Rethinking noncompetes

I have to admit it: For the past 16 years, I've been a bit of an "employer snob." Professionally, I've described myself with the cumbersome and inelegant mouthful "management-side employment lawyer." (Seriously: you want to see someone fall asleep standing up at a cocktail party? Tell them you're a management-side employment lawyer. Don't get me wrong: the job's not boring. Just the label.) Labels aside, I've seen my role as someone who helps employers.

But over the years, as my practice has grown, I have developed a specialty in noncompete litigation. (Unintended consequence: some clients have asked me if I knew a good employment lawyer. D'oh.)

Noncompete practice is a little different from the rest of employment litigation because you tend to have management-side employment lawyers (snooze) on both sides of the cases. Which makes sense because you have employers on both sides: the old (enforcing) employer and the new (defending) employer. We do both sides at Shepherd, although if pushed, I'd probably say that I enjoyed defending more.

And here's where my problem comes from. I like to say that I don't represent employees, and that's generally true. If you want to sue your employer for wrongful termination or some sort of USERRA violation, I ain't your guy. But truth be told, when I'm defending a noncompete lawsuit, I am in fact representing (former) employees. To be sure, it is commonly the new employer who's paying my freight. But most of the time, the new employer is not named as a defendant. So, yes, I represent employees in noncompete cases. And quite honestly, we've had some very good success in doing so, against some of the largest law firms and employers in the world.

But I've only just come to realize that I've been looking at this the wrong way. It's not about choosing a "side" — employers on one side and employees on the other side. It's about following a principle.

Most noncompete lawsuits are brought for the wrong reasons: to punish former employees. To thwart competition. To send a message to competitors to stay away from our people. To send a message to our employees that you're not free to leave.

I have a problem with that.

As I've said many times over the past three and a half years on this blog, talent is the most important asset any company has. And it's up to the employers to find, train, manage, and keep this talent. Noncompete agreements, which are almost always forced down a new employee's throat without the possibility of negotiation, are a poor way to retain employees. Fear never inspires loyalty. And disloyal employees will find a way to leave eventually.

No, the better method is to give employees reasons to want to stay. But if they decide eventually that it's time to leave the nest, then they should be free to do so. Even if it means that they're going to compete.

With one exception. They can't take our stuff. And by stuff I mean two things: our secrets and our client relationships. If their old jobs required them to work with our secrets — our legitimate, protectable secrets, not stupid things like prospect lists — then they should not be allowed to take them to their new jobs. And if in their old jobs we paid them to develop and maintain customer relationships to the extent that they became the face of our company, then they should have to stay away from those relationships for a reasonable period of time. A year, say. Enough time to make the customers understand that the company was what made the relationship special, not the departed employee.

And that's it. If a company hires me to enforce a noncompete against an employee who has taken secrets or hijacked our customer relationships, then I'll go after that employee with every club in my bag. But if an employer wants me to help punish or screw over employees who simply wants to do their own thing, that employer's going to have to find a different firm.

The principle I'm interested in is fair competition, because that's what our system's all about.

So from this day forward, when it comes to noncompetes, I'm not about being on the employer's side versus the employee's side. I'm about promoting fair competition. The law is designed to protect against unfair competition, not ordinary competition.

Employees: If you are stuck with a noncompete and you want to go to another company or maybe start your own, we can help you — as long as you're not stealing secrets or unfairly commandeering customer relationships.

New employers: if you're looking to hire new talent but not looking to score your competitor's secrets, we can help you.

And old employers: if someone's looking to unfairly compete, we can help you.

It's not about employers and employees. It's about competition. That's the side we're on.

Comments

[Scott F. Gibson]

Great post, Jay.

Non-compete law is an interesting area. If an employer truly wants to develop an enforceable non-compete agreement, he must limit rather than expand the scope of its coverage. The agreement must be obtained through practices that are both substantively and procedurally fair.

Courts look for visual cues to determine whether the restrictive covenants are fair and enforceable. I discuss these principles in my Black Hats and White Hats series on the BiziBoom blog.

[Charles h. Green]

Excellent post, would that more employers heeded you.

I would like to push on one point, though, and would be curious to get your take.

As to stealing or taking secrets-- technology, IO if it's clear--I'm with you. Customers--not so much.

I have yet to meet a customer who likes being told whose property they are. So right off the bat, that kind of litigation incurs two strikes against both old company and previous employee by the customer.

Worse, if the company can be talked out of the relationship by an employee, you have to wonder how string that bond was in the first place; shouldn't the company have to earn the loyalty? If the customer wants to go with the employee, I'd say that's who earned it. Get back to the product/service drawing board.

Finally, I echo your point: the best client retention policy is an employee retention policy.

Interestingly, while it may seem counter-intuitive for someone in your role to counsel clients against such litigation, it makes you far more credible and trustworthy; which letsbyou wor at consulting rates and cut your sales costs. A virtuous circle, I'd say.

Thanks for a fine post.

Charles H. Green
Trusted Advisor Associates

[Rob Radcliff]

Jay - Good thoughts as always. However, employers have the right to protect proprietary information that may not rise to rise to the level of a trade secret. At least At least they do in Texas.

Rob

[Andy Arnold]

Enjoyed reading the post. I certainly agree with most of your points. I would probably not agree that customer relationships should be protected with non-competes (although it seems to be the law of most states). Companies can enter into contractual relationships with customers if they want to create an legally enduring relationship. Otherwise, it is up to them to make sure the customer knows that "it is the company that makes the relationship special" because honestly, a good deal of the time it is the employee who has earned the loyalty.

Nonetheless, these issues deserve to be grappled with, and your grappling should lead to further reflection by your readers.

[Evil HR Lady]

I totally agree with this assessment. I'm not a fan of non-competes for the reasons you laid out. Good to hear your take on it.

[Aikon]

Hi Jay,

I know you wrote this a few years ago, but I am caught up in an agreement that I feel is unfair to me. I worked in an high tech industry (Mobile) for 8 years and worked for a company for 90 days and it did not work out, they held me to this agreement when I left. I feel this is very restrictive unfair because it keeps me from working in my field and my job with them was not the same as the one I would be going to. I did not take any info from them when I left, but did leave them with suggested improvements that they did put into their product. So I am telling me new potential employer that yes I am under a non compete, but I feel this will again blow any chance I have to find a job, what should I do?