The rising noncompete tide

FinancialWeek's Frank Byrt has a great piece on the rise of noncompete litigation directed at top executives: "No place like home: Companies blocking more execs from jumping to competitors" (registration required, maybe). Frank's jumping-off point is the recent high-profile litigation between TJX and Pier 1. In that dispute, Alexander Smith left his job as a group president at TJX to become Pier 1's CEO. TJX fired off a lawyer-letter warning Smith that he was violating his noncompete agreement. Pier 1 then made a preemptive strike by seeking a temporary restraining order to prevent TJX from interfering with Smith's new employment.

As that battle rages, Frank notes the growth in noncompete litigation and the fact that top executives are increasingly becoming targets. Frank and I had a lengthy discussion about this, and some of that discussion made it into his article:

More and more employers — witness clothing retailer TJX Cos. — are threatening to sue to enforce non-compete clauses of executives’ employment agreements when they jump ship, and it’s no longer just to protect company secrets or customer lists.

Rather, companies are more frequently using non-compete litigation to try to block top employees from working for a competitor, said Boston attorney Jay Shepherd. “I think part of it is that it’s harder to get good top executives, so there’s a competition for that talent.

“Our non-compete litigation is growing like crazy,” he said of his employment law firm. The portion of non-compete cases it handles has grown to 65% of the practice, about double that of 2002.

Some of the new cases stem from the recent flurry of mergers and acquisitions. In these situations, typically the merged company doesn’t want departing executives, who have left of their own volition, trying to duplicate their success there with the competitor down the road, Mr. Shepherd explained.

“We’re definitely seeing more of this,” he added. “And people forget that companies can get emotional, too,” and will file lawsuits based on a sense of betrayal or disloyalty and, occasionally, out of spite.

And it's not just noncompete lawsuits against executives that are rising. Our own research tells us that noncompete cases have surged over the last decade. The number of published decisions in state and federal courts nationwide nearly doubled from 1996 to 2006. Over the past three years, the number of reported cases rose 32%. One reason is the increase in employees signing noncompetes, especially outside the IT industry. Another reason is the fiercer competition for top-level talent.

Bottom line: If you're thinking of hiring your competitor's top performer, be prepared to battle it out in court.

Comments

[Evil HR Lady]

I find this fascinating. As a general rule, my company stays away from non-competes because we want our competitors to do the same.

Otherwise, none of us would be able to hire anyone.

[Charles H. Green]

I suspect non-compete agreements are a trailing indicator of greed and excess in financial markets. They reflect the latter stages of over-zealous, combative, testosterone-driven roll-the-dice business models. I suspect (haven't done the data, can't prove it) that they'll die off with a good healthy recession, just like the rest of the bubble.

The truth is, non-competes are flat-out regressive measures.

If there's anything we can say about the emerging economy, it's that everything's more connected. Relationships drive transactions, while focus on trasnactions just kill relationships. Collaboration is the new competitive advantage. And developing human resources is supposed to be a good thing, right?

All that is given the lie when a company forces non-competes on those leaving. It says, in about as succinct way as one can, that we don't give a damn about you personally; you only have value to us as a current employee. Worse yet, your leaving is an act of disloyalty, and shall be punished many-fold.

Non-competes basically have two results: they piss people off, and force retaliatory behavior. Not exactly smart in an increasingly collaborative age.

In the consulting business in the 80s and 90s, they were widely used, and widely acknowledged to be legally toothless. Which means they're little more than aggressive, nasty posturing.

The truth is, if the guy leaving is so hot, why couldn't you figure out how to keep him? The lesson that needs learning is not to punish your alumni, but to learn why you lost them.

[Bryan Price]

I've signed exactly one non-compete in my life, and I hope it's the last. I can't blame my employer for doing so, we were trying to do the .com thing before there was a .com. But when I did quit, there was absolutely no way I was going to do anything at all remotely to do with the software or that industry (Auto parts). It was a badly written non-compete, and would have been severely modified if it had gotten to court, if not thrown out entirely.

And after I left, the company fell apart anyway. Moot point. I just went from writing applications to supporting networks (which I had been doing before, it just wasn't considered part of my job. ;) ) And despite how badly that job termination went, I was still being asked technical questions 5 years later.

[Roy]

Non-competes are here at the blue collar level of the economy too.

I turned down a parts job because of a non-compete. It was amazingly broad in scope.

I couldn't sign it. Two years of not doing any job remotely related to it in all fifty states, and it didn't matter what I did next, I'd have to report everything I did to em'. The loss of all my intellectual property rights for what looked like forever wasn't exactly desirable either.