Hush, hush

Noncompete and confidentiality agreements have been a fact of business life for more than a decade, but traditional boundaries are being pushed as companies are pressured into being less than fair to laid-off employees.

In January, Amazon.com announced that it would lay off 340 customer service employees as part of a 15 percent downsizing effort involving 1,300 workers. The pink-slipped customer service employees were presented with two options: Receive the standard two-weeks' severance pay, or sign a three-page "separation agreement and general release" that included a nondisparagement clause, in return for 10 weeks' pay and a $500 "bonus." Thanks to employee and union pressure, Amazon.com backpedaled, and the clause was removed.

Noncompete and confidentiality agreements have been a fact of business life for more than a decade, but traditionally they were intended for high-level employees who were privy to proprietary data. Now, when an engineer drone can know more about a company's technology infrastructure than the CEO, the pacts have become pervasive.

It's not just the fear of losing a competitive edge that has prompted companies to abuse these hush-money pacts. Now that the spigot has tightened on venture capital, a company whose prospectus highlights such agreements is perceived as running a tight ship. "Companies are worried about losing funding," says Paul McDonough, a New York lawyer who specializes in labor relations. As the dot-com competition grows ever more intense and companies struggle to keep their spots on the Nasdaq, bad press can do considerable damage to the price of a stock.

The legal reach of these contracts varies from state to state. In California, noncompete and confidentiality agreements are enforceable only as part of the sale of a business, but in Seattle and New York, they can be powerful deterrents. In many cases, cowed employees refuse to seek legal recourse. But as the agreements become more restrictive—eliminating numerous job prospects for hungry dot-commers—more workers are challenging them.

"In some instances, there are real questions of equity and fairness," McDonough says. "For example, there's a time scope issue with noncompetes. Lots of companies want to impose two- and three-year noncompetes on laid-off workers, but the industry changes so fast that judges are now ruling that six months is more than sufficient."

As more workers learn about their rights, employers have to tread lightly when offering noncompete and confidentiality agreements. Were the laid-off employees' business contacts procured before they were hired? If so, they're free to use them as they see fit on the next job. And what constitutes a trade secret, particularly when more Internet companies are working with open source software that is nonproprietary by definition? "That's becoming a real issue," says McDonough.

If a court can't determine that "legitimate interests" are being protected by the agreements, they aren't legally binding. Of course, it could all be moot if the company goes out of business. Says McDonough, "It's hard to enforce a noncompete if there's no company to compete with."