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?

9 replies
  1. Dawn Rivers Baker
    Dawn Rivers Baker says:

    My husband recently had an issue with a former employer and a non-compete agreement. He was told that there had been a precedent set here in NY in which it was found that non-compete agreements must pass a three-pronged test to be enforceable.

    Since one of the prongs is that the employer must prove the former employee will not be adversely affected and/or unable to make a living if barred from his former industry expertise, the practical effect is often that the agreement is not upheld in court.

    But, like you, I am not an attorney. I will be interested to see if one responds here.

    Naturally under the circumstances, I completely agree with everything you have to say about such agreements. It does bring up an interesting management issue, though.

    Clearly, the value of any good salesman or customer rep to his employer lies in the relationship he or she developments with their clients.  I wonder to what degree such a relationship can possibly be transferable to a company?

    After all, relationships exist between people, don’t they?

    Rather than moving the personal relationship to a corporate relationship, wouldn’t the manager involved need to invest some time in sowing the seeds of his or her own, distinct relationship with the client(s) in question — especially once the sales rep has given in his notice?

    In fact, that is one of the biggest problems with non-compete agreements. It creates an adversarial relationship between the employee and the employer that can (and probably does) interfere with a smooth transition when the employee decides to move on.

    As a management issue as well as a legal one, surely there are methods to develop multiple company-to-client personal relationships that are both more humane to employees and less disrespectful to clients.

    Reply
  2. Charlie (Green)
    Charlie (Green) says:

    I think that’s right on the money.  The problem, from a business perspective, is analogous to cross-selling. You don’t pass on a relationship by throwing a business card at a client; you do it by each of you investing time, over time, so that the client feels something of value (the relationship) is being transferred in a respectful way.

    If the company isn’t willing to invest in the relationship, what earthly reason would the customer have to stay with them, rather than with the one who brung ’em to the dance?

    None that I can think of.

     

    Reply
  3. CB
    CB says:

    I will take the employer view, because I am one.  When a situation arises that favors the employee, everyone argues for freedom of choice, free markets, and no laws to restrict.  However, when companies site free markets and freedom of choice, they are villified as evil.  Case in point – constructive termination, wrongful termination, age discrimination.

    If in-fact, non-competes are illegal, what you will see is that companies will continue to migrate their employee base away from California, as we have been doing, as well as not invest in the individual with respect to training and development. 

    Companies invest time, money, and resources in developing employees, introducing them to clients, and then a competitor or in some cases a client, can come along and hire that person, use all of the operational flaws of the original company against them, and share proprietary knowledge.  This goes against the agreement that both parties entered into, and at its root, unfair.

    Reply
  4. Charlie (Green)
    Charlie (Green) says:

    CB,

    You’re of course entitled to your opinion, and you’re not the only one who shares it.  I’ll add three comments, however.

    1. You suggest in your last paragraph that non-compete laws are required to prevent the misuse of proprietary knowledge.  That’s not true; violation of patents and trade secrets have their own sanctions, we don’t need the added oomph of restricting people’s employment to protect against those kinds of abuse.

    2. An article in the Journal of New England techology cites a University of Toronto study saying that non-compete clauses stifled the growth of the tech sector in Massachsetts’ Route 128.  That make sense to me, because non-competes interfere with a free market.  And not for sufficient reason.  My guess is it’s the relative absence of non-competes that made Silicon Valley successful–not, as you seem to argue, their presence.  One employer’s "loss" is another employer’s gain; if one employer leaves California because they can’t enslave employees, two more will move to California because it’s easy to hire great people.   The economy and the consumer benefit in toto.

    3. Finally, I worked for two management consulting firms.  One did not ask employess to sign non-competes; in 25 years, it never sued nor was sued by its employees for any issue at all.  The other, equivalent size, used non-competes, and was in court on average twice a year.  Again, I don’t see the overriding value to constrain people’s employment when there are adequate legal remedies aside from this kind of agreement.

    Reply
  5. Robert
    Robert says:

    You work for years  for a firm and bring them business. No special training. No introductions.  Then when the firm decides to downsize your on the street and you are forced to start over because of the Non- Compete and this is morally right by??? CB the only business that should be protected is what the company had BEFORE the employee started and any business the employee was given by the company. It is not fair that the employees relationships and clients be forced to do business with whom they do not want. 

    Reply
  6. Georgia Steinberg
    Georgia Steinberg says:

    I signed a Memorandum of Understanding with my former employer after 8 years of employment.  I went on to work for them for another 6 years.  I quit October 2009.  Compensation was never offered.  I went to work for a small company that only slightly produces what my old employer can.  My ex boss starting to call me, emailed me several times wanting to talk, and finally called my new boss.  My new employer called me the next day after speaking with him and let me go.  I was let go because the new employer can not afford to get paid.  I would have went to work somewhere else if the economy was better.  I felt lucky to have a job.  My question is can my old boss do this to me?  I may lose my house now.  

    Reply
  7. Charlie (Green)
    Charlie (Green) says:

    Georgia,

    I have no idea whether your old boss can do this to you or not; I’m not a lawyer, and unfortunately that’s a legal question.

    But you do point out a typical example of the downside of these kinds of agreements; in my humble opinion, they are way over-used by employers to protect against very little risk, and their practical result is to intimidate new employers and inconvenience, often severely, people like you.  I send you my sympathy and wish that was worth more.

    Reply
  8. Matthew
    Matthew says:

    I think patents, copyrights, and "intellectual property" are garbage too, but I’m an anarchist/socialist.

    Thoughts belong to the people who think them, not to the people who "pay" for (using money that came from the thinking people’s own work.)  The alternative is just a pimp/whore scheme.

     

    Reply
  9. John Gies
    John Gies says:

    What I find interesting and Ironic about the argument is that companies today are often recruiting a Rolodex when recruiting sales professionals. And they then want to tell the professional that they cannot work with these contacts, should they leave, due to a non-compete.

    My deal is, I will share my contacts with the employer, I am doing the work, when I leave I take (and at the same time leave) all of the contacts I developed. If the company has done their job of nurturing and building a relationship good for them if not…

    The company has to earn their relationship as well.

     

    Best wishes

     

     

    Reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.