Noncompetes and Other Restrictive Post-Employment Agreements

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.