Don't sign away your future: Noncompetes done right
- — 24 April, 2009 01:37
Can signing a standard workplace document derail your career plans? Yes, says Jerry Luftman, executive director of graduate IS Programs at Stevens Institute of Technology in Hoboken, N.J. He says a former student almost lost out on a big break because he had signed a noncompete agreement, a contract that prohibits employees from doing certain work for a set period of time following the end of their current job.
The former student had been an IT manager at a Fortune 500 company but didn't feel that he was moving up fast enough. So he accepted a higher-up IT management position at another big company. But when he gave his notice, his original employer threatened to enforce in court the noncompete agreement he had signed when he first took the job.
"The company was willing to fight to keep him from going to this new company, even though he had accepted the new position and given his resignation," Luftman says.
The new company was also willing to fight for him, though, and its lawyers helped settle the dispute, in part with assurances that the IT manager would disclose no proprietary information regarding his former employer, Luftman says.
Luftman says this happens often enough -- workers happy to start a new job sign a stack of paperwork without realizing the consequences down the road. "It's the kind of thing people don't think about until they get into this situation like this one," he adds.
Here's what you should know to ensure that you don't sign away your future.
Know the different documents
Lawyers say they see plenty of workers who don't know what they've signed.
"People come in and say, 'I signed a noncompete,' and I look at it and say, 'No, it's not really a noncompete. It's a nonsolicitation,'" says Brad Schleier, managing partner at Schleier Law Offices PC in Phoenix.
In addition to noncompete agreements, companies often have workers sign nondisclosure agreements, antiraiding agreements and/or computer-use policy statements -- all of which seek to protect companies in different ways, says C. Forbes Sargent III, chairman of the corporate department and co-chairman of the employment law group at Sherin and Lodgen LLP in Boston.
Although these are all legal contracts, each one puts different restrictions on departing workers, Sargent says. A nondisclosure agreement says you can't divulge proprietary information, while an antiraiding agreement says you can't hire your former colleagues to work with you at your new job. A nonsolicitation says you can't seek out your current employer's clients once you depart.
They're not the same as a noncompete agreement, Sargent adds.
Study your state's take on the issue
If you live and work in California, you've got it easy: The state has banned noncompetes in all areas except for limited cases involving the sale of a company. But if you work elsewhere, know that the laws governing noncompetes vary from state to state.
Susan Joffe, an associate professor at Hofstra University School of Law in Hempstead, N.Y., says some states, such as Oregon, require employers to give new hires the contracts before starting. Some, including Massachusetts and Oregon, forbid employers from requiring existing employees to sign them without additional "consideration," such as a raise or a promotion.
If there's a legal dispute, the courts in some states tend to be more pro-business and are thus more likely to enforce noncompetes as they're written, while courts in other states want to promote the mobility of the workforce and might rewrite the terms or decline to enforce them, Joffe says.
Look at your employer's choice of venue
Even if you know your own state's law, you might have more homework ahead, because your employer can pick, to some degree, which state's law will govern if there's a dispute. Be aware of this as you sign the contract. If the company opts for its choice of venue, it will be written into the actual agreement -- so read it before you sign. Schleier cites the case of an Arizona-based worker who signed a noncompete with a Delaware-based company that stipulated that Florida law would govern in case of a dispute.
"Arizona is one state where you'd probably be stuck with that [arrangement], but if you had that in say, California, you're more likely to get a court that will throw out the Florida law," Schleier says.
Georgia, South Carolina and Virginia are other states where the courts might uphold that type of contract language, according to Joffe. "These states believe in the sanctity of a contract, and if the parties agreed to the terms, they won't modify it," she says. So you really do need to read the fine print before you sign a noncompete, or you might wind up having a dispute settled by judge in a worker-unfriendly state.
Assert your rights
That doesn't mean, however, your employer can dictate whatever it wants in all situations, lawyers say.
Joseph A. Ciucci, a partner at Duane Morris LLP, recently advised an acquaintance in Michigan who designed software for the auto industry at an international company. The company was getting out of that software line and recently laid off its Michigan workforce.
Ciucci says the company told his client that to get his severance check, he had to sign a noncompete prohibiting him from working on that type of software development. The company wanted to apply North Carolina law if there were disputes.
"His question to me was, 'Is this enforceable?'" Ciucci says. "My answer: I don't think it is. They're having a layoff. They're getting out of that line of business, and they say North Carolina law controls. Good luck getting a Michigan court to apply North Carolina law if that company isn't even in the business anymore." As of this writing, his client was still out of work and there was no potential new job on the horizon.
Even in pro-business districts or states, courts aren't going to blindly enforce noncompete agreements, Joffe says. They look at how long the noncompete lasts, whether the prohibited work is defined and whether the geographic area where the work is prohibited is fair. They also consider how the relationship ended, since they're less likely to enforce a noncompete against laid-off workers.
"Fairness is a very, very big issue, and courts are looking at just how much companies are trying to restrict someone," Joffe says. "Even states that enforce agreements want to make sure the employers aren't taking advantage, because the courts don't want to keep people from earning a living."
Can you negotiate?
In theory, a noncompete agreement is a contract negotiated between two parties -- both of whom should feel free to clarify terms, Joffe says.
"But in the real world, there are many more pressures when people are out of work and the job market is shrinking, and some employers might be tempted to take advantage," she says.
So how much leeway do you have to negotiate a noncompete? It depends, Joffe and others say.
The higher up you are, the more you can negotiate the terms, Schleier says. You also might have some pull if you have unique skills or were recruited.
If you're going to negotiate, you should start by finding out what your employer really wants to protect, says Sargent.
For example, if your boss wants to ensure that you don't disclose proprietary work when you leave, Sargent says you might get the company to agree to just a nondisclosure agreement.
Even if your employer is set on a noncompete agreement, Sargent says you might be able to negotiate the length or geographic restrictions or even additional severance to compensate for the time you might be sitting on the sidelines.
Sidebar: A sampling of states' noncompete rules
Here's a look at several of the country's most populous states' approaches to noncompete agreements. (Read our story, "Don't sign away your future: Noncompetes done right.")
"California clearly has a well-settled policy in favor of open competition and ensuring that there is mobility for the workforce," says Millicent N. Sanchez, a director at Swerdlow Florence Sanchez Swerdlow & Wimmer in Beverly Hills, Calif.
The state essentially bans noncompete agreements, except those stemming from the sale of a business, Sanchez says. An owner selling his business can legally be asked to sign a noncompete agreement because the person profiting from the sale has a duty not to dilute the value of the company being sold.
California's stance does not mean, however, that its courts won't enforce agreements stemming from employment in other states. "There are cases where California courts have deferred to other state courts when employees have tried to come to this state and violate their existing noncompete agreements," Sanchez explains.
State law says that employers can ask their workers to sign noncompete agreements if they are given confidential or proprietary information and/or specialized training, says Ronald M. Gaswirth, a partner at Gardere Wynne Sewell LLP in Dallas.
Companies can also ask existing employees to sign such agreements, as long as they meet the statute's requirements, he says. The state does not require employers to offer additional consideration in these cases because it considers continued employment sufficient consideration.
The statute does not lay out any specific restrictions when it comes to the scope or duration of noncompete agreements, although the length of time or the geographical scope must be reasonable, Gaswirth says. However, courts have had various opinions on what is reasonable and consider the nature of each position in question when deciding individual cases.
As for modifying agreements, Texas courts will do so in cases where the noncompete agreements have a so-called blue-pencil provision, Gaswirth says. This provision says if the courts find a part of the agreement unenforceable, it can modify that part. "But if there's not that provision, then courts are all or nothing," Gaswirth adds.
New York employers can ask employees to sign noncompete agreements at any time. They do not have to give new hires the contracts in advance, and they do not have to give existing employees any additional consideration, such as a raise, if they're asked to sign one, says Susan Joffe, an associate professor at Hofstra University School of Law in Hempstead, N.Y.
However, in cases of disputes, New York courts do weigh the facts of each individual case. For example, the courts consider the position of the employee involved as well as whether there was any severance. Joffe says the courts are more likely to enforce a noncompete against an executive who received severance equal to the time of the restrictions laid out by the noncompete, and they're less likely to enforce the agreement against a lower-level employee, such as a programmer, who received no additional pay when he or she quit.
In addition, New York courts will modify noncompetes that they think are overly broad, Joffe says.
Also, she notes that New York courts generally won't enforce noncompete agreements in most cases where the workers were fired or laid off. "If a company wants to fire someone and then enforce the agreement, most courts will say that's unfair to the employee," she says.
Companies that want to have an enforceable agreement must comply with the state's statue governing these contracts. If the contract does not comply with the law, courts can consider it void and unenforceable, explains Patrice A. Pucci, an adjunct professor at Stetson University College of Law in Gulfport, Fla., and a lawyer in private practice in St. Petersburg, Fla.
The statute says the noncompete agreement must be in writing, although employers do not have to give the agreement to new hires in advance of their starting day.
The Florida law also stipulates that the noncompete agreement can be enforced even in cases where the company has fired or laid off the worker, Pucci says. But if the company breached any part of the agreement in the process laying off or firing a worker, the courts could rule that the noncompete is unenforceable.
However, companies can't require noncompete agreements across the board, Pucci says. The law specifically says that the agreements have to be based on legitimate business interests, which are defined under the statute.
"That's where cases usually turn," she notes.
The law also establishes parameters for noncompetes, specifically related to how long they can be in effect, Pucci says. However, there are no specifications regarding territorial restrictions.
Florida courts can modify agreements, she adds. But judges who modify agreements must be sure that their changes comply with the state law.
"The courts in Illinois generally disfavor them, particularly in the employee-employer context," says Frederick R. Ball, a partner in the Chicago office of Duane Morris LLP.
For noncompetes to be enforceable in this state, Ball says they must be limited in time, scope and geography. They must also protect a legitimate business interest.
The state does not require companies to give new hires these agreements in advance of their starting date "because the employee can refuse to sign it," Ball says, adding that he knows employees who have refused to sign them and were hired anyway.
Companies can ask existing employees to sign them, with continued employment being enough of a consideration to make the agreements enforceable, Ball explains.
However, the length of time for continued employment can become an issue in disputed cases, he says. For example, most courts won't enforce a noncompete agreement that an employee signed just several days before termination. Similarly, the courts are unlikely to enforce a noncompete that an employer asked an employee to sign as part of a termination agreement.
"Illinois courts are very concerned about anticompetitive behavior," Ball says.
However, Illinois "is much friendlier to restrictive covenants if it involves a sale of a business," Ball adds, explaining that the courts look at those agreements differently than they do those governing employer-employee relationships.