Non-Compete Agreements: Friend or Foe?

I. Introduction

In today's economic climate, the excitement of finding a new job
can be overwhelming. Additionally, In the rush of starting work, it is
easy to skim the fine print of a contract without fully understanding
its terms. Non-compete agreements in employment contracts can cause
much unnecessary hardship on an individual once that individual
chooses to switch jobs. Additionally, while it may seem unintuitive
that an individual cannot use skills learned at one job to advance his
career at another job, many companies rely on non-compete clauses to
limit just that. This article will discuss non-compete agreements
generally, the history of non-compete agreements and the legal
standards state courts use in examining non-compete agreements. It will
then discuss how to enforce and contest non-compete agreements.
Finally, it will conclude by giving advice for the employer or employee
who is unsure about how to approach a non-compete agreement.

II. Non-Compete Clauses Generally

A non-compete agreement, also called a non-compete clause,
restrictive covenant, or covenant not to compete, is essentially a
clause used to restrict what an employee can do once that employee
leaves his or her job. [1] The purpose of non-compete agreements is to
preserve the interests of the former employer with whom the employee
has signed the agreement. [2] "Non-compete clauses are used by
established businesses to prevent employees from engaging in
competition or appropriating confidential information for their own use
or use by competitors." [3] They may also be used by start-up companies
in order to protect lucrative information used or needed in the
start-up of a that business. [4] Non-compete agreements can take the
form of a clause in a larger agreement, like an employment contract, or
can be a completely separate agreement. [5]

III. History of Non-Compete Agreements

Non-compete agreements have been around since the the 1400's. [6]
"The first recorded noncompete case was brought in England in 1414,
when a dyer of clothes tried to enjoin a former assistant of his from
setting up shop in the same town." [7] However, as the "free
transferability of property and goodwill became an important social
goal", non-compete agreements were disfavored by courts in this same
area. [8] There was a shortage of labor because many workers died from
the Bubonic Plague and non-competes were seen as a barrier to
craftsmanship and open trade. [9] Legal Scholars opine that courts did
not routinely enforce non-compete agreements until the start of the
Industrial Revolution. [10]

IV. Legal Implications of Non-Compete Agreements

The validity of non-compete agreements differs from state to state.
[11] Some have held that non-competes are completely and always
invalid. [12] Others have found that non-competes are enforceable in
certain circumstances. [13]

Illinois is among the thirty two states (plus the District of
Columbia) that allows non-competes to be enforced. [14]  Among the
states that allow non-competes to be enforced, there are general rules
that courts will follow. Applying the rule of reasonableness and the
blue pencil rule are just two common methods employed by courts in
determining whether to enforce a non-compete. [15]

The Rule of Reasonableness dictates that a non-compete must be
reasonable in order to be enforceable. [16] Employers generally have
the upper hand and can control negotiations between the employer and a new
employee. [17] "Generally, management has much more leverage than
employees in negotiating noncompete clauses. Restrictions on future
employment usually arise at the beginning of an employment
relationship, when employees have little bargaining power to resist
these terms. Moreover, most employees do not seriously contemplate the
possibility of leaving future employment at the outset of the
relationship and, therefore are not overly concerned about specific
terms that might circumscribe their future employment prospects." [18]
Therefore, the courts in states that enforce non-competes have found it
imperative to allow the employee to have an out when the agreement or
clause itself is unreasonable. [19]

The "blue pencil rule" allows courts to change a non-compete
agreement that is too restrictive in its original form. [20] The court
may then enforce the  modified agreement. [21]

In states where non-competes may be enforced, courts will also look
to the face of the agreement. [22] In particular, most well-written
non-competes will specify geographic scope of the restriction, scope of
services to be restricted and the duration of time the clause should
cover. [23] "Non-compete clauses must protect a legitimate business
interest of the employer, such as trade secrets, confidential
information, and customer relationships." [24] To also protect the
interests of the employee who is in search of employment, these three
factors must be reasonable and not overreaching. [25] Additionally,
recent Massachusetts cases have held that a non-compete agreement
will be found invalid if the employer has changed job positions,
increased salary, or changed bonus eligibility and the language of the
agreement does not specify that it will still be valid under such
circumstances. [26]

Alabama, California, Colorado, Delaware, Massachusetts, and North
Dakota Have all held that non-compete agreements are completely and
always invalid. [27] California, in particular, has a strong policy in
favor of "competition and employee freedom." [28]

The remedy for violation of a non-compete agreement is either
damages or an injunction. [29] Additionally, new employers may be held
liable for hiring an employee who has signed a non-compete agreement
with another employer. [30]

V. Economic Implications of Non-Compete Agreements

The overall economy of a state or region can be affected by the
legal status of non-compete agreements. [31] The East Coast, for
example, has lost many companies to California because of the tendency
to enforce non-compete agreements [32]. California, which does not
enforce non-compete agreements, has seen a huge increase in industry. [33]
Bijan Sabet, a partner at a Venture Capitalist firm explains, "If you
look at California, there are a lot of startups created from alumni of
successful and unsuccessful companies. [34] Many of these entrepreneurs
came from companies that we would call competitors to their new thing.
[35] How many people are at Google that used to work at Yahoo? How many
folks are at Apple that used to work at Microsoft? Where did the
earliest Apple employees come from? How about the founders of Intel?"
[36] Sabet goes on to explain that California's policy against
enforcing non-competes lead to the rise of Silicon Valley as a leader
in the technology industry. [37]

VI. Enforcing and Contesting the Valid Non-Compete Agreement

If an employee finds himself in a situation where he has found a new
job, but signed a non-compete agreement with his prior employer, he may
still be able to take the new job. [38] The employee should generally
not disclose the existence of the non-compete until later in the
interview process, when the potential new employer has expressed a
strong interest in the job candidate. [39] That way, the employer will
be more likely to work with the employee to find a way to hire him. [40]

Additionally, dealing directly with the former employer is a good
way to calm fears. [41] "Once the employer is satisfied that you won't
use inside information to compete, they are a lot less likely to sue to
enforce your non-compete clause. Since non-compete clauses are becoming
more common, more employers are open to taking this step to avoid
litigation." [42]

VII. Conclusion

The existence of a non-compete agreements can make or break an
individual's career. If a non-compete agreement is found to be valid,
an employee may find himself looking for work in a new field. However,
if the employee takes steps before signing the non-compete, such as
making sure it is narrowly tailored, it will be less likely to
interfere with the employee's next job search. Additionally, before
signing any contract, including a non-compete agreement, an employee
should consult with an attorney who has the appropriate specialty.

[1] Mansfield Tanick & Cohen P.A.: Will Your Non-Compete Agreement Stand Up in Court?, http://www.mansfieldtanick.com/CM/Articles/Will-Your-NonCompete.asp
(last visited Nov. 3, 2008); Sandra S. Benson, Recognizing a Litigation
Reality: Safeguarding Against Unfair Competition and Tortious
Interference,
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The CPA Journal, Nov. 2007, http://www.nysscpa.org/cpajournal/2007/1107/essentials/p56.htm.

[2] Monster.com: Everything You Need to Know Before you Sign a Non-compete Agreement, http://midcareer.monster.com/articles/movingout/noncompete (Last Visited Nov. 3, 2008).

[3] Mansfield Tanick & Cohen P.A.: Will Your Non-Compete Agreement Stand Up in Court?, supra note 1.

[4] Id.

[5] Monster.com: Everything You Need to Know Before you Sign a Non-compete Agreement, supra note 3.

[6] Matt Marx, The Power of the Noncompete Clause,
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Hbs Working Knowledge, Feb. 26, 2007, http://hbswk.hbs.edu/item/5628.html.

[7] Id.

[8] Benson, supra note 1.

[9] Marx, supra note 6.

[10] Id.

[11] American College of Foot and Ankle Surgeons: The Facts About Non-Compete Clauses, http://www.acfas.org/practicemang/managedcare/noncomplete.htm (last visited Nov. 3, 2008).

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Lawyers.com: Non-Compete Contracts, http://labor-employment-law.lawyers.com/employment-contracts/Non-Compete-Contracts.html (last visited Nov. 3, 2008).

[17] Id.

[18] Mansfield Tanick & Cohen P.A.: Will Your Non-Compete Agreement Stand Up in Court?, supra note 1.

[19] Lawyers.com: Non-Compete Contracts, supra note 16.

[20] Id.

[21] Id.

[22] QuintCareers.com: Quintessential Careers: Dealing With Non-Compete
Clauses and Agreements by Randall S. Hansen,
http://www.quintcareers.com/non-compete_clauses.html (last visited Nov.
3, 2008).

[23] Id.

[24] Id.

[25] Id.

[26] C. Max Pearlman, Changing Conditions Can Void Non-Compete Clauses,
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–&gMass High Tech, Oct.
2004,
http://74.125.95.104/search?q=cache:wV3PMRLtG04J:www.swmlawfirm.com/CM/Notable/swmlawyers1011.pdf+mass+high+tech+changing+conditions+can+void+non-compete+clauses&hl=en&ct=clnk&cd=1&gl=us&client=firefox-a.

[27] Lawyers.com: Non-Compete Contracts, supra note 16.

[28] Bob Egelko, State Supreme Court Rejects Noncompete Clauses,
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SFGate.com, Aug 8, 2008, http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/07/BAUH12716R.DTL&tsp=1.

[29] Lawyers.com: Non-Compete Contracts, supra note 16.

[30] Lawyers.com: Non-Compete Contracts, supra note 16.

[31] Xconomy.com: Spark Capital's Bijan Sabet Says Cross out Those
Non-Compete Clauses- An Xconomy Interview by Wade Roush (last visited
Nov. 3, 2008).

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Id.

[38] QuintCareers.com: Quintessential Careers: Dealing With Non-Compete Clauses and Agreements by Randall S. Hansen, supra note 23.

[39] Id.

[40] Id.

[41] Monster.com: Everything You Need to Know Before you Sign a Non-compete Agreement, supra note 3.

[42] Id.

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