Wednesday, February 27, 2008

Being upfront about a non-compete agreement can save a lot of headaches

Monday's Chicago Tribune had an interesting piece about the proliferation of non-compete agreements in today's business environment. Quoting from the article:

In an economy where information and relationships rule, businesses are quicker to try to limit the damage when people leave. And it's no longer just executives and high-tech workers whom companies worry about.... Employees encounter non-compete, non-disclosure and non-solicitation issues coming and going. The forms often sit in the stack of papers that new hires are asked to sign their first day on the job. And restrictive covenants invariably get tacked on severance offers in layoffs and firings.

The article quotes Diana Smith, managing director of The Novo Group, a Chicago recruiting firm, who advises that companies and job applicants should be up front and open about non-compete agreements:

"Companies that want to recruit from their competition will find ways to make it work. People should be really open in their discussions and not be afraid that it's going to stop the show. Chances are you're going to find a way to work around it."

Ms. Smith's point is important for employers to take to heart. Despite the existence of an agreement, companies may or may not have a real interest in enforcing a non-compete agreement against a former employee. Factors that the former employer might consider are the level of the employee, the circumstances surrounding the employee's departure, the employee's customer and industry contacts, and what trade secrets and other confidential information the employee was privy to.

Nevertheless, when an employee who has signed a non-compete goes behind the old employer's back to work for a competitor, the old employer is forced into action to send a message to all of the other employees who have signed non-compete agreements that the company takes them seriously and will enforce them if pushed to do so. Past enforcement is also a factor that courts look at in examining whether to grant an injunction enforcing a non-compete agreement.

On the other hand, what happens if the new employer picks up the phone and calls the old employer to ask for permission to hire the applicant despite the non-compete? The old employer may say yes if it does not want to run up attorneys' fees by attempting to enforce a non-compete against a marginal employee. Further, by allowing the new employer to hire the employee, the old employer will signal that it expects the same courtesy in the future - that is, at least a phone call before an employee is hired. And, if the old employer says no, the new employer has not lost anything, because hiring the employee will most likely result in litigation anyway.

Asking about the existence of a non-compete or other restrictive agreement should be boilerplate in virtually all hiring processes. Picking up the telephone and asking for an employee to be released from a non-compete for a particular job costs nothing, and could save significant heartache down the road by staving off litigation that the old employer may feel compelled to bring to save face.