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The Case Against Non-Compete Agreements

You have great ideas and methods you want to protect. But making employees sign draconian contracts isn't the way to do it. Here's why.
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You've invested a lot in your ideas. You want to protect and profit from the fruits of that investment.

Thus you require employees to sign non-compete agreements so you can protect your trade secrets and your talent pool. Makes sense, right?

Maybe not.

Here's another in my series where I pick a topic and connect with someone a lot smarter than me. (There's a list of previous installments at the end of this article.)

This time I talked to Orly Lobel, Professor of Law at the University of San Diego and author of "Talent Wants to Be Free: Why We Should Learn to Love Raids, Leaks and Free Riding."

I would think non-competes would be even more necessary in a business climate where the average length of employment is pretty short.

That all depends on what kind of employees you want. Non-competes, non-disclosures, and attempting to assert intellectual property ownership actually suppresses employee motivation and creativity.

A non-compete tends to be counterproductive on different levels. Do you want to have employees that would like to leave... but don't because of a non-compete? Do you want employees who are immediately de-motivated because they feel their human capital is not their own?

Which would you rather work for: the company that puts tremendous effort into placing legal and contractual stakes in the ground, or the company that puts tremendous effort into trying to be the employer of choice?

I have a friend who says, "The people who don't want to sign non-competes tend to be the ones you want most. They're aggressive, motivated, have lots of ideas. The people who willingly sign are the people you don't want."

When you demand non-competes you create self-selection and a market for lemons: the people who unthinkingly sign a non-compete may feel they don't have the skills to get another job or take off on their own. Every employer wants employees who are self motivated, who have confidence, and who have aspirations.

Why put up artificial barriers that make it harder to attract great employees?

People want to develop their careers--maybe work for a company for a few years then become entrepreneurs.

Freedom creates more incentive to for employees to connect, be visible, network, and develop themselves both within and outside the company--all of which benefits their employer.

Your book makes the case that the only thing worse than forcing people to sign non-compete agreements is attempting to enforce that agreement when they leave.

If employees really want to leave, they'll leave. So then what do you do about it?

Some companies engage in irrational and counterproductive threats and even litigation. Say you can actually get a non-compete enforced; do you really want to develop the reputation as a company that sues ex-employees? That sends the wrong message to current employees and to the talent you want to recruit.

So you just let employees go?

It's not like you have a choice. So rather than developing the reputation for being upset when employees leave, focus on the positives.

I was talking to Marty Beard, the CEO of LiveOps. He said, " I recently had one of my best product managers leave the company for Salesforce.com.  Initially we were upset (it's so hard to hang onto talent in Silicon Valley!) but we quickly realized he is one of our best and most informed advocates inside Salesforce, which is an important customer and partner of LiveOps, so in a way he still 'works' with us, so all is well."

Marty chose to see the employee who left not as a competitor but as a partner at a customer.

Don't create lack of mobility--see mobility as a way to seed your company in other places. Even competitors can quickly become collaborators, partners, etc.

So it's like your ex-employees are graduates of your company.

Absolutely. They're alumni. See it as developing your alumni base.

And don't forget that potential employees who are developing their careers are extremely interested in what your employees go on to do. People don't expect to stay for 40 years; tap into that desire for growth and change.

I was surprised to read that Silicon Valley tends not to use non-competes.

Silicon Valley is arguably the prime example of complete avoidance of non-compete agreements. Most companies have adopted the premise of, "We'll simply try to be the best we can be."

It's part of competition and part of the market. Knowledge flows away. Knowledge flows in. In the long run everyone gains from the greater density of rich knowledge, from stronger networks, and from moving together as a whole.

So how can a company protect its secrets?

I never advocate against having clear intellectual property protection--copyrights, trademarks, patents, etc.--but much of what companies try to achieve with non-competes can be achieved through trade secret protection.

A non-compete is like a shotgun; trade secret protect is much more targeted and applicable.

For example, you can use non-disclosure agreements that articulate exactly what the trade secrets are, including customer information. The traditional notion of trade secrets tends to be technical and process-oriented; today trade secrets cover a much broader area. Trade secrets can protect pricing, business strategies, client information and even client lists, even marketing strategies.

The key is to be very specific: "We taught you this, or we gave you access to that, and it remains ours."  That won't totally protect you from reverse engineering, but the message is over time good for everyone.

Empirical studies confirm the intuition that businesses that allow more movement, more job mobility, and more flow of information within a region gain from that intra-regional ethos of focusing on what's next. And they gain from the cultural benefit of a workforce that is more open and attractive to employees.

When you allow talent to be free it's not only better for employees, it's better for overall economic development.

Check out other articles in this series:

Last updated: Nov 19, 2013

JEFF HADEN | Columnist

Jeff Haden learned much of what he knows about business and technology as he worked his way up in the manufacturing industry. Everything else he picks up from ghostwriting books for some of the smartest leaders he knows in business.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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