Job Changers Find A Barrier In Non-Competes

by | March 10, 2009

In Latin, they're called "In terrorem," -- capable of inciting fear.

In English, they're called "non-competes." And if that doesn't scare you, maybe it should.Non-competes refer to a clause found in employment contracts that have historically been designed to prevent employees from defecting to work for the competition.

In these days when job-hopping is the norm, companies are increasingly requiring prospective employees to sign contracts limiting their ability to work within their field if they quit.

And depending on where you live, what you've signed, and how much damage your old company thinks you can cause, signing a non-compete clause can have detrimental affects on your future employment prospects.

Unfortunately, people usually find that out too late.

The truth of non-competes

"When they're looking for a job, most people are excited and enthused about the prospects," says Sam Dobrow, president and CEO of thoughtforce.com, a national executive search firm for managerial, high tech and consulting professionals. "They may not know about employee morale, financial problems or market range for salaries. The lack of information may lead someone to signing an agreement thinking 'this really won't affect me,' until two years down the road when they want to make a job change."

That's when, he says, they find out they've signed away their chances of moving on to a far better, higher-paying dream job at a competing company when they were the eager-beaver new employee.

~Although litigation over such clauses is on the rise, Vault research shows workers don't believe they'll be prevented from leaving a job because of a non-compete. The issue sparked debate most recently on Vault's message board for Sapient, an e-services consulting firm.

"Most of you will not have to be worried about being sued," one anonymous poster wrote in response to a prospective employer's inquiry about the company's employment agreement. "They'll only go after senior-level people leaving Sapient for equal or greater posts at key competitors. If you try to take a client or employee, you will probably receive a threat."

Still, the mere fact that you've signed a legal contract could cost you a job, experts say.

"No one should assume youth protects them and non-competes are unenforceable because their friends are telling them that," says Arnie Pedowitz, a Manhattan-based lawyer who penned "Covenants Not To Compete, A State By State Survey," a top-selling book from the Bureau of National Affairs. "You have to treat it seriously from the very beginning."

Even if the contract would likely be thrown out in court over an overreaching non-compete, the threat of a lawsuit by your current employee is enough to make some companies renege on a job offer, says Pedowitz, who represents employees in such cases.

"When looking for a new job, you're stuck running the risk of being sued," Pedowitz said. "Most employers can't afford the litigation and new employees don't want to get dragged into litigation."

Dobrow says some companies aggressively enforce non-compete agreements to keep salaries low.

"A lot of companies have people sign these agreements more as intimidation, but certain companies have a very aggressive, potentially vindictive management style," he says. "They take people to court for the sake of it. These companies typically pay below market wages and use it as a technique to cap people's salaries."

~

What's a non-compete, anyway?

In today's knowledge-based economy, employees are major assets. And smart companies, of course, want to protect their assets. Non-compete clauses help businesses by restricting when, where and in what capacity former employees can work for a competitor in the future.

When cases go to trial, courts typically try to balance the person's right to work versus a company's need for protection, says Scott Smith, an Atlanta-based employment litigation lawyer. Although laws vary from state to state, courts typically uphold agreements deemed reasonable.

In the past, barring someone for working in his or her field in the Northeast for one year may have been considered reasonable. Because of changes in the marketplace, geographic territories can sometimes be boundless, but time limits have decreased due to the quick-changing nature of technological changes

"In the old days when salespeople usually had geographic territories, they may have been the salesman for the Mid-Atlantic States," Smith says. "Nowadays, particularly with electronic commerce, a person's territory really can be the whole world."

Still, the differences between state interpretation of "reasonable" vary. California courts will almost always throw out cases involving non-competes. In Georgia, a right-to-work state, courts will typically throw out agreements if any part is in violation of state law.

In contrast, when New York courts encounter contract language in violation of state law, they will strike through incongruous sentences and words in an attempt to reconstruct the intent of the agreement within the confines of Empire State law.

Still, it's worth noting that just because you work in Georgia, it doesn't mean a non-compete lawsuit will be argued in the Peach State. Where the agreement was drafted will determine where it is ultimately litigated, the lawyers say.~

Why non-competes?

Athletes, entertainers, media personalities as well as CEOs and sales executives have historically had to sign onto post-employment restrictions. Court cases, in fact, date back in American history some 300 years. The reason they're heating up now, Smith says, has to do with major changes in the direction of businesses over the last decade or two.

"It's the movement away from a manufacturing-type industry where the primary assets of employers were either physical or patentable, and therefore protected by other types of laws," he says. "So many new types of businesses we have today, the assets of employees are primarily intellectual."

So what businesses are trying to protect range from an employee's knowledge of source coding to their training in how products are produced, services provided and customers are kept happy, Smith says. Such learned knowledge, which would be very useful in the minds of an arch-competitor, isn't so easily protected under more specific employee contract provisions, such as an agreement not to divulge company secrets, raid employees or steal customers.

"Employers very often feel 'I know this stuff. It's true I learned it here, but I should be free to use it in the market place, so I'm going to give it a try,'" Smith says. "This conduct prompts many employers to say 'no, you signed a contract, and we intend to hold you to it.' Many employees understand - also many don't - that employers really do make a big investment in a new employee."

On the flip side, he says, the rival company may be willing to fight a lawsuit for a high-quality defector.

"Candidates in whom a big investment has been made by another employer are more valuable to the subsequent employer," he says.

Ross Runkel, founder of LawMemo.com, says another reason non-competes have gained popularity is because businesses are now aware that such clauses exist - and have teeth.

"Employees are getting more and more sophisticated in the sense that they're asking employees to sign contracts in which they're putting more and more clauses into," he says. "A real obvious one is the promise not to compete."~

IT and non-competes

In typical situations, employees will be told up front that they will be asked to sign their non-compete contract as a condition of starting a new job. But beware, says Dobrow. Some companies will produce one during orientation, taking the new worker by surprise. Other companies will offer incentives, such as stock options, to get employees to sign onto a non-compete after they've already been on the job for awhile.

In all cases, the experts advise, it's best to seek the counsel of an attorney specializing in non-competes before signing.

IT workers particularly targeted

In today's economy, the IT field has embraced the non-compete clause, says Brian Malsberger, editor-in-chief of "Covenants Not To Compete."

Although no data exists on companies that require employees to sign such agreements, non-compete lawsuits filed by companies against their ex-computer employees have tripled since 1995, says Malsberger. And more are likely to come, he says.

"The IT industry will be the stage, theater or battleground from the most interesting developments in the law arena," he says.

Nine cases were decided in courts from 1995 until late 1999, Malsberger said. Countless others were decided before they made it to trial. Among high-profile decisions, a New York court ruled in 1995 that DoubleClick, the pioneer online ad agency, had a legitimate interest in preventing former employees from using their knowledge in competition against the Interent advertising company. The ex-workers were barred from working anywhere in the world for at least six months for competing companies.

DoubleClick had originally tried to shut the employees out of competing jobs or starting their own similar business for at least a year. But the court deemed that too long a time period, given the rapid speed with which the Internet advertising industry changes. ~

When a threat matters

Sometimes the threat of a lawsuit has as detrimental an effect on squashing workers dreams as a real-life lawsuit, says Dobrow, of Thoughtforce recruiting firm. He won't work with a prospective recruit without finding out whether someone has signed a non-compete with his or her current company. He proceeds by asking whether they'd be willing to take on the risk of a lawsuit themselves or would expect their future employee to do the dirty work.

He learned the hard way. Several months ago, Dobrow recruited a technical manager who had signed a worthless stock options agreement that contained a non-compete. Under the deal, he was granted 1000 options with a strike price of $16.25 when the stock was trading at $8.

The company, Dobrow says, had been in secret negotiations to be acquired by another firm for $16 per share. Management, worried about losing key technical people over the merger, offered select employees worthless options that came with a non-compete that prohibited them from working in the software industry anywhere in the world.

When the candidate had an offer in hand with a well-funded start-up software company for a compensation package worth about $1 million, he resigned, prompting the company to promise to sue over the non-compete agreement. The unlucky technologist turned down the job offer on the advice of a labor lawyer, Dobrow said.

Legal costs would have been too high and the agreement, which would be tried in South Carolina, where it would likely have prevailed, he says.

"Everyone is in such a frenzy to have stock options that they're signing agreements that basically prevent them from taking jobs elsewhere," Dobrow says. "They can get stuck in a job that has no future."

Will you be sued?

Obviously not everyone who has signed a non-compete agreement will face a lawsuit, experts say. However, you may still be a lawsuit candidate even if you started off in an entry-level position. What matters more is the job you're trying to get, says Runkel, of LawMemo.com.

"If you're moving onto a low-level job, than who cares?" Runkel says. "If your next job is going to be a higher level job, that's where the non-competes come in with a vengeance. The better the job, the higher the risk."

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