Employees Win a Big Round Against Non-Compete Agreements

Occasionally, the law appears to coincide with commonsense. The longer the view one takes, the more likely this is.

Occasionally the long view seems captured in a single case; one which appears obvious in the rear-view mirror, but which was anything but at the time of the decision. In the US, Brown v. Board of Education comes to mind.

Last Thursday, as reported in law.com, “the California Supreme Court effectively invalidated the use of most non-compete agreements in the State.

"In sum, following the Legislature, this court generally condemns noncompetition agreements," Justice Ming Chin wrote. "Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule."

As the Industry Standard put it more directly, “California Supreme Court says non-compete agreements are illegal.”

While this doesn’t reach Brown v. Board of Ed status, nor is national, nor is it conclusive—I think it may come to be viewed as “about damn time.”

Non-compete agreements, in my humble opinion, are of a class with indentured servitude and restraint of trade—both of which are (largely) illegal.

(Disclaimer: I am not a lawyer, and I welcome the opinions here of those who are: I’m just speaking as a businessperson and an observer of business—and, Iike to think, on behalf of commonsense).

Non-compete clauses are common in many industries. They typically are required as a condition of employment, and they restrict an employee’s ability to leave to go to work for a perceived competitor or related business for a period of time (often 1 to 2 years, sometimes more).

One reason many employers use non-competes because they feel the company “owns” its customers or clients, and the employee shouldn’t “be allowed” to “steal” the customer. This reason is the parallel to restraint of trade.

But I have yet to meet a client or customer who enjoys being thought of as “owned” by a provider. Most of them resent that framing of the relationship. Most customers feel, as I do, that the choice should be theirs—that neither employer nor employee “owns” them, and that if they want to follow an employee to a new employer, their right to do so shouldn’t be infringed.

From a commonsense capitalism point of view, I’d simply add that if a company hasn’t been able to transfer the personal relationship to a corporate one, then the resort to heavy-handed legalisms only spotlights their management failure.

The second reason some employers like non-competes is they feel they have some “right” of control that exists after the employment contract is up. This reason is the parallel to indentured servitude, where an employee is required to “work off” an obligation over time.

Smart, successful companies—McKinsey, Goldman, PwC—have long known the value of alumni. The value of post-W2 form relationships is enormous. But not if it’s coerced.

This is simple human dignity; employers do and should have many rights, including various forms of intellectual property protection (trademarks, patents, copyrights)—but those rights have their own distinct protections and can stand on their own. Using employees as chattel to further a former employer’s competitive adventures is unnecessary—and thoroughly out of sync with a modern global business world.

That’s how I see it. What do you think?

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