Is That Non-Compete Too Broad?

Is That Non-Compete Too Broad?

Summary: Interesting Calif. Case Involving Arthur Andersen(Yes, That's Not a Typo!

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TOPICS: Legal
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Interesting Calif. Case Involving Arthur Andersen

(Yes, That's Not a Typo!)

You really ought to check out this court filing involving that fascinating business/employee contract: the non-compete. This case is about an Arthur Andersen Tax professional whose group was being sold to another firm as a consequence of the post-Enron breakup of Arthur Andersen in 2002.  In 1997, while at Andersen, this professional had been asked to sign a non-compete agreement. But, before this individual could start work for the new firm, he was being asked to sign away several critical legal rights that the court eventually ruled were unenforceable.

What made this case so interesting is that the court found that non-compete agreements for California workers are essentially unenforceable except in a very limited number of situations. And, this ruling was absolutely clear on these very limited cases.

The prevalence of non-compete agreements in software, high-tech and professional services firms continues to run strong (especially outside of California) but employers should read this court filing and seriously ask yourselves if:

  • your firm really does need these agreements? Are your confidentiality and other protections adequate for most employees?
  • you are using a legal threat to force retention or are you focused on creating the kind of employment environment where people really want to work for you? If it's the former, no amount of contracts will save your firm from your self-destructive policies.

If you'd really like to know how great managers lead and win in the market, they create a work environment that causes people to stay with the firm years longer than average. They make work fun and exciting. They constantly nudge people to continue to develop their craft and increase their personal net worth and that of the firm. They build the kind of company everyone wants to join and no one wants to leave.

What will be your firm's legacy? Will people still be litigating your non-compete agreements six years after your firm is almost extinguished? Or, will people be talking up your business to other great talented folks and encouraging them, strongly, to join your team?

Topic: Legal

About

Brian is currently CEO of TechVentive, a strategy consultancy serving technology providers and other firms. He is also a research analyst with Vital Analysis.

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5 comments
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  • Noncompetes are Bad

    I spend a great deal of my time representing employees in disputes over the enforceability of noncompete contracts. Almost to a fault, these provisions are overly broad and puntitive for the employee. I also believe they stiffle innovation. We blog about noncompete law at: http://virginianoncompete.blogspot.com/
    dfrith
  • Non-competes are often pointless

    I have to agree with the sentiment of the court in California. Here in Texas, my board-certified labor attorney told me that a number of clauses in my non-compete were simply unenforceable in Texas, since the principle was that a person has a right to make a living; thus, the geographic and temporal scope of the non-compete would be curtailed by any court in the State.

    I have to agree with your sentiment that overlay broad non-competes just send the wrong message to employees. I heard one president of a software company tell us employees that not only could we not compete with the company anywhere in the US for years, but also that he owned everything we did, even on our own time and totally outside the company's industry. This ludicrous statement caused the company more damage than if he had just kept quiet, because a number of employees were so offended that they went out and started looking for things to do outside the company.

    Management is typically its own worst enemy...

    Bill
    mccalpin
  • Non-competes are definately bad

    They stifle innovation and product and service improvements.

    All too often people leave a company because of gross mismanagement and failure to provide for their customers' needs.

    Case in point, almost a decade ago, part of the requirement for hiring by a medicare quality improvement organization was to sign a non-compete agreement. I know the QIO was grossly mismanaged, to the detriment of the medicare beneficiaries and tax payers. (So badly in fact, that at one point the company had to do an emergency layoff of over 33% of their employees.) I also know that the non-compete inhibited exodus from that company to form a competing company that would better serve people's needs.
    Dr_Zinj
  • i banish you. . . you are banished

    A non-compete might make sense for those very few individuals who are PARTNERS in a business holding an equity stake and having access to priveliged information (assuming there is any, which is not always the case).

    For ordinary hire-at-will employees, the whole non-compete concept is totally ridiculous and should be outlawed. New hires should check this stuff out on the way in. It is excellent evidence of screwball management with an over-inflated sense of self-worth and the ego to match.

    Do you really want to be working for such twits/idiots? I think not.
    dmennie
  • RE: Is your non compete too broad

    I would say, that depends on the business and the conditions included in the non compete.

    A case in point: Broadcasting. It is very common for stations to require their on-air talent a to sign a non compete contract. The last thing you, as a station manager want is for your evening anchors to quit on a Friday, and show up on your competitor's station the very next Monday. Years ago, this actually happened at one of our local radio stations.

    However, often times, these clauses will allow one to completely leave the market and start elsewhere without penalty. Also, they may require a talent leaving an employer to wait out a period of time before working for a competitor in the same market. Well negotiated contracts provide for payment during this time.

    I definitely agree that non competes are useful where a partnership splits up; or when a business gets sold, and the new owner does not want the seller to steal customers or employees.
    fatman65535