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Are Non-Compete Agreements a Thing of the Past? You Tell Me

written by: •edited by: Michele McDonough•updated: 8/30/2011

Do you force new employees to sign non-compete agreements so they can’t steal a secret recipe, design or what you feel is yours and yours alone? If so, these are not so popular among top job seekers so you may want to reconsider the practice.

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    I Own Your Future

    Do you want to own your employees Many big corporations (and some not so big) ask employees to sign non-compete agreements, especially if the employee will have access to intellectual property or is on a design team where the company eventually owns the ideas or inventions developed.

    As fair or unfair as this may seem to some, I have a friend who has a major corporation and his umbrella (holding company) has many, smaller companies underneath it. When I became an entrepreneur, I asked him if he used a non-compete agreement and he offered he did. Because we are friends, I asked for a copy and his permission to alter it so I could create my own.

    This was a bad idea all around folks. Why? I really enjoy being friends with this guy (who shall remain nameless in case you recognize his company names) but the non-compete agreement he uses would surely scare the heck out of anyone wanting to work for him. In fact this non-compete actually made me feel like if I signed it, his company would own my tail—much like any branch of the U.S. Military—and if I went AWOL, I was doomed.

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    Understanding and Interpretation

    In my experience with non-compete agreements in the auto industry, upon hire, employees sign an agreement basically saying if they leave the company for any reason, they agree not to work for a competitor for a number of years after they leave. How far away the competitor is as far as miles also comes into play.

    The idea behind these agreements is to keep company ideas, intellectual property, inventions and even files, documents and customers out of the hands of a new competitor—and they’re pretty much legal.

    According to Carmen Nobel of the Harvard Business Week newsletter, the only states prohibiting these sign-your-life-away-for-a-while agreements are California, Alaska, Connecticut, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Washington and West Virginia.

    Nobel points out, “…even if someone signs a non-compete agreement in Massachusetts, for instance, a judge in California is not obligated to enforce the contract because it conflicts with California state law."

    So, if you ask an employee to sign a non-compete agreement with your IT company in New York State and you also have offices in California and transfer the employee, that agreement may not hold up in court. Of all the states that deny non-competes, California has the strongest of laws.

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    Research Findngs

    Non competes and top secret IP Matt Marx, MBA a now-professor at MIT Sloan was interviewed by Carmen Nobel and explains California offers an ocean of opportunities saying, “There's an open labor market," he continues. "People can leave (their jobs) when they want."

    Nobel also revealed Marx co-authored an upcoming paper, Regional Disadvantage? Non-Compete Agreements and Brain Drain, that will investigate how non-competes drive “high-tech talent away" and that creates a “brain drain of smart inventions." The other authors included Harvard professors Lee Fleming and Jasjit Singh.

    To prove brain drain, Marx researched patents from the United States Patent and Trademark Office (USPTO) and looked for only those inventors who had multiple patents from 1975 to 2005.

    Seems this research group stumbled on a little 19-aught-five (1905) law in Michigan, Public Act No. 329 that said “all agreements and contracts by which any person…agrees not to engage in any avocation or employment…" and Fleming says this Act did cover non-compete agreements, meaning they were illegal. Probably for the good anyway—can you imagine Henry Ford firing top engineers only to leave them standing in the bread lines with a pink slip from Henry informing them General Motors and Dodge and Chrysler are out of the question?

    Public Act No. 329 was repealed in 1985 (took them long enough) and non-competes were legal once again in Michigan—a state full of inventions and ideas, especially in Detroit.

    Off on their research journey, Marx et al found that from 1975 to 1996 “…the rate of emigration grew in Michigan—0.24 percent to 1.18 percent" and did drop in states without non-competes—0.20 percent to 0.13 percent."

    Still. it’s interesting to me that one of these professors (Fleming) says of California and its denial of non-compete agreements, “Are people going to California because they're trying to get out of the non-compete in their original state, or are they going to California for the weather or whatever else?" I do suppose this could be a hypothetical reason, but I think high-tech job seekers are more interested in high-tech opportunities, not the Santa Ana winds or the sunshine California offers.

    Brain drain via enforcement of non-compete clauses on the other hand does seem to affect a group of unique people. The excellent or best engineers, scientists, and research and development folks; these are the people leaving states with non-compete clauses, not those who fall on the average scale of skills, knowledge and experience.

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    Fair Competition

    Engaged employees are happier Competition breeds innovation but perhaps the Harvard professors are correct. If only the smartest or best of the best, or those with many patents seek out states that don’t enforce non-competes, then many states are losing the “brains" of these experts—and if you think about it, most states do and will enforce non-competes.

    Of course no employer wants their trade secrets given away by an employee leaving and that’s understandable. The website NOLO which offers the “Law for All" reminds employers wanting to initiate non-competes that the agreement must be “reasonable."

    NOLO states the agreement should not, “Last too long, cover too wide a geographical area, or prohibit a former employee from engaging in too many types of businesses."

    In essence, those of you out to write a non-compete agreement need to sway from including the ridiculous.

    Keeping the word “reasonable" in mind, suppose you insist Joe in your engineering department sign an agreement and it has conditions such as the following.

    Joe may not work for any competitor in a 25 mile radius for a period of ten years and that includes non-competitors who hire engineers for other services beyond what ABC Company is engaged in.

    Here, not only would Joe have to look for a job 26 or more miles away from his current job, but he'd also be prohibited from working as any type of engineer for the next ten years! No judge would enforce this so it’s best to use common sense if you want to use non-competes.

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    Prepare for the Average

    When you instruct HR recruiters to find the best of the best and tops in their field and offer up a non-compete agreement—even if it’s reasonable—expect most to say no thanks. This may leave employers with choices from a pool of people on the average side of smarts and intelligence.

    Finding and holding on to valuable employees often means skipping the non-compete or at least making it fair.

    Then again, many employers offer non-competes that are reasonable but don’t enforce them, causing the exiting employee unneeded stress awaiting a letter saying the company has changed their mind and the non-complete shall now rule. In other words, if you use one, enforce it or if you plan not to, what’s the point in having employees sign one?

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    Reasons to Skip Them

    Say no to non competes Ensuring you have the best minds working for your company doesn’t mean you need non-competes and actually, I believe they should be illegal in all states. Why? Today’s workforce wants to be engaged and happy which spawns productivity and a feeling of “I like my job."

    Holding an anvil over their heads with these types of agreements does not make for a happy and content worker—no matter where they fall on the leadership or experience scale.

    Back in 2010 when Toyota faced so many recalls and issues of gas pedals sticking were all the talk, remember when Congress obtained one whistleblower willing to reveal Toyota’s secret Books of Knowledge? Some Americans cheered—give them up; show us what you’ve got. Other not so much.

    I land on the I don’t care side of this argument. Why shouldn’t a company be able to keep its trade secrets and designs? Sure one may argue these particular knowledge books revealed some safety steps skipped by Toyota, but for the most part, these journals and records were intellectual property, plain and simple.

    If you’re like my friend who wants play God and “own" his employees, tattoo his company name on their butts and make their life impossible after they leave the company, I suggest you find a labor law attorney to write the perfect non-compete (but nothing is perfect right?).

    If you don’t enjoy playing God, however; and desire dedication over fear of reprisals or lawsuits, why not let those who excel do just that. You hired them for their abilities. Don’t penalize them if they find a more attractive offer. Instead, match or better that offer.

    What’s your opinion on non-competes? Did you sign one and what does it say? Are you stuck at your job with a ball and chain around your ankle? Or, are you lucky enough to live in a state where non-competes are disallowed?

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