When he left Computervision Corp. to found a new electronics company, Philippe Villers was nearly stopped in his tracks by his old employer. Computervision sued, claiming Villers had moved into competition with his old company, resulting in a "loss of corporate opportunity" for Computervision. The jury found that Computervision's claims were not valid.
Today, Villers is on the other side of the issue. At his new company, Automatix Inc., a $13-million robotics-systems manufacturer in Billerica, Mass., Villers asks his key employees to sign an agreement with a so-called restrictive covenant: They must promise not to join a competitor's staff for a year after they leave Automatix.
Robust competition and a mobile work force can produce a case of paranoia for business owners concerned with protecting their competitive edge. When the success of a business hinges on the performance and knowledge of a few staffers, owners understandably get edgy, and that has prompted a sharp increase in the use of restrictive covenants. It is one element in the broad spectrum of employment law aimed at shielding such proprietary information as trade secrets, copyrights, and customer lists. Restrictive covenants are a sticky -- and sometimes expensive -- issue for entrepreneurs who want both to retain and attract experienced employees.
Large companies routinely ask research and development staffers to sign restrictive covenants, but in small concerns noncompete clauses are usually introduced after the fact, when "all of a sudden the owner realizes that a key employee knows everything," says Michael A. Epstein, a New York lawyer and author of a new book, Modern Intellectual Property (Law & Business Inc./Harcourt Brace Jovanovich, New York; $75).
It is not surprising that restrictive covenants are perhaps most prevalent in the high-technology sector, where information is precious currency and start-ups are usually staffed by corporate emigrants. But these contracts are also appearing with greater frequency in many other types of small companies, although six states -- California, Louisiana, Michigan, Montana, North Dakota, and Oklahoma -- prohibit them in almost every instance.
Edie Mesch, president of Datek Software Associates Inc., a New York City consulting firm, has had to confront both sides of the issue. Before forming Datek, she had been a senior marketing representative for another consulting firm. During her first year in business, she says, "I had to stay away from the accounts that I had actively dealt with."
These days, Datek and its customers agree not to hire each others' employees for a year after their business ceases. But Datek consultants frequently get job bids on the sly. "They feel insulted if the client doesn't make them an offer," Mesch says, adding that an employee's problem isn't whether to jump ship, but how to reject the offer gracefully, without jeopardizing the consulting relationship.
"I don't use restrictive covenants to impede employees' entrepreneurial tendencies," says Mesch, "but merely to establish the rules. It's pretty standard."
The key in drafting enforceable post-employment contracts is to place reasonable restrictions on time and geography. Often, a restrictive covenant will place a one-to-three-year restriction from working for a competitor in the present employer's market area. Courts are generally hostile to companies' attempts to protect their interests at the preclusion of an individual's ability to work. But contracts that provide a substantial financial incentive to stay out of the competitive arena are most likely to be upheld. Epstein has seen companies pay as much as 100% of the final year's salary during the period of restriction.