Noncompete clauses in employment contracts can be risky, and even law firms that use them find themselves fighting over what the wording means and how legally restrictive the clauses can be.
Just ask Herbert Smith Freehills (HSF) that recently found itself in a court battle with eight of 10 lawyers that White & Case hired away to open an office in Australia. The eight partners were subject to a noncompete clause at the firm that required six months' notice and restrained them from practicing as a partner at a competing firm for one year, according to sibling publication The Asian Lawyer.Herbert Smith Freehills sued the eight attorneys and reached a court settlement on May 2. The accord allowed the lawyers to join White & Case as of March 2, but not as partners until one year after their resignations last September.
Companies and law firms in the United States are increasingly inserting noncompete clauses into employment contracts, and sometimes for good reason: Such clauses can help protect trade secrets such as the recipe for a product, or other confidential information such as client lists.
About 30 million workers—including those in low-paid jobs like sandwich maker—have noncompete clauses "and that number is growing fast," said Orly Lobel, a professor of employment and labor law at the University of San Diego School of Law.
Lobel, who is the author of the forthcoming book, "You Don't Own Me: How Mattel v. MGA Entertainment Exposed Barbie's Dark Side" , said she based the figure on a U.S. Treasury Department Office of Economic Policy report that was shared with a 2016 White House working group examining the growth of noncompetes and how they can narrow employment options. Lobel served on the working group.
More companies and firms that use the clauses also are ending up in litigation, however, especially when the clauses have no reasonable basis, Lobel said.
Based on the Treasury Department report, the Obama administration issued a call for action, urging states and Congress to push back against their misuse and overuse. Twice in the past two years Congress has introduced legislation that would limit the use of noncompetes, but they have gone nowhere.
"The political climate is not amenable in Congress" for this type of legislation, Lobel noted.
Lobel predicted, however, that more states will take action to narrow noncompetes, if not ban them, and some already have: Like California, Colorado, Montana and North Dakota also prohibit the enforcement of noncompetes. Oregon and Utah have laws limiting the duration of noncompetes, two years in Oregon and one year in Utah. Illinois law says noncompetes cannot be imposed on employees making less than $13 per hour. Texas has taken a middle ground, stating that a noncompetes must serve a legitimate business purpose, and contain reasonable limits as to time, and geography and scope of activity restricted.
Lobel argues there are at least three key reasons why states should take action against noncompetes if Congress won't:
* It's good for the region's economy. Label said studies show that there is a positive effect on state economies where they do not enforce noncompetes, or hold them to a narrower scope based on reasonableness. She cited Silicon Valley's high-tech companies as an example of a region and an industry that has been allowed to thrive because California voids such agreements.
* It's good for companies. "Businesses lose out because the best employees over time will move to places where there is less enforcement," Lobel said. "Empirical studies show that employees who are constrained by no competes are demotivated" and less likely to do their best work.
* It's good for employees. Wages are 10 percent lower in states that enforce noncompetes, and they have less bargaining power, according to Lobel. "It might even affect women disproportionately more than men, because some may already have restraints on their career, such as not being able to leave an area for family reasons," she said.
Kate Visosky, a partner in the labor and employment group of Kelley Drye & Warren's Los Angeles office, said even in California there are ways for employers to protect confidential information without noncompetes clauses. The main way is through a nondisclosure agreement that is tailored to the company, the industry and the specific employee or independent contractor, Visosky said.
"It's also important for employers with national operations to know where their operations are and what protections they have within each jurisdiction," Visosky said.
"We advise clients to have a different agreement for California employees than for, say, employees in New Jersey, which allows noncompetes and has broader protections for employers," she said.
Contact the reporter Sue Reisinger at firstname.lastname@example.org
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