Noncompete Agreements: If Handled Properly, They’re Fair

A recent New York Times article entitled How Noncompete Clauses Keep Workers Locked In paints a picture of noncompete agreements (clauses in employment contracts that prohibit work for competitors, theft of trade secrets, and solicitation of customers) as nearly on par with unfair labor practices that depress wages, impede job mobility, and cause massive  drains of intellectual capital from states that enforce them to states that do not (enforcement laws vary among the states). The article suggests that noncompetes are misused by overbearing companies to keep the American worker down to protect profits. The reality is that if properly drafted and applied in the right scenarios, these agreements are essential to protect the intellectual capital of our economy and the goodwill that companies have invested in.

The Times article is well worth the read. I don’t doubt the studies it cites, but the academic commentary is pedantic and inaccurate. I have negotiated, drafted, litigated, and settled non-compete agreements for nearly 20 years. The Times article doesn’t mention that these agreements are disfavored under the law and must meet rigorous standards to be enforced. Robust protections against corporate abuse exist for able lawyers and their clients when the need arises. This is a tricky area for employers and their lawyers.

I’ll quote sample from and react to the article.

“The growth of noncompete agreements is part of a broad shift in which companies assert ownership over work experience as well as work.”

Not in South Carolina, or frankly in most states. Our case law is clear that an employee is free to take with him or her the general work experience and knowledge gained over his or her career, because a clause saying otherwise does not “protect a legitimate business interest” of the employer. That is what our law requires, that it protect a legitimate interest. And this is something altogether different from a trade secret, true intellectual property, say the recipe for Coke.

“In addition to noncompete clauses, there are nondealing agreements, which prevent employees from calling or servicing customers they have worked with in the past. There are nonpoaching agreements that prevent employees from trying to recruit old colleagues.”

The Times article behaves as though this is unfair, but it’s not. The customers belong to the company, not the employee, and clauses protecting those relationships are among the narrowest—thus the most enforceable—protections in this area of the law. The employee’s interaction with those customers was fostered by the company, paid for by the company, and facilitated through use of the company’s infrastructure. As for colleagues, there is a similar idea here. As long as the Company can articulate why it would be unfair to permit the poaching, those restrictions can be enforceable.

The Times article cites a 2011 survey by Matthew Marx of the Sloan School of Management at M.I.T saying that technical workers are typically presented with noncompetes “when they lacked negotiating leverage” as on their first day of work.

Well, that’s more than a little slanted, because it has long been legally required by the courts in most states, that for a noncompete even to be enforceable, the employee must receive something of value in exchange, and the surest transfer of value is the employment itself, and on the first day. And while it is true that sitting at employee orientation with human resources is not one’s most powerful moment in terms of bargaining power, the typical offer letter either includes the noncompete agreement or at least the mention that one will be required.

The Times article also discusses the heartbreaking story about a North Carolina man whose noncompete was litigated to the Court of Appeals where he lost after two competing companies spent lots in legal fees while his family lost a fortune in income. As the Times article notes, these disputes are always about money. Companies don’t want to lose market share because key employees do them real or perceived damage, and employees don’t want their careers to stagnate when they believe they could make moves to better opportunities. Courts can enter injunctions to suspend employment temporarily in extreme cases, so the stakes can be high.

But skillful negotiating at the initial stages can often head-off litigation. Peaceful co-existence is usually very likely. The potential that a court could declare a noncompete unenforceable always exists, which means that finding a way for everybody to work within fair parameters is almost always possible. If litigation cannot be avoided, the best outcome is one that is fair and that results in enforcing only what’s permissible under the law. The Times got this topic wrong. If handled properly, at any stage, noncompetes are fair. They’re also often necessary.

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The author, Peter Rutledge, is an Employment Lawyer and Partner at Rutledge Law, Greenville, SC. You can contact him via these channels:
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Our case law is clear that an employee is free to take with
him or her the general work experience and knowledge gained over his or her career, because a clause saying otherwise does not “protect a legitimate business interest” of the employer.

–Peter Rutledge, Rutledge Law