Got a New Job? Better Check That Non-Compete Clause
Few would dispute the ability of the Internet to generate and spread information instantly and on a global basis. And few would deny that the Internet has helped to redefine such concepts as "workplace," "marketplace" and "intellectual property."
What is up for debate ? and indeed has been the subject of recent court cases ? is the Internet? s impact on an individual? s ability to change jobs without interference from a previous employer.
On the surface, it doesn? t sound like there should even be a conflict. Individuals who are not covered by an employment contract are generally governed by the "employment-at-will" doctrine, which presumes that the employee is employed for an indefinite period rather than for a fixed term, and that both employer and employee have the ability to end the employment relationship at any time and for any reason. While some activity on the part of an employer is prohibited (such as termination based on discrimination or the violation of other "public policy" as defined by state and federal law), the legal theory has also traditionally meant that an at-will employee can leave one employer for another without any barriers.
But recent court cases, driven in part by high-tech concerns, seem to be eating away at the concept of employee mobility, thereby giving employers the right to dictate what company an ex-employee may or may not join.
Some of the legal activity appears to be no more threatening than an application of traditional non-compete clauses that are recognized by most states. But other cases indicate that the courts are closing the noose around the practice of job-hopping and, in seeking to protect legitimate trade secrets, may hinder technological progress.
Consider the case of Ciena Corp., a Linthicum, Md.-based provider of intelligent optical networking systems. According to a recent Wall Street Journal article, Ciena won a court order last year enforcing the company? s standard employment contract that bars employees from working for a rival for a year after leaving. In this case the ruling forced a former Ciena manufacturing director to cease working for Chromatis Networks Inc., a manufacturer of optical networking and related products. In addition to losing his job, the former Ciena employee lost out on "millions of dollars in potential stock profits when Lucent Technologies Inc. bought Chromatis for $4.5 billion in May," according to the Journal.
Traditionally, these employment contracts, often referred to as non-compete agreements, were aimed at protecting an employer? s trade secrets or customer lists. So a salesperson or stock broker, for example, might be prohibited from soliciting former clients for a reasonable period of time, or a pharmacist-employee might be prohibited from opening his or her own practice in the same town as the ex-employer for a limited time. Courts would often honor a "covenant-not-to-compete" if it was reasonable in nature and did not prevent the former employee from making a living.
But the principles behind non-compete clauses get a bit more tangled when the issues concern the Internet, where there are no geographic limits and where trade secrets are made up of applications of thought instead of processes or tangible property.
"Contractual limitations have been common for a long time, but in today? s high-tech economy they? ve become more newsworthy," observes Wharton legal studies professor Richard Shell. "In today? s market the most valuable component of many high-tech companies is the human, or intellectual capital, which means a firm? s main asset can now simply walk out the door."
The problem, says Shell, is that the efforts of a company to protect that intellectual capital with a non-compete clause can unreasonably restrict a person? s mobility. "A covenant not to compete is only enforceable for a limited time, but it can still be a problem when you have companies like Microsoft, for example, that use the law to aggressively quiet competition in industries where there is not enough competition to begin with."
Non-compete agreements, which are common for high-tech companies as a condition of employment, can be tough. But at least the employee is aware of the restriction on subsequent employment. What happens, however, when an employee who never even signed a non-compete agreement is barred from joining a competitor?
That happens and it? s not infrequent, says Christopher Wells, a Seattle-based partner with Lane Powell Spears Lubersky LLP, a multi-specialty law firm. He notes that the doctrine is known as "inevitable disclosure" and was demonstrated in 1997 in a New York court case involving DoubleClick, Inc.
In the case, Kevin Ryan, president of Internet advertising company DoubleClick, Inc., discovered that two of his executives planned to leave. Fearing they would use confidential information about DoubleClick? s business to start a competing venture, the employees? lap-top computers were confiscated and the company asked the New York State Court to issue an injunction preventing the two from working in the Internet advertising industry for six months.
The court granted the requested injunction based upon "evidence of actual misappropriation" of DoubleClick? s trade secrets. That part of the decision was not controversial. But in a move that was chilling for employees across the nation, the court also found that the actual misappropriation claim was "bolstered by the fact that there is a high probability of inevitable disclosure of trade secrets in this case."
Based upon these findings, and despite the fact that neither employee had a non-compete agreement or even a valid confidentiality agreement with DoubleClick, the court entered an order that prohibited the defendants from starting a competing business for at least six months.
"The inevitable disclosure doctrine seeks to prevent a former employee from working for a competitor under the theory that an individual cannot help but exploit knowledge from his previous employer and put it to work for a competitor," says Wells. "There? s no ? Chinese wall? to segregate information in your head."
He observes that courts are more likely to apply inevitable disclosure, or enforce a non-compete agreement, if the former employee takes a position that? s is similar to his or her previous job, particularly if the position pays considerably more than the old one even though the responsibilities are not very different.
"If an employee leaves company A where she was northeast regional sales manager and goes to company B as a regional sales manager in the southwest, a court might say she? s not subject to a non-compete covenant or the inevitable disclosure doctrine," says Wells. "She might also be safe if she works for a company that? s in a different kind of business. But if she? s in a similar line of work the court may be suspicious."
He said concerns over that kind of outcome probably fueled a recent decision by Redmond, Washington-based Crossgain Corp. to ax about 25% of its employees, including the start-up? s two founders and chief executive officer, in response to pressure from Microsoft. Crossgain develops Internet-based standards and tools for software developers and, according to a recent report in the Wall Street Journal, the terminated individuals were all ex-Microsoft employees who had previously signed non-compete agreements with the Redmond-based giant.
The inevitable disclosure doctrine is at the heart of a court case currently being argued by an attorney in a Philadelphia-based law firm in which Wharton legal studies lecturer Bob Borghese is a principal.
The firm is representing a seller of specialized medical products that hired two salespeople who formerly worked for a competitor. Alleging misappropriation of trade secrets, the former employer says the two ex-employees improperly left with customer lists and should be enjoined from contacting the customers.
