreement. Does he really plan to stay with this job long enough to make the restrictions worthwhile? Are the restrictions specific as to time, geographical area, and type of future employment? It’s in Bob’s best interest to ask an employment attorney about the reasonableness of the restrictions. If the restrictions are so out of bounds that the courts are unlikely to enforce them, then Bob can take a chance on signing and dealing with the consequences should he breach the terms of the agreement. Most legal experts advise against this. Bob needs to be direct with management about what kinds of restrictions he will accept. If the company proves unyielding, then he might be happier working in a situation in which such an agreement is not hanging over his head.

And then there’s Lydia, who was presented with a noncompete as she is preparing to start a new job, which the company says she must sign before recieving her promised severance pay and vested pension. Despite whatever hard-sell tactics management may use with Lydia, she is not obliged to sign any noncompete, nondisclosure, or other restrictive agreements when terminating her employment. She is entitled to whatever benefits her employer typically gives to departing workers as well as her legally vested pension and retirement benefits.

The company may use “extra” benefits, such as pay for accumulated sick leave, as incentives for signing. If Lydia feels she has nothing to lose, she might choose to ask for additional severance pay or other compensation for signing the agreement. Whether she signs or not, the provisions of the Uniform Trade Secrets Act or its state-level equivalents will still restrict her from sharing trade secrets with her new employer. But most legal experts agree that she is entirely within her rights to refuse to sign any agreements that restrict where, when, and with whom she can work in the future.