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Tutorial Tuesday: Recruiting Law-- Non-compete Agreements
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Many companies are requiring new employees to sign a non-compete agreement (NCA) that restricts where an employee can work and what they can do after they leave. This is really good for employers. It's not so great for people trying to move to a new position, or recruiters who are working to place them. New employers are usually not keen on getting a lawsuit along with their great new hire.
This is the heart of the issue in the current dispute between Apple and IBM over Mark Papermaster who just joined Apple's iphone team after 25 years at IBM. Papermaster has an NCA that prohibits him from working for a competitor for 1 year after leaving IBM. A federal court in New York just issued a preliminary injunction requiring him to stop work at Apple until the case is resolved. (This could easily be longer that the 1 year NCA, so expect an immediate appeal of the preliminary injunction.)
IBM claims Papermaster knows its proprietary information, including the architecture for their microprocessor and that knowledge would give Apple an unfair advantage in the competition between them for computer sales. Apple claims that Papermaster is doing different work than he did at IBM and that his knowledge about larger servers or personal computers is not going to apply to his work at Apple on the iphone and smaller consumer electronics. Papermaster says that sitting out a year in this fast-paced field would damage his career and that the NCA prevents him from being able to work virtually anywhere, and especially a "dream-job" like Apple. New York generally recognizes NCAs and the issue will be whether IBM can prove a substantial likelihood of damage as a result of Papermaster working for Apple.
In the meantime, here are the important things to know about NCAs and how to navigate them.
Anatomy of a Non-Compete Agreement
NCAs typically have two important parts: 1) protection of trade-secrets; 2) restrictions on where employees can work after they leave.
The trade secret protection is essentially a non-disclosure agreement and is designed to keep a company's proprietary information secret. It usually covers company product information, sales strategy and client lists and contains a long list of other things that boil down to one of the above.
The work restrictions usually prevent an employee from working for a competitor in the same market or geographical area—usually for one or two years. These provisions are often drafted so broadly that the only place the employee could ever work would be a research substation in Antarctica teaching polar bears to surf.
Non-Compete Agreements Are Often Unenforceable
Because NCAs are so restrictive, they are often not enforceable. Some states, like California, have laws that make them illegal. Other states will enforce some provisions, usually the trade secret protection, but not the work restrictions.
The first thing to look at is whether there was some form of payment or consideration for the NCA. When the agreement is signed at the beginning of employment, courts will usually interpret the NCA to be part of the overall employment deal and find that there was some fair exchange for the agreement. But when an employer asks an employee to sign an NCA after starting employment and there is no extra payment or benefit to the employee for signing it, then almost all courts will invalidate the NCA for lack of consideration.
The next thing to consider is the laws of the states involved—where the employer is headquartered and where the employee will physically be working. If either has restrictions against enforcing NCAs, then the agreement may not be effective.
About one-third of states have some restriction on the enforceability of NCAs because they interfere with a person's basic ability to work and make a living. The restrictions usually limit the geographical area where the employee cannot work for a competitor and limit the time of the NCA to less than two years. The employer has the burden of showing that any restriction is reasonable and necessary to protect against unfair competition. California, Louisiana, Alabama, Florida, Oregon and Michigan have the most restrictions against NCAs. Other states, like Texas, will enforce the agreement but the courts often re-write NCA to the restrictions the employer can prove are necessary to preventing an unfair advantage by the new employer.
In California, non-compete agreements are illegal and unenforceable except in very limited situations. California will recognize an employer's right to protect trade secrets, but only if the employer can show that the information really is proprietary and should be kept secret—not just because the employer says it is. Even client lists are not secret if the information can be obtained in other ways besides the employer's internal lists.
This year the California Supreme Court ruled against Arthur Anderson in a non-compete lawsuit holding that NCAs are unenforceable and even narrow restraints on a former employee's ability to take a new job will not be allowed.
Canada also has restrictions on NCAs. The Supreme Court of Canada just decided a case against Merrill Lynch in which a branch manager left and took most of the employees with him. The Court ruled that employees have a duty not to compete during their employment, but there is no duty not to compete after the employment. The branch manager and his new employer were stuck with significant liability anyway because he cooked up the scheme and recruited all the employees while he was still with Merrill Lynch. He also was liable for damages for failure to give notice of resignation- notice is a requirement under Canadian law. If he had waited until after he had left, it would have been a much harder case.
So if you are working with a candidate that is subject to a non-compete agreement make sure to know the following:
1. When was it signed? If it was after the start date, it may not be valid because there was no additional compensation given.
2. What is restricted? Legitimate trade secret restrictions will generally be enforced, but broad restrictions on someone's ability to work will not be unless the old employer can show some unfair advantage or damage will result.
3. What is the law that covers the situation? Many states will not enforce or will restrict non-compete agreements no matter what they say. If you don't know, contact an employment attorney like me to find out.
4. What is the real risk? If the employee is leaving due to a lay-off or there is no real direct competition between the old and new employer, it may be possible for the employee to get released from the non-compete once the old employer knows there is little or no threat. Consider trying to work this out to eliminate the problem directly between the people involved. If the employee does not have any luck, it may be useful to have an attorney get involved in the negotiation.
Heather Bussing is a California attorney who has specialized in employment and business law for the past 21 years.
This is the heart of the issue in the current dispute between Apple and IBM over Mark Papermaster who just joined Apple's iphone team after 25 years at IBM. Papermaster has an NCA that prohibits him from working for a competitor for 1 year after leaving IBM. A federal court in New York just issued a preliminary injunction requiring him to stop work at Apple until the case is resolved. (This could easily be longer that the 1 year NCA, so expect an immediate appeal of the preliminary injunction.)
IBM claims Papermaster knows its proprietary information, including the architecture for their microprocessor and that knowledge would give Apple an unfair advantage in the competition between them for computer sales. Apple claims that Papermaster is doing different work than he did at IBM and that his knowledge about larger servers or personal computers is not going to apply to his work at Apple on the iphone and smaller consumer electronics. Papermaster says that sitting out a year in this fast-paced field would damage his career and that the NCA prevents him from being able to work virtually anywhere, and especially a "dream-job" like Apple. New York generally recognizes NCAs and the issue will be whether IBM can prove a substantial likelihood of damage as a result of Papermaster working for Apple.
In the meantime, here are the important things to know about NCAs and how to navigate them.
Anatomy of a Non-Compete Agreement
NCAs typically have two important parts: 1) protection of trade-secrets; 2) restrictions on where employees can work after they leave.
The trade secret protection is essentially a non-disclosure agreement and is designed to keep a company's proprietary information secret. It usually covers company product information, sales strategy and client lists and contains a long list of other things that boil down to one of the above.
The work restrictions usually prevent an employee from working for a competitor in the same market or geographical area—usually for one or two years. These provisions are often drafted so broadly that the only place the employee could ever work would be a research substation in Antarctica teaching polar bears to surf.
Non-Compete Agreements Are Often Unenforceable
Because NCAs are so restrictive, they are often not enforceable. Some states, like California, have laws that make them illegal. Other states will enforce some provisions, usually the trade secret protection, but not the work restrictions.
The first thing to look at is whether there was some form of payment or consideration for the NCA. When the agreement is signed at the beginning of employment, courts will usually interpret the NCA to be part of the overall employment deal and find that there was some fair exchange for the agreement. But when an employer asks an employee to sign an NCA after starting employment and there is no extra payment or benefit to the employee for signing it, then almost all courts will invalidate the NCA for lack of consideration.
The next thing to consider is the laws of the states involved—where the employer is headquartered and where the employee will physically be working. If either has restrictions against enforcing NCAs, then the agreement may not be effective.
About one-third of states have some restriction on the enforceability of NCAs because they interfere with a person's basic ability to work and make a living. The restrictions usually limit the geographical area where the employee cannot work for a competitor and limit the time of the NCA to less than two years. The employer has the burden of showing that any restriction is reasonable and necessary to protect against unfair competition. California, Louisiana, Alabama, Florida, Oregon and Michigan have the most restrictions against NCAs. Other states, like Texas, will enforce the agreement but the courts often re-write NCA to the restrictions the employer can prove are necessary to preventing an unfair advantage by the new employer.
In California, non-compete agreements are illegal and unenforceable except in very limited situations. California will recognize an employer's right to protect trade secrets, but only if the employer can show that the information really is proprietary and should be kept secret—not just because the employer says it is. Even client lists are not secret if the information can be obtained in other ways besides the employer's internal lists.
This year the California Supreme Court ruled against Arthur Anderson in a non-compete lawsuit holding that NCAs are unenforceable and even narrow restraints on a former employee's ability to take a new job will not be allowed.
Canada also has restrictions on NCAs. The Supreme Court of Canada just decided a case against Merrill Lynch in which a branch manager left and took most of the employees with him. The Court ruled that employees have a duty not to compete during their employment, but there is no duty not to compete after the employment. The branch manager and his new employer were stuck with significant liability anyway because he cooked up the scheme and recruited all the employees while he was still with Merrill Lynch. He also was liable for damages for failure to give notice of resignation- notice is a requirement under Canadian law. If he had waited until after he had left, it would have been a much harder case.
So if you are working with a candidate that is subject to a non-compete agreement make sure to know the following:
1. When was it signed? If it was after the start date, it may not be valid because there was no additional compensation given.
2. What is restricted? Legitimate trade secret restrictions will generally be enforced, but broad restrictions on someone's ability to work will not be unless the old employer can show some unfair advantage or damage will result.
3. What is the law that covers the situation? Many states will not enforce or will restrict non-compete agreements no matter what they say. If you don't know, contact an employment attorney like me to find out.
4. What is the real risk? If the employee is leaving due to a lay-off or there is no real direct competition between the old and new employer, it may be possible for the employee to get released from the non-compete once the old employer knows there is little or no threat. Consider trying to work this out to eliminate the problem directly between the people involved. If the employee does not have any luck, it may be useful to have an attorney get involved in the negotiation.
Heather Bussing is a California attorney who has specialized in employment and business law for the past 21 years.
Tags: non-compete, tutorial tuesday
Replies to This Discussion
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Permalink Reply by Amitai Givertz on -
Heather, this is a fantastic article. Welcome to Tutorial Tuesday line-up!
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Permalink Reply by Maureen Sharib on -
This will be very interesting to watch. Thanks Heather, for bringing this subject forward.
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Permalink Reply by Tektree Gopi on -
Heather,
Superb, Wonderful article. It definitely opens up the knowledge for everybody in this industry. I was also struck by this NCA last year (2007).
Thanks so much for such a fabulous article.
If NCA is not enforceable., how employer's can survive. We put all your efforts in recruiting a candidate and somebody solicits our candidate. In my case, I placed a candidate for a contract position with a client through a consulting firm, the candidate worked for 8 months and one fine day he told me the project got over and he doesn't want to deal with me anymore and will look out the job on his own. As well, he said that he has applied for a position with the same client. I got to know the candidate is still working in the same client through the same consulting firm from Jan 2008., it's going on. I am helpless. I am the one who put him to the client through the Consulting firm. I don't have NCA/NDA with the candidate as well it hasn't mentioned anywhere in the consulting firms' contract.
I really appreciate if anybody can give me their inputs., this incident still bother's me.
Thanks,
Gopi.
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Permalink Reply by Maureen Sharib on
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It would bother me too Gopi but sometimes you have to chalk these things up and go on. There are always going to be a**holes like this. Hopefully, we get better at recognizing them when they raise their lousy heads out of the dark spaces they belong in.
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Permalink Reply by Steve Levy on -
TG-
My first reaction has nothing to do with the law - I'm wondering how often you communicated with this person between the time he started and the time he decided to go regular. My second reaction is that you've learned that the law is the framework for business and that you'll never make this mistake again - you'll be certain to have a conversion clause in every contract you print out.
You can try to negotiate with the company; sometimes it works. While they may balk at the thought of paying you a conversion fee, you may receive more work on a go forward basis.
Now close your eyes, breathe deeply, and pick up the phone to the company and ask for a meeting...
Tektree Gopi said:Heather,
I am helpless. I am the one who put him to the client through the Consulting firm. I don't have NCA/NDA with the candidate as well it hasn't mentioned anywhere in the consulting firms' contract.
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Permalink Reply by Steve Levy on
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Step .5: ASK if the person has a signed NCA...
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Permalink Reply by Tektree Gopi on
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Hi Maureen,
Thanks a lot for your inputs Maureen. As you said, I would like to forget and move forward for the past one year., but somehow it gets into my mind atleast once a day. The reason why it bother's so much is., he was desperate in looking for a job when he initially approached me. He was new to this country. I placed him for a one month contract with a client. Once that got over, I immediately within a month found this second job for him. I trusted him as I got him through referral.
Thanks once again Maureen.
Regards,
Gopi.
Maureen Sharib said:It would bother me too Gopi but sometimes you have to chalk these things up and go on. There are always going to be a**holes like this. Hopefully, we get better at recognizing them when they raise their lousy heads out of the dark spaces they belong in.
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Permalink Reply by Tektree Gopi on
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Hi Steve,
Thanks for your inputs Steve.
My communication with the consultant was always there, as he used to come collect his check bi-weekly from me.
This candidate came through referral and he was new to this country and desperately looking for Job. I have given him Training to enhance his skills and got one month contract. After the first project got over, within a span of one month, I found him Second Job which is also contract. While he was working, in the end of the third month, he tried to cut me and join the consulting firm there by increasing his share by $10 which is my margin. Somehow I threatened him by saying I am going to file a law suit and got him to table and increase his share by $2.50 and reduced my margin to $7.50. He was working for 8 months till Dec'2007, and he started this story.
When I spoke to the consulting firm that this is not fair, they said we can't help you, as this project was found by the consultant on his own.
The candidate has signed the same document which was signed by me to the consulting company.
_______________________________________________
Steve Levy 27 minutes ago
Step .5: ASK if the person has a signed NCA...
_______________________________________________
Thanks once again for taking your time out inspite of your hectic schedule and sharing your expertise knowledge across to me.
(P.S.: By the way, I think we met in the "Happy Hour" meeting in NYC which was sponsored by ICIMS - Lindsay)
Thanks,
Gopi.
Steve Levy said:TG-
My first reaction has nothing to do with the law - I'm wondering how often you communicated with this person between the time he started and the time he decided to go regular. My second reaction is that you've learned that the law is the framework for business and that you'll never make this mistake again - you'll be certain to have a conversion clause in every contract you print out.
You can try to negotiate with the company; sometimes it works. While they may balk at the thought of paying you a conversion fee, you may receive more work on a go forward basis.
Now close your eyes, breathe deeply, and pick up the phone to the company and ask for a meeting...
Tektree Gopi said:Heather,
I am helpless. I am the one who put him to the client through the Consulting firm. I don't have NCA/NDA with the candidate as well it hasn't mentioned anywhere in the consulting firms' contract.
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Permalink Reply by Maha Akiki on -
When my husband was to be hired by an engineering company as a consultant, they asked him to sign a non-compete that will basically prevent him to work with any engineering company within Ontario. He went to a lawyer, who basically laughed at the Non-Compete, told my husband, that, by principle, he should negotiate to change the territorial limitation of the NCA, or not sign the NCA altogether. However, if they insisted, and he still wanted to work with them (it was an exciting project), to go ahead and sign, because the NCA is not worth the paper it's printed on. That was about 6 years ago. Since then, I've heard - from VPs of HR, CFOs, and others - that Non Compete in Canada are not re-inforceable....
My thoughts are, however, that the company usually has the cash to drag the former employee through the courts, damage their reputation, even if the employee "wins" in court -- Would you hire someone who you know was sued by their former employer?... or should I ask: would you "readily" hire "regular Joe or Jane" if they were sued by a former employer...
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Permalink Reply by Maureen Sharib on
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Maha - why was it unenforceable? Because they're unenforceable in Canada (are they?) or because it was too restrictive (not being allowed to work w/any engineering company in Ontario)?
Maha Akiki said:When my husband was to be hired by an engineering company as a consultant, they asked him to sign a non-compete that will basically prevent him to work with any engineering company within Ontario. He went to a lawyer, who basically laughed at the Non-Compete, told my husband, that, by principle, he should negotiate to change the territorial limitation of the NCA, or not sign the NCA altogether. However, if they insisted, and he still wanted to work with them (it was an exciting project), to go ahead and sign, because the NCA is not worth the paper it's printed on. That was about 6 years ago. Since then, I've heard - from VPs of HR, CFOs, and others - that Non Compete in Canada are not re-inforceable....
My thoughts are, however, that the company usually has the cash to drag the former employee through the courts, damage their reputation, even if the employee "wins" in court -- Would you hire someone who you know was sued by their former employer?... or should I ask: would you "readily" hire "regular Joe or Jane" if they were sued by a former employer...
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Permalink Reply by Maha Akiki on
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Good question :-)
It was two-fold... If the NCA was so constricting that the former employee is unable to find a job in his chosen field where they live, it is definitly unenforceable: The lawyer's first comment was, "what, they want you to move to montreal?"
After that incident, and after some research, I learnt that the courts just tend to find that NCAs are too one sided and do not protect the interest of the employee (or former employee), and courts in Canada tend to lean towards the employee's rights...
Maureen Sharib said:Maha - why was it unenforceable? Because they're unenforceable in Canada (are they?) or because it was too restrictive (not being allowed to work w/any engineering company in Ontario)?
Maha Akiki said:
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Permalink Reply by Heather Bussing on -
Hi Tektree, Rather than a non-compete agreement, you may be able to put language into your agreement with your clients that allows you a commission or fee if they take a job with an employer you referred them to within a set amount of time. It would be similar to the commission agreement for realtors who often request a fee if you buy a house they showed you, even if you don't buy it at the time they first showed it to you. Again, it would need to be a reasonable amount of time and would require you to keep comprehensive records.
My understanding is that in the US charging candidates fees of any kind is not considered okay and is thought of a sleazy--but that may not be true everywhere. I'd be interested in knowing more about this. Do you think the change in economic times will affect this?
I hate it when people try to rip me off. And people do sometimes. The important thing to remember is that they are just being their self-centered, crazy selves and it doesn't have anything to do with you or how hard you worked or how great you are at what you do.
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