Non-Compete is a Tricky Subject

I have worked as a software engineer for the last 10 years. I have been fortunate enough to work at a company that doesn’t require a non-compete, but I have a number of friends who signed one. It’s a tricky subject.

On the one hand, there are some fields where a non-compete is essential to retain business. Specifically areas where clients are transient, such as sales or consulting. You don’t want other companies recruiting your employees for their contacts.

On the other hand, specifically engineering, non-compete agreements are more of a ball and chain for employees than anything else. It’s an attempt by employers to control wages by limiting their current employees ability to find more lucrative employment elsewhere.

Limiting the length of time of a non-compete helps, but it is still a challenge. An engineer is an engineer, and an inability to do engineering for 6 months means an inability to earn a wage for 6 months.

In my opinion, the best solution is to limit the scope of a non-compete. There’s already laws against theft of intellectual property, so maybe the right solution is to target the theft of clients. Limit the scope of non-compete agreements to only prohibit the theft of clients, rather than limiting the length.

That’s just my 2-cents.

8 replies on “Non-Compete is a Tricky Subject”

  1. Chris makes some excellent points. As a corporate lawyer, I deal with non-competes often, from both the company side and the employee side. From the company side, I see non-competes as a way for my startup clients to protect their trade secrets. However, from the employee side, I have seen two troubling scenarios. One is the employee who signs whatever the company hands him — who wants to scare off a new employer by negotiating a non-compete right up front? — and learns later that they have agreed to major restrictions on their career opportunities. The other (which may happen to the same person) is that a talented person bound by a non-compete makes the cross-country move to greener pastures in California.

    Even in California, which is well-known for not enforcing non-competes as a matter of public policy, there are some exceptions where non-competes are typically enforced. For example, in the context of an acquisition, where the former founder is agreeing not to compete with the acquirer, a non-compete is generally reasonable. A non-compete that is narrowly tailored to prevent direct competition with the company, without severely restricting the employee’s opportunities, should be reasonable.

    I support the efforts to limit enforceability of non-competes in Massachusetts because I think it will help us attract and retain talent, which in turn helps us attract and retain great businesses. I think that any law should be carefully drafted to allow for exceptions where restrictions on competition are reasonable. In drafting our proposed law, we should look at the development of the law in California and other states that have dealt with this issue.

  2. I’m retired now, but worked in hi-tech for over 30 years. I agree with Chris; limiting the time of a non-compete agreement is not very useful. What is an employee supposed to do when looking for new opportunities? Should they look for a position, but explain to perspective employers that they can’t work for them until they go without a salary for 6 months? That is unhelpful for the employee, and will scare employers off. Should they leave their position and take a position at Dunkin Donuts for 6 months, and then try to work in their given field again? How does that benefit the financial situation of the employee, or for that matter, the income tax revenue due to the state?

    If a company seeks to prevent an employee from using their education and knowledge for a given period of time after they leave the company, then they should be required to pay that employee the same salary for that period of time.

    I believe that employees invest time and money (for schooling) in their careers and they should have the freedom to take full advantage of that investment. My Mother always told me that education is the only thing no one can take from you, but she was wrong if that education can be prevented from being used to my best advantage. Non-compete agreements are a kind of restraint of trade, something employers would not like if it applied to them.

    What employees should be required to do is to not steal company property, and theft includes the disclosure of customer lists, product plans, trade secrets and the like. This is where the law should stand, not in the restriction of employees’ ability to make a living from their hard earned education and experience. I suppose you could argue that the experience gained by the employee should be the property of the employer, but how many employers would hire a an employee without any experience in their field? And yet, the experience and education that the employer hires was not created by their employment of the employee, it was only improved by that employment. So all employers are both givers and takers, and that works to improve the overall level of employee training and the overall business climate.

    One final thought: I like my personal medical doctor, and when she left her group practice for another, I followed her to her new practice. As a consumer of medical services, I do not want to be prevented from getting that service based on my own good judgement. But I suppose this part gets tricky. If the consumer, whether a person or a company, follows an employee to their new place of service because they value the service, that is one thing. If they are stolen away by promises or bribes of some kind that is another.


  3. Sally has it right: the real problem isn’t competition – heck, aren’t we all supposed to thrive on competition? The problem is lots of other things like theft of customer lists and trade secrets that all have their own remedies. Non-competes are an extremely blunt instrument to address them.

    And to one specific point in the discussion, I think it’s easy to overstate the number of occasions when the individual employee is so unique and valuable that they will take a significant number of customers with them when they leave. I’m a consultant, and if I say so myself a reasonably good one who has genenerally had excellent client relations. But I don’t think for a minute that what our clients are buying is me: it’s the company, our knowledge base, our methodologies, our reputation – all things that should survive the loss of a single employee. For that reason we have never had non-competes.

    In fact, on the few occasions when we’ve hired somebody who has intimated they can bring clients with them, it hasn’t actually happened.

  4. I work for a small company that prepares taxes.

    If we need more clients, I could just work part time at HR Block and offer to undercut the fee that they charge? And HR Block could do nothing?

    Also, I would worry about hiring and training college students to do basic things like bookkeeping if I couldn’t be sure that they wouldn’t undercut my fees and take my clients.

    I can think of lots of examples were you could be training your competition without some level of protection.

  5. I have been on both sides of the non compete document. I empathize with both sides. To me, signing or receiving these employment packages sends the message that one is not to be trusted from the start. I think there is a better approach than the draconian ‘you can’t work in the field for x time’. By the way isn’t there a ‘cooling off’ period after working in certain government positions?

    How about an NDA/employee contract that requires full disclosure of employment positions for a time period after one leaves a firm. For example, I take a position at New Firm, I notify my old firm that I am now working at New Firm. Old Firm can keep an eye on New Firm for signs of IP, trade secret etc theft. If they detect theft they can investigate the employee and/or New Company.

    Dispersion, obsolescence, and rediscovery of trade secrets and IP is something that eventually happens. There is a tradeoff between being too defensive or offensive with control over these ‘methods’. It is common for organizations to spend exuberant amounts defending every single thing employees think of. It is one thing to possess knowledge but often times materials and or labor are still needed to realize revenue from the idea. At a certain point the lawyer’s fees will eclipse the income potential of the ideas.

  6. Lots of folks confuse (a) non-compete with: (b) non-poaching; (c) trade secret protection; (d) employment limitations.

    Employment limitations of any sort are unjustifiable, IMHO. If proper non-compete, non-poaching and trade secrets agreements are used, there is absolutely no justification for employment limitations.

    non-compete — you cannot establish a competing business for a period of time. This is for principals only, and is reasonable to establish the trust needed among company principles and senior executive staff to start and/or run a business. But ***principals only***. Time limited, with the exact terms negotiated among the principals, who can defend themselves quite well (unlike employees at the short end of a significant power imbalance)

    non-poaching — a salesman (or anyone) cannot take customers or documented prospects upon leaving a business that they know about only by virtue of their association with that business. Ever — no time limit.

    trade secret protection — an employee or principal cannot take documented trade secrets or other intellectual property and use it in a competitive business, as employee or principal. Again, no time limit on this one.

    Obviously the trade secret issue is the tricky one — where do you draw the line between generic skill and knowledge gained on the job, no matter how extensive or deep, and protected intellectual property. But there is a very robust body of law and practices to adjudicate this kind of thing and absolutely no need to hit this hornet with the howitzer of employment limitation.

    Yes, it can be tricky. But using these principles, it’s a lot less tricky than many businesses would have you believe, and in no way justifies the kind of semi-slavery represented by employment limitations masquerading as the other three kinds of protection.

  7. I beg to disagree, John. When you accept a position with a company as an employee, you would be dishonest if your intent were to steal their secrets or customers. I believe this is far too rare an occurrence to justify throwing an NCA blanket over everyone in a company and thus constricting their future options.

    Think about universities. They are in the business of training talented people to enter academia and in a real sense compete with them at other institutions. Should universities require their graduates or employees to sign agreements that they will not work at a rival institution? That would completely undermine the pursuit of knowledge and nullify their mission to educate skilled workers and researchers.

    What you should worry about is companies that employ CPAs in India and other countries undercutting your costs. You are barking up the wrong tree if you are worried that recent grads will steal your business!

  8. Great thread here — indeed a tricky subject.

    I think the weight of the argument in this thread is towards abolition. As Chris, David, A, Tom, and Sally point out there is a strong set of tools other than non-competes. This does argue for abolition.

    But John’s argument represents the argument that I have heard from many small businesses. There are many voices like John’s that other legislators do hear. Pia’s comments also reflect the practical reality that new businesses want to use all the tools they can to protect their trade secrets. And as Sally acknowledges the client stealing scenario does get tricky.

    So, I personally start from abolition, but wade into a practical political situation in which compromise is necessary and perhaps wise.

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