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
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
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
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
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
To: PERSONAL BUSINESS