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PERSONAL BUSINESS

4.12.99  
Noncompete Agreements: What's Enforceable — and What's Not
Your old company can't prevent you from earning a living, but it can make it tough

The first in a two-part series

It seemed like a natural progression to tap your years of experience and stable of clients at Amalgamated Widget and to start your own business. You'd think the company brass would wish you well. Instead, they whipped out the noncompete agreement you signed years ago, and they pointed out all the things your new venture couldn't do. There wasn't much left when they got done.

It's a situation many entrepreneurs encounter these days. Once confined to top executives, researchers, and salespeople, contracts that prevent employees from taking a job with a direct competitor or starting a competing business are becoming common. They're now an employment condition for many mid-level managers, technical staff, or anyone whose departure might be a competitive disadvantage.

Blame the tight labor market, in part: "It's a real issue with high-tech companies, because there's a real shortage of people with the right kinds of skills," says Debbie Rodman Sandler, a partner in the labor and employment law firm of White & Williams LLP in Philadelphia.

STRAITJACKET. Noncompete agreements, also known as restrictive covenants, can be highly intimidating, which may be part of the point. They're appropriate to protect trade secrets and confidential information -- and should be valid for a limited period and in a specific place. Still, your former employer isn't allowed to put you in a straitjacket that prevents you from making a living.

The good news -- from the perspective of many business owners or would-be entrepreneurs -- is that noncompete agreements are often written too broadly to stand up in court, says Sandler. Or a company's own practices may nullify them. For example, some businesses make all employees sign such contracts, then selectively enforce them, a practice most courts frown on.

In fact, many state courts dislike noncompete agreements. "[They] are viewed as a restraint on trade," says Sandler. "Courts believe that individuals should be free to make a living in the area they choose." The only ones that are routinely enforced, she adds, are those signed when a business is bought or sold.

Unfortunately, people tend to sign noncompete contracts when offered an attractive job without considering the consequences, only to rue the day when an entrepreneurial or corporate opportunity shows up.

If that's your situation, don't assume the worst. Take a close look at what your former company is holding over you. Some have little or no legal basis. That's what Paul Kesman and Mark Winter found when they left a large Detroit public-relations agency to start their own company in early 1999, taking five small accounts with them. Both signed noncompete agreements preventing them from contacting or soliciting any of their old company's clients for 24 months. Their former employer threatened to sue.

Kesman and Winter took their plight to an employment lawyer, who discovered the agreement they signed was from the summary page of an employee handbook, which clearly stated it wasn't a contract. "So really, there was nothing of substance to it," Kesman says. The two sent a letter to their former employer saying as much. They haven't heard from the company since.

That's not always the case -- and it's a good idea to consult a lawyer before you blithely disregard a previous commitment. In some cases, it's easier to live with a noncompete than to try to fight it. That's what John P. David concluded after he left his job at a Miami public-relations company to start his own agency in September, 1998. At first, David thought a judge might overturn his noncompete, which prevents him from working with any of his former clients for one year. But he gave up after an employment lawyer told him the battle would be long and expensive -- and victory far from certain. "Why spend time and legal fees I can't afford?" he says.

LONG-DISTANCE DISPUTES. Don't assume that being far from corporate headquarters at an international company will give you leeway to ignore a noncompete agreement. Foreign units can enforce their contracts just as vigorously. Frédéric Foucard, who runs his own recruiting and Internet business in Paris, left the local office of a California-based headhunting company in 1997, only to find himself hamstrung by an agreement that prohibited him from working as a recruiter anywhere in France for one year. Although the agreement may have been too restrictive, Foucard, a former lawyer, decided not to go to court because of the time, money, and stress. "It's very difficult to fight legally. And you only know if you're right or wrong after a judge makes a decision," he says.

Of course, small businesses have interests on both sides of the debate -- especially given how many are in high-tech fields where skilled people are heavily courted. Pacific Palisades (Calif.)-based GoldMine Software Corp., which makes automation software for salespeople, requires key employees to sign noncompete agreements. "A lot of your employees may have intellectual knowledge of your product and the workings of your company that could be very valuable to a competitor," says GoldMine President Elan Susser.

Foucard understands a company's desire to protect its client base, especially now that he has his own recruitment firm. "On the other hand, it's completely unfair to prevent someone from working in his or her chosen field," he says. Foucard's solution: Ask employees to sign noncompete contracts that prevent them from soliciting former clients for one year. It doesn't stop them from working as recruiters, though. The bottom line: Your clients are going to stay with you because you give them good service, not because you hamstring former employees.

By Laura Castañeda in Philadelphia

TABLE: How Tight Are The Ties that Bind You to Your Old Employer?
PART II: To Sign or Not to Sign a Noncompete Contract
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