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Judge says Internet Obsoletes Lengthy Non-Competes
dashNine writes "The NLJ's Law News Network has this story on a New York case in which a judge refused to enforce a Web firm's noncompete clause, saying that "in the Internet environment, a one-year hiatus from the work force is several generations, if not an eternity." Another well-deserved nail in the coffin of this instrument. " Non-competes are definitely an annoying part of the industry. Do you think this is legit?
At a previous company I worked for I was made to sign a non competition agreement as part of my employment. It really did not bother me to do this.
Later in my employment at this company I had some legal questions about some of the things in my employee agreement so I went to see a lawyer. The lawyer told me that the non-competition clause in my employee contract wasn't worth the paper it was printed on. In a right to work state like Utah this type of agreement was not allowed. The only thing that a company could enforce was the employee could not use company secrets/patents/code in another company. Also the employee could not use the "goodwill" that the company has with vendors/customers etc. Other than that the employee is free to work for any competitor he chooses.
Of course I am not a lawyer and this is not meant as legal advice. Also this may only pertain to the state of Utah, your mileage may vary.
The moral of the story is that contracts are most effective because the person signing them thinks that it is legal and it keeps him from doing anything against that contract. The creators of the contract I signed knew that the non-competion clause was not valid but put it in there as an intimidation tactic to keep the employees from going to a competitor.
The main problem as I see it stems from the fact that most "older, more traditional" companies have not yet updated their contracts to reflect the fast-changing nature of the 'net. If the clause says something like "I will not compete in markets similar to the market this company operates in" that can be VAST if the company does something on the 'net, and most companies today at least have a 'net presence.
What if you've built an e-Commerce website for a car company and you've signed a non-compete agreement like this. Does that mean now you can't build an e-Commerce website for that electronics firm who would like to contract you? What's the marketplace, autos and electronics or e-Commerce and Web?
Another related problem comes from the sorts of "IP non-compete" clauses that has shown up in contracts I've read. The contract may say "I will not use knowledge acquired during the course of this project to assist other companies during similar projects."
That's understandable and even acceptable if you're doing genetic engineering where things you've learned on the job are legitimately unique and very likely can't be acquired elsewhere, but, again, what if you're building a website and during the term of the contract, say some new Java package that makes building servlets easier. Does that mean you are never allowed to use those new packages for other clients you may work for because you learned about them during the course of your building a website for the people who made you sign the contract?
Another scenario: What if you've used "Acmesoft sitebuilder" to build the site for Company A. Since you've signed this "IP non-compete" agreement, does that mean you can't use the skills with Acme Sitebuilder you've honed while building Company A's site to build more sites for other companies with Acme Sitebuilder?
With the speed at which technology advances in this industry and the amount of effort it takes for programmers and technicians and consultants to keep up with it, it's silly to expect that anything you might learn during the course of one job should not be applied to a subsequent job. In this industry you can't help but learn new stuff no matter what the job might be!
If nothing else, what you should learn from this sort of thing is: READ THOSE CONTRACTS CAREFULLY !
And don't just look for non-compete clauses! I had to refuse to put my name on a contract once because for whatever reason, everyone else involved in the process missed the clause that stated that any work I or anyone else in the company I represented produced would be wholly and solely owned by the company for whom we were contracting, even though I was the only person working on the contract!
Newcomers to contracting, naieve programmers and people who are simply too lazy to read their contracts carefully can get burned by any of this sort of thing. Having laws that make it illegal, or at least imply that they are unethical and unenforceable are nice, but ultimately it really falls onto the person signing the contract to make the decicion whether or not they can bide by the terms therein.
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My mom's going to kick you in the face!
The classical argument for such agreeements is that the employee consented to the clause and therefore knew what he was doing when he signed away his freedom to work at a competitor. These are good for the employer to the extent that they protect trade secrets and hurt the competition. They are good for the employee to the extent that the employee might get a higher salary in return.
On the other hand, this was likely a boiler-plate contract that the employee had no real control over (no sign, no job). Thus, is there really consent? It would amount to near slavery to force the employee to stay on the job or leave the industry. I would agree that such a contract provision is unconscionable, particularly in the Internet industry where time flies.
Disclaimer: I am a lawyer, but this is not legal advice. If you need legal advice, see an attorney licensed in your jurisdiction.
The level of misinformation and erroneous explanations of law I'm seeing in other posts is unusually high . . .
The law has *always* been hostile to agreements in restraint of trade, *including* non-competition clauses. Not just in some states, not just in the U.S., but the entire English speaking world which inheritted the Common Law of England.
In front of me is a case on the subject from 1711. Yes, nearly 300 years old. [Mitchel v. Reynoldds, 1 P. Wms. 181, 24 Eng. Rep 347 (K.B. 1711)]
It applies the same rules used today. An agreement in restraint of trade, particularly one barring a man from engaging in his trade, is presumed illegal, and must be shown to be necessary, Particularyly, a non-competition clause must be necessary to accomplish the purpose of the contract.
In Mitchell, a baker sold his bakehouse, and agreed not to compete in that parish for five years--which he promptly violated, claiming that the bond was void by law. The court found the clause enforceable because it was the only way the business could possibly be transferred--if the old baker could open again across the street, he would take all of the business that had supposedly sold to the new baker. So in that one parish (not even the entire city), the baker couldn't sell--but he could in the rest of England.
Essentially the same rules apply today. To enforce such a clause, it must
1) actually be necessary to achieve the contract,
2) be as limited in time as possible--only long enough to achieve the purpose needed, and
3) be limited in geography, only covering the minimal region needed.
Overstep any of these by even a little bit, and the entire clause is thrown out. In five years of full-time practice, I only saw one non-compete clause that it wasn't clear I could have thrown out [hint: *don't* try to write your own--pay someone who knows what he's doing.].
So there's nothing new or shocking here. If there's no trade secrets (these could include in-house techniques for getting the job done faster), you fail part one. Today, a year is forever, and it would be hard to conceive of any internet related field where a year wouldnt' be too long, and two fails. Three, however, isn't clear--the entire world might be a single geography for purposes of competition.
Just for an example: suppose that a week after they sold slashdot, rob, hemos, & rob quit andover and formed the new cmdrtaco site, covering the exact same topics, and with discussion forums. If this were possible, and the non-compete clause couldn't be enforced, andover would be nuts to pay anything, and would certainly pay much less than they did. On the other hand, if andover could prevent them from competing for a year, andover would probably keep the audience if, a year later, they opened a competing site. In fact, much less than a year would do.
hawk, esq.
I can name a company that uses noncompete clauses and has repeatedly won in court when they were challenged. It's Mackay Envelope, run by the book-writing cool guy Harvey Mackay, and he explains exactly why that is: here's how it works. :) ;) ) by walking off with most of the clients for a whole company, essentially killing them.
First of all, the Mackay noncompete is justifiable- it's for salesmen, and sales is such a personal occupation that one salesman can walk out of a company with basically the whole future of the company. Mackay did this to start his own envelope company, and vowed never to let anybody do it to _him_. As he put it, if he'd backed a truck up to the factory and taken every envelope in the place he'd have done his previous employer less damage- he took their _future_, 'cos he wanted to be an envelope king
Secondly, the way Mackay gets around this problem with his contracts is simple- his noncompete clauses are incredibly fair and reasonable. A new salesman is given a bunch of accounts to take over and service when the salesman starts the job. Those names are written in the contract, and the guy can't take those with him when he leaves. Also, a large percentage of the customers are within the county Mackay operates in- the guy can't walk away with the customers _within_ the county for one year, after which it's open season. Outside the county, there are no rules.
The whole arrangement is designed to make it perfectly reasonable for a departing envelope salesman to continue making a living, even for the company's archrival, even still selling envelopes. The customers the guy can't walk away with are specified. The area where the noncompete agreement protects Mackay is intentionally very limited- _one_ county in size. All this adds up to one fact- in order to have a problem with this agreement, a saleman would have to be trying very hard to hose Mackay. And that's been tried, and Mackay won in court, apparently several times, and was right to do so because what was being asked was quite reasonable and it wouldn't have been too hard to comply.
Real companies do require noncompete clauses. The wrong guy walking out could really hose a company, and it's not like anybody these days is so fat and happy that they can ignore being hosed and having tons of clients taken away. The trick is, of all the noncompete clauses, most of them _are_ crap. The ones that are not crap are the ones which are really very reasonable: "You can't take the clients I handed you when you started, for a year. You can't go after the guy across the street for a year, go down the street some. After a year, go nuts, if I can't keep the client that long I don't deserve it..." and that's how to do it.
As for the why to do it- Harvey Mackay started being an illustrious envelope tycoon (
As for the time constraint- that's a smokescreen though it is a valid concern. Read the statement: he was forbidden to work with 'an on-line service whose "primary business is to provide information technology professionals with a directory of third-party technology, software, or developer resources," an "on-line reference library" or an on-line store whose primary purpose is to "sell or distribute third-party software or product uses for Internet site or software development."' That's WAY TOO BROAD! Way way too broad. Forget 'internet time', this is the noncompete equivalent of those stupid patents. If it had been more sharply defined and less of a sweeping generalisation, the year duration might have even held up. I'd suggest narrowing it to _specific_ IT professionals, or to only 'sell Internet site development software' (basically, a noncompete saying 'For a year, do not work for a site created to serve webmasters'), or even geographical or computer-platform limits. As it is, that agreement seems vaguely specific, but to be a good noncompete agreement it has to be _painfully_ specific, protecting only the absolute heart of the business and only the most critical clients, and even then you're better off if you can specify particular ones, not _classes_ of client.
But instead, it's "Thou shalt not work for anybody selling access to information, or software, or web tools, or telling people where they are!" *furrfu*. This has little to do with 'internet time'. The whole noncompete agreement is fatally broad.
Again, it has to be _really_ specific. "Thou shalt not try to woo away Fred, or Bob, or Harold for a year, so we can get a head start 'cause we gave you those accounts in the first place. Also, don't work for a company that steals our mission statement, trademarks, and mailing list." _That_ would be a slamdunk. Who'd argue with that?
Sounds like your present company is run by people who are in it for "the love of the game" as it were... More motivated by developing cool stuff than by profit motive?
/. and certainly nearly every poster here would recognise it. They are in it for the money. It's a good company, where lots of people do care about their work and about doing cool stuff. But make no mistake, the lawyers who run this shop do not work for the joy of building cool programs - they expect cold hard cash.
I work for a very large computer hardware and OS company that is frequently discussed (and often maligned - sometimes rightly so) here on
The reason we don't have a non-competition clause is, I suspect, that we also poach many employees from our competitors. Imagine if someone sued us because we hired somebody in violation of their non-competition agreement? (I imagine we must hire such people all the time.) We would look pretty stupid in court claiming that what we were doing was legal while trying to convince employees to sign away to us those same rights.
No, we would just look dumb and opportunistic. Looking dumb is very bad in the technology business, far worse than in other sectors.
At least that's my guess. I'm a small cog here and at least five layers of management are between me and the CEO, so I can only guess at our hidden motives.
There was a case in the news a while back about an engineer who signed a non-compete (knowing it was unenforceable, he didn't worry about it) and when he left was sued by his former employer. He went to court and won, but he was forbidden from accepting employment in his field while the case went on (over a year), and went bankrupt in the process. Then at the end, noone would hire him because he had been off work for a year suing his former employer.
I think this points out the real purpose of non-competes. Employers aren't willing to keep their people happy by paying and treating them well, so they'll keep them under threat of ruining their lives. Wonderful world we live in.
there's a slightly bigger issue underlaying this. Judge Pauley's decision doesn't address a company's covenant preventing employees from leaving to form their own start-up, which is potentially much more lucritive and dangerous. This is a much bigger problem that has existed in the manufacturing industries for 100 years.
J
Maybe I'm ignorant, or naive, but i actually support non-competes. Non-competing clauses are signed by both parties. They know what they are getting into before they sign, if they sign and have a problem with that, its their fault. Also, I think that in the volatile world of the internet, non-compete clauses can prevent internet only companies from being totally hosed by someone with inside info.
We rant about patents alot. I think that non-competes are have much more benign "patent-like" effects. I would rather sign a non-compete clause for a short period than have to leave a company with patents barring me from doing anything...
-- Moondog
Non-competion clauses are already illegal in many places. Right-to-work laws are pretty widespread in the US. This New York decision, assuming it isn't appealed, applies only to NY and states with court agreements with them (if any - I don't know which states have such agreements.)
A good quote from the judge:
Read collectively, the effect of these provisions is to indenture the employee to EarthWeb. This court will not allow EarthWeb to expand the agreement's confidentiality provision so that it potentially has that result, (...) nor can EarthWeb make an end-run around the agreement by asserting the doctrine of inevitable disclosure as an independent basis for relief.
I always thought non-competion clauses were a barbaric, anti-labour practice. In California, they are already considered against public policy and have no force.
Using the speed of technological change as an argument against them is novel, and I'm not sure how happy I am with that. It would be far better to strike down non-competion clauses completely.
The business community will, of course, complain that this prevents them from securing their intellectual property and acts to undermine business. However, since the computer industry is more concentrated in Calfornia than anywhere else, and California hasn't allowed such contracts for years, I doubt businesses can make a good case that it harms innovation.
Workers should own their own skills and should be free to seek employment wherever they choose. To me, this ought to be a basic human right.
Right now computer professionals of all kinds (yes, even MSCE weenies) are in very high demand. This places us in a position of strength when negotiating our contracts, not just in terms of wages, but in terms of other conditions as well. Even back in the early 90s, when demand (and compensation) was lower, I refused to sign non-compete clauses. While this may have cost me one particular opportunity or another, it did not seriously hamper my ability to get a job and make a good living.
An immediate gain is not worth the potentially crippling of one's career down the road, and immobility through a required 1 year hiatus gives your employer far too much of an advantage should you become dissatisfied with the job in any way (wages, working conditions, working hours, toxic boss, or relocation to name just a few possibilities). Far better to shop around a little longer than hamstring oneself by signing such an agreement, even if it impacts one's credit rating a little.
The Future of Human Evolution: Autonomy
From my observations, my employer requires all employees to sign non-competes and employees still go off to other competitors after a year or so and nothing happens to them. I think my employers reasoning behind letting us programmers go is that they know they have a better chance of getting us back sometime down the road if they don't make a big deal over it (and many, many people do return, as weird as that sounds). I think some posts above have said similar things.
Now, my question is, when I was first hired as a programmer, I was 17. Now, does the non-compete agreement I signed considered null and void since I was under the legal age to sign binding contracts (18? 19?)? I don't know (and I'm not entirely worried about it, since I've seen that it's never enforced), just mildly curious.
Non-compete agreements may not be enforced simply to reduce competetition. In other words, a non-compete does not bar you from working from a competitor unless one of 3 allgations is sustained -
You had access to trade secrets and your new employer ( who is in direct competition ) could and would use those secrets or
You were given specialized training at company expense that you would otherwise not have been able to receive or
You are taking industry goodwill from your old company to your new one. This case is usually for salespeople who have 'their' clients. Those clients might follow the salesperson rather than stick with the original company.
In this case, the judge looked at the allegations and found they did not meet the requirements above. He also noted quite correctly that a year is an infinity in this business. Non-competes may be successfully challenged if they have the effect of preventing a person from working. So the judge first dismissed the actionable claims, and then also found it non-enforceable for work prevention. Seems a reasonable ruling to me.