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September 3, 2012

Non-compete agreements may restrict employees' mobility, but experts say they have benefits

PHOTO/JACQUELYN GUTC Dave Kurlan, owner of sales development firm Kurlan & Associates in Westborough, says employees who deal with clients sign non-compete agreements as a condition of employment. He says the agreements have never been a point of contention.
Jack Merrill
Jonathan Sigel

Most employees may hate them, but for their employers, non-competition contracts — more commonly called "non-competes" — are often a necessary evil.

Most commonly used in sales and information technology roles, non-competes are used in a variety of industries, according to labor and employment attorneys.

"They're commonly used," said Framingham attorney Jack Merrill of Mayer, Antonellis, Jachowicz & Haranas LLP in Framingham. "They're probably overused. I think they're helpful, and sometimes employers need them, but employers should think about them before they (propose) them."

Merrill said many businesses use a generic contract rather than tailor it to a specific worker or position.

"Those aren't as useful as ones that are specific to a worker that might actually be a threat," he said. "An employer doesn't have a right to restrict all of its employees."

How Restrictive Are They?

A non-compete agreement limits where employees can work after leaving a company. It typically dictates a region where they can't work for a competitor for a set time period.

Although, as the name suggests, there's an assumption that non-compete agreements bar former workers from going to work for competitors, that's not always the case.

"I draft a lot of agreements that don't necessarily say, 'You can't go work for a competitor.' Most say, 'You can't solicit customers,' " said Jonathan Sigel, a partner in the labor and employment group of Mirick O'Connell, which has offices in Worcester. He said he asks clients: "What do you really need?' I want to go before a judge and show we're as reasonable as possible."

He said that often, employers are satisfied with the promise that former employees won't solicit their companies' clients.

Non-competes can be tricky to enforce in Massachusetts as each case is unique and largely left to a judge's discretion. Sigel said that if a judge finds a non-compete to be too broad, he or she can amend it.

"Non-compete agreements obviously limit someone's ability to work where they want to work," Sigel said. "The law says there's got to be a balance in it."

It's up to a judge to determine whether enforcing a non-compete will cause more harm to the former worker than not enforcing it would cause the employer.

One of the biggest keys to making sure an agreement holds up in court is to make it as narrowly tailored to an employer's needs as possible.

Merrill said employers have to prove more than financial damages. "Money is never enough for an injunction," he said "The question is what is irreparable," including damage to the company's reputation, relationships and technology.

Dave Kurlan owns sales development firm Kurlan & Associates in Westborough, which helps companies grow their sales forces. He said his employees who deal with clients sign non-compete, non-solicitation and non-disclosure agreements and are told in the interview process that it's a stipulation of accepting the job. The non-compete prohibits former employees from working for a competitor or a client or starting their own competing businesses within 50 miles for two years. It also stops them from taking Kurlan's clients with them.

"We've giving them our trade secrets and the use of our intellectual property and our business practices, and we're giving them the support and the materials and investing in them and paying them a lot of money in order to succeed," he said.

Kurlan said about 24 of his employees have signed non-competes and the contracts have never been a point of contention.

Kurlan also said employers need to be aware of potential employees who have non-competes with other firms but don't pay attention to them.

But What About A Layoff?

Some workers believe their non-competes aren't valid if they're fired or laid off, but that's not the case. Merrill said the grounds in which the employee leaves a firm doesn't affect the validity of the agreement. However, what can is lax oversight of the agreements. Merrill said they must be managed through an employee's tenure with a company, and a change of job positions within the company, for example, can affect an agreement.

Although workers may dislike non-competes, a variety of factors cause them to sign them.

Often, people don't want to walk away from a job in a tough economy. Other times, Sigel said, people think they can deal with the contract while others think it just isn't worth anything. Few seek legal advice before signing, though.

"Some people come here asking about non-competes," Merrill said. "I would categorize those people as more forward-thinking individuals. The majority of the people just sign them."

Merrill said that sometimes, people are presented with non-competes years after being at their workplace and can be threatened to sign, or a threat is implied, and that they fear losing their jobs.

"A lot of people don't think they have a choice. The vast majority of people want to please their superiors and follow orders," Merrill said.

In Massachusetts, an employer can ask a worker to sign a non-compete at any time. However, there's legislation under review by the state's Joint Committee on Labor and Workforce Development in which employees would have to receive written notice of a non-compete agreement seven days before starting the job or when a written offer is provided. Notice of the non-compete would also have to be given before the worker resigns from his or her current job.

Merrill said the pending legislation clarifies what courts are already saying.

"When you give somebody a non-compete and tell them, 'We're only going to hire you if you sign the non-compete,' there's a bargain there. If you give it to them after they've started, all you're giving them is the continuation of a job, and the courts are saying that's not good enough."

Opting Out

While many sign the agreements, not everyone does. Merrill said more experienced workers who have higher-level positions are more likely to reject them.

Neil Licht, a member of the Worcester Business Journal group on LinkedIn, said he refused to sign non-competes when asked before starting a job and while already working at one.

"We are valuable because of our acquired skills and we need to be free to use them as we want and for whom we want," he wrote. "We acquire a reputation and become known in specific industries as we do our job … Can I ask my former company to sign a non-compete that they cannot go after my old and new accounts? Nope."

Matt LaBarre, another LinkedIn group member, helps nonprofits raise funds through social network-based programs. He said having a variety of products is essential so that he's a consultant and not just someone selling a product.

"I won't represent companies that want me to sign non-competes — (that) narrows the options I can provide clients and opens the door to problems — especially if it turns out the company isn't all they represented themselves to be," he wrote.

Kurlan sees both sides of the argument, but believes business owners need to protect their companies and the time and money they've put into employees.

"All the goodwill the company built up, those (clients) could follow the salespeople (to the new company), so there's the potential to do tremendous harm to a business when those non-competes aren't in place," he said.

May Help Or Hurt

In 2009, Matt Marx, a professor at the Massachusetts Institute of Technology's Sloan School of Management, who has done extensive research on non-competes, testified before the labor and workforce development committee in support of earlier non-compete legislation.

One study, conducted with Lee Fleming of Harvard Business School, looked at a new law allowing enforcement of non-competes in Michigan. They found that job mobility dropped 8.1 percent, compared with states that continued not enforcing non-competes. Job mobility dropped nearly twice that much for workers with highly specialized skills, Marx said. He found similar results comparing other states allowing non-competes against those that don't.

In related research, Marx found that when people who had non-competes left jobs, they often left that particular industry and took jobs with lower compensation because they couldn't use their skills. He also found that non-competes slowed entrepreneurial activity.

But other research from the University of Virginia found that the high-tech areas of California's Silicon Valley, the Research Triangle region of North Carolina, Austin, Texas, and the Boston area experienced heavy job growth in the 1990s, even though Silicon Valley is the only one without non-competes (which are illegal in California). But, in recent years, unemployment has been higher in Silicon Valley than in the other three high-tech hubs.

Marx also said that workers subject to non-competes were reluctant to join small firms out of fear that the companies would be vulnerable to legal action by their former employers. He said larger companies have more credibility to indemnify individuals and can also offer a "holding tank" by having an employee work in an unrelated area while the non-compete is in force.

Ironically, startups can most benefit by enforcing their own non-competes because those firms can be more greatly affected by the loss of an employee or technology to a competitor, Merrill said.

But no matter what industry or the size of the company, the decision of whether to try to enforce a non-compete always lies with the employer.

"The main message is that these things, if narrowly tailored, are enforceable and if employers don't have them for an employee that could harm them if they go to competitor, then they should," Sigel said.

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