Noncompete Agreements: frequently asked questions

The Sunday New York Times business section has a good roundup of the various issues that arise in signing non-compete agreements.  In Massachusetts it is common, particularly among high tech companies, to require all employees to sign some form of non-competition agreement (along with other standard employee agreements involving confidentiality and assignment of inventions made while at work). Here is the full text of the NYT article:

January 21, 2007
Career Couch
The Noncompete Clause: Balk at Your Own Risk
By MATT VILLANOQ. You’ve been offered a new job, and your prospective employer wants you to sign a noncompete agreement, but the document makes you uneasy. What should you do?

A. Take some time to scrutinize the terms. Robin Bond, managing partner of Transition Strategies, a law firm in Wayne, Pa., says it’s perfectly reasonable to ask to review the details of the agreement before accepting the job. When it comes to legal documents, you can never be too careful,” Ms. Bond said. “The last thing you want to do is sign something that could affect your ability to earn a living.”

Q. What do noncompete clauses cover?

A. Generally speaking, these agreements are one-sided contracts designed by companies to prevent employees from competing with them after leaving the fold. Paula Weber, a partner at the San Francisco law firm Pillsbury Winthrop Shaw Pittman, said that companies generally use the documents to protect trade secrets, customer contacts and other forms of intellectual property. When a company hires an employee, that company gives the person all sorts of valuable and one-of-a-kind insider information,” she said. “The noncompete is one way for the company to protect whatever assets are transferred.” Most noncompete agreements limit what employees can do once they leave, whom they can do it for and where they can do it. In many cases, Ms. Weber added, the documents preserve these restrictions for a defined period that rarely exceeds three years.

Q. How common are noncompete agreements today?

A. That depends on where you live and on the industry in which you work. Noncompete agreements are governed by state laws. They are permitted in Florida and New York, for example, while California courts have ruled them to be illegal restraintsNoncompete agreements are most prevalent in industries where intellectual property is at a premium, like software development.Ms. Weber noted that companies in some industries might also require the signing of nonsolicitation clauses, which prevent employees who leave a company from recruiting former colleagues. Both agreements fall under a category of contracts known as “restrictive covenants,” she said.

Q. Are the details of noncompete documents negotiable?

A. They might be. Chris Farella, a partner at Stahl Farella & Sarokin, a law firm in Westfield, N.J., said that, as always, the more a company wants to hire a particular person, the more leverage that person has. “If you’re bringing something to the table that they can’t live without, a company will be far more likely to bend,” he said. Mr. Farella added that issues like the agreement’s duration or the geographic area covered by the agreement were the easiest to negotiate. Usually, however, companies are hesitant to make concessions on an individual basis, Mr. Farella said. John Reddish, president of Advent Management International, a consulting firm in Drexel Hill, Pa., noted that some employers might view a request to modify a noncompete agreement as a hostile act, and could withdraw a job offer.

Q. What can happen if you violate a noncompete agreement?

A. An expensive lawsuit, for one thing. Because noncompete clauses are legal contracts, employers have the right to sue any employees they suspect to be in violation. John J. Myers, a partner at Eckert Seamans Cherin & Mellott, a law firm in Pittsburgh, said cases could drag on for months, presenting challenges for employees with limited finances. Mr. Myers added that judges deciding in favor of employers could enjoin, or stop, an employee from working for the new company. “A court will award compensatory damages, such as lost profits, in addition to issuing an injunction prohibiting the violation of a restrictive covenant,” he said. “In other words, the court will put the person out of work.” Breaking a noncompete agreement can lead to other troubles as well. Bryan Cleveland, a lawyer at Ferrell Worldwide in Miami, said that a former employer with whom you had a noncompete agreement could tell your prospective employer that hiring you would make the company an accessory to a crime. The tactics can get pretty strong-armed at times,” Mr. Cleveland said. “From a company’s perspective, pointed threats can be just as damaging as actual litigation.”

Q. Is there a way to avoid these issues altogether?

A. Not if an employer insists on a noncompete agreement.

Peter Polachi, managing partner at Polachi & Company, an executive search firm in Framingham, Mass., says that because a noncompete agreement has such bearing on future employability, it should be regarded as a crucial facet of a job offer — equivalent to factors like pay and benefits packages. D. Kevin Berchelmann, president of Triangle Performance, a consulting firm in Spring, Tex., says that if a prospective employer insists on a signed agreement, you have a choice: approve the document or decline it and start your job search all over again. “Noncompete agreements are not designed to be win-win for employees,” he said. “No matter how much you may not like the idea of a noncompete, if you want the job, you may have to sign.”