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Wednesday, October 7, 2009
Tips to make noncompetes work — and work fairly
By Mass High Tech staff
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Go ahead, debate the merits of noncompete agreements. For now, they remain a reality in Massachusetts. But there are ways to ensure that such agreements are effective and fair. So, Mass High Tech invited a handful of local attorneys to offer their thoughts on how to do noncompetes right.
What advice can you give to tech employers to make noncompete agreements work for them?
Employers need to understand three things about noncompete agreements:
First, noncompete agreements are needed to keep three types of key employees from competitors: scientists who know your company’s secret sauce, executives who know confidential business information of strategic value, and sales representatives in a position to divert customer accounts to rivals. Attempts to impose noncompete agreements more broadly will prove ineffective and self-destructive.
Second, the most useful noncompete covenants are the ones that provide the greatest and most easily accessed remedies for the employer. For example, an effective noncompete is one that can be enforced through unilateral employer action (such as cancellation of stock options or restricted equity, or termination of severance payments).
Third, employers who think that imposing onerous noncompete terms is the key to retaining talent are mistaken. Inducing retention through positive experience and incentives in the workplace, economic and otherwise, will prove to be the most effective tool for employee retention.
— Robert B. Gordon, Ropes & Gray LLP, Robert.Gordon@ropesgray.com
Carefully crafted noncompete agreements can prevent employees from taking trade secrets and other intellectual property to competitors. When an employee moves to a competitor, such an agreement can enable an employer to move quickly for a preliminary injunction to prevent the transfer of important intellectual property and confidential information.
To increase the likelihood of succeeding in such litigation, noncompete agreements need to be clear, reasonable in scope, and tailored to the employee. As Massachusetts law generally favors employers with respect to noncompete agreements, including a Massachusetts choice-of-law provision in the agreement may increase the likelihood that the court applies favorable law. Finally, under Massachusetts law, noncompete agreements are not assignable by the employer unless the employee assents. To increase the likelihood that a court will enforce a noncompete agreement if the company is acquired, the agreement should include an explicit assignment clause.
— Ilan Barzilay, Wolf, Greenfield & Sacks PC, Ilan.Barzilay@wolfgreenfield.com
Here are some of the more important items employers need to be aware of in implementing noncompete agreements for their employees.
• Disclose the noncompete terms at the time of the offer, by providing a copy of the proposed agreement.
• The agreement should include strong nondisclosure and assignment of inventions provisions. This is the first line of defense in protecting the employer’s IP.
• Make sure the noncompete provisions are reasonable in geographic scope and time.
• Implement a proprietary information policy. The company must treat trade secrets and proprietary information as confidential if it wants to protect them from disclosure.
• Have the employee sign a new noncompete agreement upon substantial changes in position, duties or compensation.
• Make sure there is adequate consideration for the noncompetition agreement if you are asking the employee to sign it after they have already started working for the company.
— C. Forbes Sargent III, Sherin and Lodgen, cfsargent@sherin.com
A movement is afoot for Massachusetts to follow California’s lead in making noncompete agreements unenforceable. In the meantime, many Massachusetts employers believe noncompetes help maintain their competitive edge by making it more difficult for an employee to jump ship to a competitor.
To make a noncompete agreement effective and legally enforceable in Massachusetts, an employer should consider:
• Setting a reasonable time period for the noncompete and considering paying severance, under certain circumstances, during some or all of the noncompete period.
• Defining a reasonable geographic scope for the noncompete.
• Providing a right in the agreement for the employer to contact the employee’s new employer with respect to the former employee’s continuing noncompete obligations.
• Finally, an employer should remind the employee of his or her noncompete obligations during the employee’s exit interview.
— Michael Barron, DLA Piper LLP. michaelk.barron@dlapiper.com
Reports suggest two disturbing facts: Employees change jobs more frequently than ever before and the majority of departing employees misappropriate their employer’s trade secrets and other confidential business information. The tech industry is particularly susceptible insofar as so much of its intellectual property is maintained as trade secrets, too often only in the heads of their employees.
While corporate culture and fair compensation are the key drivers to employee retention and loyalty, companies must be proactive to make certain that when employees leave (which they will inevitably do), the company’s R&D is not set back and the employee cannot harm the company. To do this, companies need both explicit procedures to ensure that confidential business information is kept confidential and not solely in the head of one employee; and appropriate agreements, including noncompete agreements, confidentiality agreements, invention assignment agreements, and non-solicitation agreements.
— Russell Beck, Foley & Lardner LLP. rbeck@foley.com
What advice do you have for tech employees to keep from being unfairly hamstrung by noncompetes?
Employees often fail to appreciate the impact of noncompetition clauses, either because they believe the agreements are unenforceable, they hope an old employer will just let things go, or they think the new employer will not care. These misconceptions lead to missed opportunities, and may leave a terminated employee with little chance of finding a new job and slimmer chances every day they’re off the market.
Although judicial enforcement of noncompetes may be limited, the mere specter of enforceability creates a problem. Employees who are able to negotiate these clauses upfront should, among other things, trim their scope and duration, obtain releases for termination without cause or changes in circumstances, and secure compensation for the possible duration or conversely some form of buyout clause.
Those burdened with noncompetes at the time of termination should request waivers, seek payoffs and work with new employers in an open manner to identify solutions. The restrictions on employee mobility can be brutal, but if employers will be open to treating noncompetes as merely one tool to protect legitimate business interests, they don’t have to be considered a scarlet letter.
— Philip J. Gordon, Gordon Law Group LLP, pgordon@gordonllp.com
Because tech companies have a legitimate interest in protecting their trade secrets, reasonable noncompete agreements are typically enforced by the courts. Courts do, however, take an employee’s need to work into account, and will seek to impose the least restrictions appropriate. The courts’ analysis is informed by many things, including the contract itself and the departing employee’s conduct.
Accordingly, employees — particularly higher-level employees — can do three things:
• If a noncompete is required, negotiate — before signing it — for the least burdensome restrictions and reasonable compensation during the term of the restriction.
• Make sure that you are “squeaky clean” (no downloading or taking anything belonging to the employer without asking — no matter how innocuous it may seem at the time).
• Negotiate with the current employer to narrow the noncompete restrictions and with the new employer to narrow the scope of the new job.
— Russell Beck, Foley & Lardner LLP, rbeck@foley.com
Before you sign
• See if the employer will make some revisions to the agreement: While most employers are not very open to negotiating the language of a noncompete, if they really want you, they may be willing to make a few tweaks. Some possible changes: Try to narrow the geographical scope to areas where you worked or to lessen the noncompete period; define what is deemed to be a “competitive business”; and carve out the ability to work for a noncompetitive division or unit of a competitor.
• See if the employer will pay severance for the length of the noncompete: This can be pitched as a “win-win” since a court is more likely to enforce a noncompete if you’re being paid severance for the length of the noncompete.
• See if the employer will carve out your customers/clients. Such clients/customers should be carved out of the nonsolicitation and noncompete provisions, since these are your clients pre-employment and such customer goodwill belongs to you.
After you sign
• See an attorney to determine if the noncompete is enforceable: You may have several defenses.
• See if your new employer will agree to defend and indemnify you: Your prospective new employer may agree to cover your attorneys’ fees and any liability you may have if your former employer takes legal action. If the new employer agrees to indemnify (or to reimburse you for lost compensation), make sure to include such language in your offer letter/agreement.
• Do not take, disclose or use any of your employer’s property or confidential information. You do not want to give your former employer any ammunition in arguing that you have breached such duties, as a court is much more likely to enforce the noncompete if such evidence exists.
— Barbara A. Robb, Shilepsky O’Connell Hartley Casey Michon Yelen Robb LLP, BRobb@shoclaw.com
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