The Boston Globe's Scott Kirsner recently wrote (December 30, 2007) a column on the Innovation Economy, entitled Freeze Talent in Place, and Innovation Suffers. This interesting and provocative article suggested that post-employment "non-competition agreements" should be legislated away in Massachusetts because the overall economy - and entrepreneurial vigor - suffer when talented employees are yoked to a single employer by a covenant not to compete. Mr. Kirsner pointed to the "tech hotbeds" of California and Washington as states with abundant entrepreneurial energy and, coincidentally, laws that "don't let non-compete agreements stop employees from job-hopping." The article, however, begs for some clarification and a little push back from the other perspective.
Let's start with a common hypothetical situation. Your company has an employee - let's say a senior nanotechnology engineer - who decides to go to a new company with whom you compete. She joined your company three years ago out of graduate school and got the benefit of a decent salary and the opportunity to work in an emerging industry with smart and innovative people. You invested in her, and others have invested in your company. Now this talented young woman wants to take her skills - and her very current knowledge of this emerging area and technology - to the competition.
Sure, you're disappointed because the engineer has worked with, and now directs, a small team working on some critical products which were scheduled for release in the next few months. Sure, you are alarmed at the prospect of this key employee going to a competitor in a similar, if not the same, engineering role working on the same types of products in the same rapidly developing niche. But you figure there isn't much you can do. The engineer signed only your company‘s standard Non-Solicitation and Confidentiality Agreement, which does not prohibit her from joining a competing employer.
Let's stop our hypothetical and set down a few definitions. Mr. Kirsner's column spoke broadly about "noncompete agreements." A non-competition covenant is exactly that: a promise made (properly with advance notice to the employee that it will be a condition of employment) at the outset of employment not to go to work for a competing company for some prescribed post-employment period. Courts loath them, and virtually every state's courts impose a rigorous standard of reasonableness and scrutiny on them, and some, like California and Colorado, outlaw them except in certain specified circumstances.
But there are other post-employment restrictive covenants that employers can use to more narrowly tailor the restrictions - and less dramatically restrain the departing employee. One of these is a non-solicitation covenant, under which an employee agrees, for a period of time after departure, not to solicit clients and businesses with which he or she has had meaningful contact while employed at the old employer. These non-solicitation agreements do not restrict contact with all clients of the former employer, but only those with whom an employee actually dealt with and used the employer's goodwill.
Another restrictive covenant is the confidentiality agreement or non-disclosure agreement, which protects a company from disclosure and use of its confidential information. Under these agreements, employees agree never to disclose certain broadly defined "Confidential Information" concerning the company's business, usually defined as "financial information, product development and marketing plans, price lists, pricing strategies and policies, customer information and customer lists, suppliers and vendor contacts, discoveries, ideas and concepts, designs, drawings, specifications, techniques, source and object code, and software in various stages of development." The employee typically agrees not to use information that is a "trade secret" or is confidential; which the employer protects from disclosure; and which is not otherwise obtainable in the public domain.
So let's go back to our departing nanotechnology engineer. You learn that she is going to lead a group at the new employer working on an identical, mission critical solution for the new company, and that the new company wants to get the product to market in two months - and you were planning on introducing your product in three months. Your product is intended to be readily scalable, so that once you capture the customer you are unlikely to lose them easily — and the same is true, you think, of their product. You learn that the employee has been given a lower salary than she had at your company, but has been given stock options, and performance incentives that are directly linked to the speed and success of the new product line. And you understand that, although she left you only a week ago, she has been in serious discussions with the new company for several weeks and perhaps a couple of months.
In this type of circumstance, where the "first-mover" advantage is real, where time to market is crucial and immense investment has been made in technical or technological solutions, the departing employee's interests in advancement and using her knowledge and skill must be balanced against another, equally or more important societal value in investment. Should another company get the benefits not only of the departing employee's talents and knowledge, but the talents and knowledge of the rest of your team? Should she be able to make totally unrestricted use of the knowledge she gained from your company's trial and error, the so-called "negative knowledge" gained over time from earnest efforts to overcome serious technical and technological problems? Is all of that knowledge really hers to take?
A company that cannot be sure that its employees will preserve the confidences and information entrusted to them will be less willing to provide information to employees, less able to confide the broad contours of its product efforts to employees, and less able to move quickly and nimbly in the marketplace. Covenants protecting against unfair competition - such as through the departing employee's use of trade secrets and confidential information, and the misappropriation of goodwill generated by placing employees in positions of responsibility with clients - create the conditions under which people will invest dollars and develop talents.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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