Editor’s Note: Nearly 40 percent of Americans have signed a noncompete agreement.
But do employees always know what they’ve signed and what it means for future employment prospects?
Many don’t, according to a new report by U.S. Department of the Treasury.
By signing a noncompete agreement, an employee agrees that they will not go to work at a rival company if they quit. For this week’s Making Sen$e, special economics correspondent Duarte Geraldino reports on noncompete agreements and the bind it puts on workers — from lamp shade manufacturers to foster parents.
Geraldino sat down with attorney Russell Beck, who specializes in business and intellectual property litigation and has an influential blog on the subject, to discuss why businesses use noncompetes. Read that conversation below, and tune in to tonight’s Making Sen$e for more. The following text has been edited for clarity and length.
— Kristen Doerer, Making Sen$e Editor
Duarte Geraldino: In the 25 years that you’ve been working this, have you seen the number of these noncompete contracts increase, decrease or stay the same?
Russell Beck: I’d say overall there has been an increase in use of noncompetes in the past 25 years.
Duarte Geraldino: Why the increase?
“Companies have determined that they have a need to protect their information, and the way to protect it is through locking down employees.”
Russell Beck: I think with the increased value of trade secrets, which noncompetes are used to protect, and the increased mobility of the workforce, companies have determined that they have a need to protect their information, and the way to protect it is through locking down employees.
Duarte Geraldino: So you have these noncompete contracts, and you have trade secrets contracts. Are noncompete contracts considered trade secret contracts?
Russel Beck: Yes, they are trade secret contracts. They are called nondisclosure agreements or confidentiality agreements. Those are used to prevent employees and anybody else who has access to your information from using the information or disclosing the information. What noncompetes do is they add a layer of protection on top of that. They prevent an employee from leaving your company and working for a competitor in a role in which they might be using that information.
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Duarte Geraldino: So would it be correct to say that the base level are these nondisclosure contracts, these trade secret contracts. Above that are these noncompete contracts, is that correct?
Russell Beck: That’s exactly right. The noncompete contracts offer greater protection, but for a limited time. Nondisclosure agreements or the trade secret contracts last for as long as the trade secret lasts.
Duarte Geraldino: So when we look at just the noncompete contracts, what percentage of American workers are bound by these?
20 percent of Americans are bound by noncompete contracts.
Russell Beck: So the studies show there about 20 percent of American workers are bound by them.
Duarte Geraldino: Twenty percent of 100 million people, that’s 20 million people. It seems almost absurd that you would have 20 million American workers who have at one point signed these contracts. How many people will have signed these during the life of their career?
Russell Beck: The studies again show about 37 percent.
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Duarte Geraldino: How did it get so large?
Russell Beck: Over the course of the past 20 years or so, trade secrets have become an increasingly important aspect of a company’s business, and couple that with the fact that they are now easier to move. So if you think about recipes or production processes, they are all recorded by electronic means, and they are very easy now to move out of a company. You have a workforce that is increasingly mobile and increasingly changing jobs, and over 50 percent of them admit to taking information when they leave, so companies are very concerned about information moving when the employee moves, and so I think it’s because of that, that you’ve seen an increase in noncompetes.
Duarte Geraldino: What type of information would someone take with them to a new employer that might give that employer some type of competitive advantage?
“You have a workforce that is increasingly mobile and increasingly changing jobs, and over 50 percent of them admit to taking information when they leave, so companies are very concerned about information moving when the employee moves.”
Russell Beck: The quintessential example that people always use is the secret formula to Coca-Cola, and that’s obviously a prime example. But anything can be a trade secret as long as it’s information that provides some value to the company and that the company takes reasonable measures to protect. Recipes for cookies, profit margins, customer lists, all business information that provides a company the ability to be more effective in the marketplace.
Duarte Geraldino: Noncompetes seems to vary from state to state. Why is there so much difference?
Russell Beck: So there is no federal law on noncompetes; every state has its own noncompete law. Some states, like California, don’t enforce noncompetes at all; they favor employee mobility over the protection of former employer’s information. Other states, like Florida, are at the other end of the spectrum in terms of the willingness to enforce noncompete agreements. They favor the employer’s protection and growth of their information as opposed to protecting the employee’s ability to move and change jobs.
Duarte Geraldino: Is there any reason why it would be so different? Is the labor market different in these particular areas?
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Russell Beck: There really isn’t a tremendous difference. California has the tech industry obviously, and people point to the lack of noncompete as the reason for the existence of the tech industry there. Others dispute that. But, other than that, no, there is nothing that seems obvious for why California might choose one way and Florida might choose another. Typically, the noncompetes are used and seen as more favorable if a state is trying to encourage larger companies to thrive.
I think from a policy standpoint, a state has to make a determination as to whether it’s looking to encourage employee mobility. And a state like California has decided that employee mobility is important.
Duarte Geraldino: Why is so much attention being focused on noncompetes now?
“The company Jimmy John’s… used noncompetes to restrict its sandwich makers from moving to a competitive company.”
Russell Beck: Well, that’s a good question. There have been a number of states that are looking to change their laws, and they have been looking at a lot of abuses of noncompetes. You’ve seen in the news the company Jimmy John’s, which used noncompetes to restrict its sandwich makers from moving to a competitive company. Those kind of abuses exist, and they make headlines. As a consequence of that, I think a lot of states have been looking to rein in those types of abuses.
Duarte Geraldino: But you have actually defended companies and employers who are saying that a noncompete has been breached. In what circumstance is it actually defensible?
Russell Beck: So different companies will enforce noncompetes for different reasons. Some will enforce them to protect their trade secrets. Some companies will enforce them to protect what are called other legitimate business interests — the protection of customer relationships that a company has invested in. When a company comes to me and asks me whether they should enforce their noncompete, I will take a look at the agreement, understand what the facts are and advise them as to whether they should enforce it or shouldn’t enforce it. Oftentimes companies will assume that they are going to move forward with the enforcement of a noncompete, only to find out that really they shouldn’t be moving forward with it for one reason or another. Either the employee doesn’t really pose a risk, or the agreement is just not valid for some other reason.
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It really comes down to the particular language of the agreement and the state that you’re in, because the jurisdiction that will control the enforcement of the agreement and may have laws that will make it hard to enforce in one state, whereas in another state it might actually be enforceable.
Duarte Geraldino: So what’s the trend so far? Are most states moving in the direction of making these contracts unenforceable, or are they actually getting stronger?
Russell Beck: Most states are looking for ways to curtail the use of the agreements to some extent. There are about nine states that are looking to put some sort of restrictions on the use. There are about five states that are looking to outright ban them, and there are three states that are looking at making them easier.
How To Protect Your Company from Employees “Jumping Ship”
By Michael E. Adler, Esquire
Of course, it is a reasonable protective measure for an employer to want to prevent the disclosure of the company’s trade secrets and other confidential information by their employees. It is understandable that employers do not want to invest time and money training an individual who then quits and goes to a competitor or opens a competing business. It is not just the loss of a valued employee. Having a valued employee defect to a competitor and take sensitive proprietary information such as customer lists, pricing information, marketing strategies, or product and service expertise with him or her can be a devastating blow to any business – large or small.
On the other hand, it is sensible for the entrepreneurial employee who accepts employment with the company today to avoid forever being barred from using his or her hard-earned skills in pursuing a livelihood elsewhere in the future. Thus, courts in most states undertake to balance these interests through the even-handed enforcement of reasonable non-compete agreements with employees.
A non-compete agreement is typically signed by new employees as a condition of employment either before or during the orientation period. If the employee later leaves the company, a well-written non-competition agreement prevents former employees from competing with the company, recruiting other employees, or misusing confidential information such as customer databases. Such an agreement should always be used when hiring a key employee, as defined by the parameters of your business. A non-compete agreement is particularly useful for employees who have access to critical information, either through job responsibility or through social interactions with owners or high-level executives.
Every business should consider having its key employees or sales people sign this contract as part of their employment agreement. If the employee later leaves the company, this agreement will prevent them from competing with the company. A good non-compete agreement provides the employer with protection in three key areas: 1) It prohibits a former employee from working with a competitor; 2) It prohibits a former employee from soliciting former coworkers to be employed in his or her new company; and 3) It prohibits a former employee from soliciting or disclosing confidential information, such as customer lists and data, learned in the course of their employment. Other clauses that should be considered in consultation with an attorney include provisions that provide for injunctive relief, compensatory and punitive damages and reimbursement for attorney’s fees.
Employers must understand that courts generally do not favor agreements that prevent people from working. Courts appreciate the need for non-compete agreements, but they will not tolerate agreements with unreasonable restrictions. Consider carefully the fact that an employee who signed an agreement does not guarantee that the court will enforce it. Courts understand that there is a substantial investment in hiring, training, and paying employees, and that employers need to protect their interests. Generally, however, the court will enforce a reasonable non-competition agreement, provided: 1) the employer has a legitimate need for the agreement; 2) the geographic area covered is not too broad, and 3) the duration of the agreement is not too long. These three factors may vary from state to state, industry to industry, and even from judge to judge, so it is advisable to consult with a attorney knowledgeable on these issues.
Moreover, like all other contracts, to be enforceable this agreement must be supported by consideration. Usually, this requirement is satisfied if the non-compete agreement is completed at the start of employment. If the employee is asked to sign the non-competition agreement after employment has started, a court may find the agreement unenforceable for lack of consideration. There is also a noticeable recent trend in some states to enforce a non-compete promise only if the employee made that promise in the context of a larger agreement.
Every company should consider reviewing the non-compete agreements they presently use, if any, with an attorney. Should an employee “jump ship” with the company’s trade secrets and sensitive customer information, the company should promptly contact an attorney. With a well-written, reasonable non-compete agreement, and the prompt filing of a temporary restraining order, the company can put the ex-employee -- now-competitor – out of business before the defector knows what hit him.
For more information about non-competition agreements, and how to protect your business from the defection of key employees, contact Michael E. Adler, Esq., who is an attorney with Blank Rome LLP in Philadelphia, at (215) 569-5500 or via email at firstname.lastname@example.org. Mr. Adler has advised many companies on the drafting of their employment agreements, and has handled litigation throughout the United States against employees who have left their employ and attempted to ignore the terms of their agreement.