Non-compete agreements?

Chris Oei Independent Contractor at Realty ONE Group

May 24th, 2015

Hi all,

I was recently asked by a company (which shall remain nameless) if I would be willing to sign a non-compete agreement. Now, I know the State of California where I reside has laws forbidding most forms of such an agreement, but I'd like to put those aside for the purposes of this discussion. Let's pretend that we lived in a state or country that would enforce such an agreement.

Would you -- as an employee -- be willing to sign such an agreement as a condition of employment?

Would you -- as an employer, and if it were enforceable -- ask potential employees to sign a non-compete agreement?

I'm curious what other founders out there think about these sorts of agreements. It's the first time I've ever been asked to sign one, and I've never even thought about asking a potential employee for it.

Antone Johnson Social/Digital Media/Mobile Startup Lawyer, Advisor, Board member, Commentator

May 25th, 2015

Many insightful points raised in this discussion. I'm a California lawyer so the subject is straightforward here: Covenants not to compete are unenforceable except in connection with the sale of a business (i.e., after selling your company, the buyer can prohibit you from turning around and founding a competitor the next day).

I haven't seen much come of the absence of enforceable non-competes here. The primary reasons, I suspect, are that (1) other means exist to similar ends, and (2) contracts don't enforce themselves. I flog this point endlessly in business because lawyers and dealmakers so often treat provision X in a contract as if it's a sure thing. "They can't do that!" Sure they can; it would put them in breach of contract, but we'd have to sue them to enforce it. Is it a big enough deal to merit entangling the company in a lawsuit?

Litigation is incredibly expensive, disruptive, and distracting to executives and technical experts whose time is very valuable. (It's also a matter of public record, which is another subject.) Even if the contract says the loser is required to pay the winner's legal costs, those provisions don't enforce themselves either, there can be a lengthy time lag, and they still don't compensate for things like hours of senior management time wasted in depositions, document production, etc.

I've written similar comments about NDAs. In practice, they are virtually never litigated except in situations that are truly flagrant or high-stakes. This gets back to the point others have made about trade secrets. When Company A goes after competitor B for hiring away its best people, in a state where non-competes don't exist, it makes the case based on IP, such as suspected use or disclosure of A's trade secrets. Proving that isn't always easy, but something called the "inevitable disclosure doctrine" (which is what it sounds like) can apply if dealing with direct head-to-head competitors where the person(s) in question have extremely specialized knowledge from A that couldn't magically be forgotten when serving in a similar role at B.

Another helpful item is the non-solicitation covenant, which is generally enforceable in CA, referring to the solicitation (after moving to B) of A's employees or customers. A strict no-hire clause won't fly, but it's common to prohibit the employee who moves to company B from actively recruiting others to come along, or from actively soliciting A's customers, for some reasonable period of time.

Returning to the point about enforcement, the cost and resource drain of litigation to enforce any of these agreements is roughly equal on both sides. If you're a startup and your 10X ninja engineer who knows all the secrets of solving problem X leaves to work on something similar at Company B, sure, you may have a case (without a non-compete). If B is another startup, litigation could hold up or tank its next round of funding, or at least tax its resources, giving A some leverage. On the other hand, if B happens to be Apple or Google, a six- or even seven-figure bill and many hours of management time soaked up by litigation are a gnat on the elephant's hide.

Obligatory disclaimer: This is legal information, not advice.

Peterson Trethewey Software Engineer at Kamcord Inc

May 25th, 2015

> Would you -- as an employee -- be willing to sign such an agreement as a condition of employment?

Depends on the details. Often the definition of "competition" in the agreement is too broad or ill-defined for comfort. I've never refused to sign, but I once quit a company because of it.

> Would you -- as an employer, and if it were enforceable -- ask potential employees to sign a non-compete agreement?

If I'm going to entrust sensitive company information to a person, I want some assurance that person won't use it against me. But again, the details seem key. Companies often have one blanket employee contract that everyone signs. This feels wrong to me. An employee might not totally agree to the standard contract, or it might not make sense for them. For example, forbidding an office temp from ever working for a competitor as a temp. That seems extreme, but the company will talk people into signing by explaining that "this is just a standard contract; everyone signs it" That makes me sick. The employee --if they're anything like me-- will feel resentful for having their arm twisted. It's no way to start a business relationship. So, I would hope I could work out contracts on a more individual basis.

Jake Carlson Software Development Manager at Oracle

May 24th, 2015

Yes and yes. The issue for me isn't really whether competition is ok -- I think it is. But unfortunately as a result of the employee's work at a company, he/she knows trade secrets that can be used against the company, giving the new company an unfair advantage over the original company. Same goes for the employee starting his/her own business. It really depends on the type of business, but in most cases I think a non-compete with a definitive end date is pretty reasonable IMO if only to prevent the type of unfair / unethical discloser of trade secrets, contacts, etc.

In other threads I've railed against overly restrictive contracts regarding the ownership and use of code. IMO the issue isn't so much the code itself per se; it's how a company's bottom line can be damaged by the code if it is used to compete against it in some way. I suppose the same argument can be made for other company assets, like sales contacts etc. It doesn't hurt a company for a former employee to use his/her rolodex to sell unrelated products / services; it's only when that rolodex is used to compete with the company that it harms the company. So I'm all about looser restrictions on the assets and stricter restrictions on the actual competition.

Dimitry Rotstein Founder at Miranor

May 24th, 2015

Yes, I would (and have, both ways), providing such an agreement expires a few months after the employment is terminated. Anyway, speaking from an employer's side, I'm not really worried about a potential competition from a former employee. The chances that an ex-employee a) decides to make a competing product, AND b) succeeds at it, AND c) becomes a real threat, are so small that such a threat is negligible compared to the plethora of real threats. Not to mention the fact that enforcing a non-compete agreement is a big problem too.

Karl Schulmeisters Founder ExStreamVR

May 25th, 2015

I have and will again, sign non-compete's in the future. BUT as an employee, I make sure that they do not preclude my ability to work after leaving. I have done things like modify some of the text, initial it and sign it and return it as such.

Invariably they get accepted - though I suspect no one double checks anything but my signature so its possible they are accepting my changes via ignorance.

Which leads into the second part of the non-compete discussion: What is Fair?

as Jake points out, these employees potentially have "trade" and "business" secrets. At the same time such trade and business secrets often have a shelf life as well as a scope of impact. A developer who is working on your core engine - should be bound mostly by a Non Disclosure Agreement. Thus any "non-compete" needs to be fairly short time limited (3-6 mos)

OTOH someone responsible for a product line will know not only where the weaknesses are in your product line, but also your business strategy. And they can work for a competitor, fully honoring the NDA and yet still retarget the competitor's strategy at your weaknesses. Such a person should have a "non-compete" of anywhere between 1-3 years depending on level of seniority.

But remember, it should be a combination of non-compete AND NDA

Mark Lieberman Chief Startup Officer and Director, Advantage Accelerator at Oregon State University

May 25th, 2015

Most states have limits on non-competes. As you clearly stated, a few states such as California, a non-compete is not worth the paper it is written upon. You are much better off with a good employee agreement that covers protection of intellectual property, trade secrets, duty of loyalty and other similar clauses. There are many good human resource documents on the Internet.

Karen Leventhal

May 25th, 2015

I was asked to sign a non compete recently. I declined initially, but eventually capitulated because it was a temporary job in an industry that I don't plan on staying. But the non compete stipulated that not only was I not able to share trade secrets (understandable) but I wasn't allowed to take any employment (even as a paper shredder) at a competing company. I understand that a former employee shouldn't disclose confidential information. But overall it seems to be that these agreements are essentially anti-free market and put together by companies that are afraid to compete on the strengths of their product alone. If your employee leaves and takes their rolodex with them and that hurts you a) you can also poach an employee from a competitor and get access to their rolodex, so it evens things out b) your product isn't strong enough to stand on it's own.

I maybe naive. Even when it comes to "trade secrets" I don't quite get it. As an entrepreneur, we are told over and over again, that ideas aren't worth the paper they are written on. It's the execution that counts. But when it comes to large companies that analogy is apparently no longer relevant. ??

In general, I think these contracts stifle creativity, and are often unethical.

Chris Oei Independent Contractor at Realty ONE Group

May 25th, 2015

Thanks for the feedback, everyone. I'm a bit surprised, actually, that there wasn't more push-back against the concept of a non-compete agreement. I understand the need for confidentiality and keeping trade secrets away from competitors -- I've often signed NDAs and asked employees to sign NDAs -- but non-compete agreements feel to me like they're overly burdensome on the employee. If I ever moved to a state or country that enforced them, I kinda think I still wouldn't ask employees to sign one. The San Francisco Bay Area has birthed many successful startups without the burden of non-compete agreements, so from a macro perspective it seems to me they are of questionable benefit to the employer, and an obvious burden to the employee. It's possible that the cross-pollination of companies hiring each others employees actually helps everyone in the long run, assuming the employees transfer skills and ideas that aren't trade secrets.

In the particular case that spurred my original post, the scope of what constituted a "competitor" was I think very, very broad, which made the opportunity cost much, much greater than the amount I'd stand to gain from working with the company (which had not yet gained traction in any of the spaces it was calling "dibs" on). I suppose I could sign on the assumption that it wouldn't hold up in court, but I didn't want to go down that road. Oh well.

Food for thought, though.

Thanks again, all.

Gary Zatkovich Managing Partner, Zatkovich & Associates

May 25th, 2015

Non-Compete contracts are nearly impossible to inforce. Most all states are reluctant to restrict anyone from "game full employment."

One exception would be if the employee owns, or has equity/percentage of the company.

Jake Carlson Software Development Manager at Oracle

May 25th, 2015

Ok, here's a simple exercise: anyone that thinks trade secrets should not have protection, I challenge you to publish all details of of what you're doing and how. That means which clients you are pursuing, what your bids are, all the details of your strategy, what your technology stack is, how you solved specific technology problems, etc.

You won't and you shouldn't. These kinds of details are what your business competitive and differentiates it from others. I think it's unethical for certain company knowledge assets to be intentionally divulged to competitors. I do agree that 'ideas are a dime a dozen,' but that refers more to the overall product / service you are selling. Entrepreneurs are told over and over that the idea is not worth much; that it's the execution that matters, and that's 100% true. But the 'ideas' (strategies and processes) that you specifically use to accomplish market dominance *ARE* in fact part of the execution (the work to make the overall idea come to fruition). In the same way, the specific code manifestations of concepts are execution. Not all 'ideas' are worthless. Inventions, true innovations, and novel strategies are the building blocks of a successful business. But yes, the initial concept of the business usually can't be / shouldn't be a closely guarded secret. So I'd caution against confusing the two.

I do sympathize with those with very specialized industry knowledge being confronted with non-compete contracts. It is a real issue for them as they are potentially signing away large swathes of their experience to not be used in the industry in the future. Perhaps I'm fortunate in that as my role as software engineer, industry knowledge is less important than system knowledge. In other words, I can more or less seamlessly move from industry to industry and take with me the knowledge I gained in solving certain types of problems, and can implement those ideas in other industries without competing with the companies where I concocted the idea.

So it is a bit unfair of me to impose my standards with regards to non-compete contracts on others. But for me personally, I'm happy to sign non-competes so long as they are not overly broad with regards to who a 'competitor' is. For example, I am working on a social network for a specific demographic right now. I would never sign a non-compete that prohibits me from working on another social network, but I *would* sign one that prohibits me from working on a social network for that specific niche within a certain timeframe. I think it would be unethical for me to use the information specific to the demographic to directly compete with the original company. But a social network for another demographic is absolutely fair game and I would fight tooth and nail any effort to restrict my future involvement in such endeavors.

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