A recent Wall Street Journal article about the rise in litigation over non-compete agreements, noted that over the last decade there has been nearly a 60% increase in lawsuits over the breach of these agreements. While an increase could be expected since non-compete clauses have become almost commonplace in employment agreements, the steep increase in litigation over these clauses is troubling. What is troubling is that the litigation and the threat of litigation over breaches of non-competition agreements are affecting job and market growth as well as employee employment opportunities.
Non-competition agreements were created to protect employer trade secrets and competitiveness in the market. A company’s trade secrets are what give the employer its competitive advantage in the market. Trade secrets can be technology, a company’s process, a company’s customer base, or anything that gives the company an advantage and is not publicly known. Non-competition agreements restrict a former employee’s ability to seek employment with the employer’s competitor, to recruit the employer’s customers or employees, and it prohibits the sharing or use of the employer’s trades secrets or methods. These restrictions have to be reasonable in scope, location and time. This means that to be enforceable they cannot last indefinitely nor can they prevent all future employment in a given field or even a specific region.
Some non-competition clauses include non-disparagement provisions which prevent former employees from bad-mouthing the employer. Microsoft provided an example of a non-competition agreement with a non-disparagement provision with its recent agreement with its former Windows president, Steven Sinofsky. Sinofsky agreed to not accept employment from Microsoft’s competitors, to not bad-mouth the company, and to not encourage Microsoft’s customers or employees to switch to one of its competitors. He signed his non-competition after he left the company, but normally non-competition agreements are only valid if signed before starting employment because there needs to be consideration. Consideration is some sort of benefit for the employee at the expense of the employer or vice versa. Normally, this consideration comes at the start of employment when the employer agrees to hire and pay the employee while the employee promises not to compete after leaving the employer.
Unfortunately, sometimes this consideration, which seems like a good thing at the time, becomes less considerate as time goes by. For instance, the Wall Street Journal article illustrated the chilling effect non-competition agreements have on both forming start-up companies and recruiting for start-up companies. Former employees are often prevented from starting their own company because they might use the employer’s trade secrets. If they do manage to start their own business they are often prevented from hiring qualified individuals because of that individual has a non-competition agreement with another business. Additionally, this situation can dissuade employees from leaving employment because their employment opportunities are more tightly restricted. There are probably other drawbacks with these agreements, but these are some of the most obvious and problematic for employees and employers considering non-competition agreements.
If you have any questions about non-competition agreements or trade secrets contact a Washington employment law attorney.