Noncompete Clauses Punish the Wrong Party

Intellectual property and trade secrets are increasingly seen as the heart of competitive advantage, and the easiest way to get that information from a competitor is to hire one of their key employees.  The concern about losing that information rightly drives many employers nuts, and the use of noncompete agreements to keep that information seems to be expanding considerably, as recent reports suggest.  Perfectly understandable, right?

Not when the companies tightening up their noncompetes are also poaching away the employees of their competitors.

Let’s back up a minute and remind ourselves what the problem is and what noncompete agreements do.  It’s devastating to lose key intellectual property to competitors, and it is also illegal for competitors to steal that property, whether they walk into your office and remove the file or hire one of your employees who then reveals all.  Suing someone who steals your secrets is a reasonable thing to do, although it is time-consuming and expensive.

A noncompete agreement tries to head off the concern that former employees might spill secrets to a competitor by preventing them from even going to work for a competitor.

Noncompetes outline who you can work for after leaving your current employer.  If it’s drawn too tightly, it makes it impossible to earn a reasonable living.  If you’re in the investment world and your noncompete prevents you from working in the investment field anywhere else, for example, then it becomes virtually impossible to quit because you won’t be able to use your skills elsewhere.

The thing to remember about the theft of intellectual property, though, is that there has to be a buyer or there cannot be a seller. No employee can go to work for a competitor and pass along trade secrets unless a competitor hires them. What noncompetes try to do is threaten employees with big enough penalties that they will not give in to the offers of competitors to come work for them.  My understanding of the labor market is that far and away the biggest factor in employees changing employers, especially at the executive and technical level where trade secrets matter most, comes from competitors trying to hire them away rather than individuals shopping themselves to other companies.

Does this sound like the problem of prostitution to you? If not, stay with me.  Let’s say we had a situation where potential clients are trying to solicit individuals to engage in various kinds of illegal behavior with them.  Would the most reasonable approach be to impose penalties only on the individuals who agree to the solicitations?  No, we think that solicitation itself deserves penalties.  But the noncompete analogy would have us only punishing those solicited—nothing happens to the solicitor—and doing so even before anything illegal happens.

Noncompete agreements clearly are private sanctions, not legal mandates, and one reason why employers impose sanctions on their employees who leave rather than waiting to sue competitors for stealing trade secrets is because the former is so much cheaper and easier to do.

The problem is that the courts that have to enforce noncompete agreements aren’t very interested in what is cheap and easy.  They have been increasingly reluctant to enforce noncompete agreements.  They more or less don’t do so in some states, such as California, in part because they work by punishing the weakest party in the three-part dance of employer-potential hire-competitor. It doesn’t matter whether those agreements are signed voluntarily or not—although if you really need the job, how we define “voluntary” gets tricky—courts in every state tend not to enforce very restrictive noncompete agreements because they start to violate constitutional provisions against slavery.

Here’s the real kicker about noncompete agreements.  Most of the employers who impose them on their employees are or have tried to hire current employees from competitors.  That doesn’t mean they are trying to steal secrets, of course, but it does mean they are engaged in a hiring practice that they are preventing their own employees from using.

Employers who are going to court to enforce a noncompete and prevent an employee from leaving to work for a competitor are increasingly confronted by defense attorneys who outline for the judge all the recent hires the employer has poached from their competitors.  The information is readily available in places like LinkedIn.  This looks like hypocrisy to the judges—not surprisingly—and they are tossing the cases out.

Remember the old days when companies would never think about hiring an employee from a major competitor because they figured they were either a spy or a complete dud as a worker? Otherwise their current employer would never let them leave, and a good employee would never want to go.

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