Labor / Employment, On The Job

When You're Caught In The Middle: 4 Tips For Employees About Noncompetes

Noncompetes are incredibly expensive and time-consuming to enforce -- and often just aren't worth it.

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Stop and think before you sign - or ask an employee to sign - a noncompete.

Stop and think before you sign – or ask an employee to sign – a noncompete.

A few months ago, in what felt like a different time, the Obama administration wanted to ban noncompetes.  Those banes of an employee’s existence, the agreements that are presented as “new hire paperwork” and end up meaning you have to “sit out” of your ten-year industry between two years and six months. As if the average employee can afford to do that. But these seemingly benign agreements can also be very very bad for employers, because they can be a tool for competition that can literally put a smaller business out of business.

There are states where even professionals like doctors can be subject to these things. Yes, a piece of paper can dictate whether you get to see the doctor of your choice.

Fortunately, noncompetes are incredibly expensive and time-consuming to enforce, and only in the most egregious of circumstances do they, in the end, tend to work out. In general, I discourage employers from filing these types of actions. An example: in this lawsuit here, the parties spent nearly half a million in fees for a three-figure judgment. And this was a claim based on egregious behavior by an employee. Thank goodness for attorney-fees provisions in contracts.  Let’s hope the employee has deep deep pockets for this judgment. (Pro tip: he likely does not.)

But what is the most likely use of these agreements, in my opinion? To stop competition, of course!  The noncompete provisions (and related nonsolicitation provisions and likely confidentiality agreements) become fodder for a much bigger battle for market share.

A noncompete provision can greatly alter your career landscape, even after a termination, because the provisions survive months, and even years, after the separation event. So what should you do if you are an employee?

  1. Read everything you sign carefully. Believe it or not, you can negotiate these things. You can push back and get clarification, in writing, for parts of a company’s “standard” NDA. And you should. Unless you are an attorney (and even with some J.D.-advantage roles in-house), you can find yourself bound by them. And getting “unbound” isn’t easy. Keep copies of everything you sign, and have them available in the event you plan to make a transition.
  2. When you are planning to leave, consider them in your exit package. If you read my posts, you know I am a big advocate for thoughtfulness by employees in their careers. This is an area where that really really pays off. When you are planning to say your goodbyes, voluntary or involuntary, negotiate the provisions of your NDA as to competition and solicitation, and be sure they will work for you with what you plan to do in the future.
  3. Understand your industry and what you bring to your employer before you sign. For example, if you are a sales person, have handy a list of customers you already dealt with before this employer. If an employer hires you because of a prior relationship with a company, they can’t then try to stop that relationship with a noncompete. But they might try.
  4. Disclose any prior agreements to new employers. Failure to disclose can cause your employer to drop you like a hot potato, because these are expensive types of litigation that bring with them bad publicity. And they are often used to fend off competitors. Be honest and straightforward, and it will likely help you in getting the issue behind you.

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But if you are an employer, be equally as prepared. No matter what a company does, it likely has information it wants to protect and key employees that it won’t want to take that information to a competitor. However, employers are often enticed with the siren song of noncompetes for all. In no state can you enforce a noncompete for just any employee. Employers must be equally as thoughtful about who they give these agreements to, and honest with themselves about the enforcement. Key things to keep in mind (assuming you aren’t in California) include:

  1. Only give them to the employees who need them. There are, at any time, three to five key employees of a mid sized business who know the secret sauce, and who, if they were to get together, could really impact a business’s bottom line. These are the employees who should have noncompete agreements.
  2. The noncompete should be geared toward the secret sauce and tailored for the business. It should be flexible to include changes in the business, but keep the core business in mind. When done right, no two agreements for two businesses should be exactly the same. Pro tip: very seldom are they done right.
  3. The noncompete should be appropriately limited in time and geographic scope. While all businesses fancy themselves an international force in the making, every business, even “international” ones have a market that isn’t everyone everywhere. And even the key employees for the business aren’t in all of the markets. Be thoughtful because this increases the likelihood of winning. While sometimes companies win spectacularly with such agreements, it is often when an employee or former employee does something incredibly dumb. In most of these situations, employers spend hundreds of thousands of dollars litigating a case that settles for a fraction of what they paid the lawyers, if they don’t lose on appeal.
  4. Prepare to negotiate. When an employee leaves with a noncompete, be prepared to reasonably negotiate with her. She still needs to take care of her family. You want to keep your business going. It is likely you will see one another again in the small business space where you operate. Why not use the transition as an opportunity to negotiate for what you want most in the agreement (pro tip: you can get specific concessions that could be more valuable than a blanket noncompete), and facilitate a more positive outcome?

Employers should also ask new hires about any prior agreements. Noncompetes are legally significant ways to protect a business, but they can be abused and misused as a way to attack the competition. Litigation as a business strategy is a real thing; just ask Apple. But businesses that are seeking to increase market share the old-fashioned way, by having a great product or service, want to avoid this growth strategy.

beth-robinsonBeth Robinson lives in Denver and is a business law attorney and employment law guru. She practices at Fortis Law Partners. You can reach her at [email protected] and follow her on Twitter at @HLSinDenver.

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