Noncompete agreements work, but not for everyone

STRONG COMPETITION: Michael Gamboli, attorney with Partridge Snow & Hahn LLP, says disputes over noncompete agreements are becoming more common with the rise in worker mobility and lower barriers to starting companies. / PBN PHOTO/TRACY JENKINS
STRONG COMPETITION: Michael Gamboli, attorney with Partridge Snow & Hahn LLP, says disputes over noncompete agreements are becoming more common with the rise in worker mobility and lower barriers to starting companies. / PBN PHOTO/TRACY JENKINS

A star salesman’s or software developer’s defection from one company to a rival can trigger rumor and intrigue worthy of a spy novel.
Will the defector use his relationships with key clients to poach them for his new employer?
Will he divulge the game-changing innovation his old boss was working on, opening the door for it to be stolen?
For these scenarios of corporate espionage, a number of industries rely on noncompete agreements in employee contracts to prevent workers from using what they’ve learned on the job with one company to take business from another.
Some clauses are narrow – simply barring the worker from contacting current clients – while others are broad – exiling former employees from the industry for years.
In either case, noncompete agreements have generated debate and controversy in every industry where they’ve become common.
For employees, agreements they may have casually signed in the excitement of a new job can over time become burdensome barriers to leaving a company they’ve outgrown, pursuing a better opportunity or fulfilling the dream of starting out on their own.
And in some places industry and political leaders see them as stifling growth and innovation, especially as the tech sector and startup environments become larger parts of the national economy.
Lawmakers in Massachusetts have debated bills that would either ban noncompete agreements or limit them in several recent legislative sessions, although none of them have won approval.
This year Mass. Gov. Deval L. Patrick’s administration for the first time endorsed making noncompete clauses unenforceable as long as the state also adopts the Uniform Trade Secrets Act, which protects proprietary corporate information. Massachusetts, New York and North Carolina are the only states that have not adopted the act.
“Noncompetes stifle movement and inhibit competition,” said Mass. Secretary of Housing and Economic Development Gregory Bialecki in written testimony on a proposed noncompete bill this fall. “Providing the talent needed to support the kind of explosive growth we want in the innovation economy is considerably more difficult if employees are legally unable to move between jobs in the innovation economy.” Despite the governor’s support, it is unclear that the legislation has any better chance of passing this year.
In Rhode Island, where a booming technology sector is still mostly a dream, noncompetes have never been the same kind of political issue.
“In Rhode Island it doesn’t come up except in isolated instances,” said Saul Kaplan, founder of the Business Innovation Factory and former executive director of the R.I. Economic Development Corporation. “It has never raised itself to be a top issue, but when it affects you, it really affects you.”
Although he didn’t see it on the horizon, Kaplan said he would support some form of noncompete reform if it protected trade secrets.
“Anything that enables Rhode Islanders to move from one setting to the next is in the best interest of growing the economy,” Kaplan said. “The last thing you want is someone constrained [who] has to move out of state or [the] industry to make a living.”
Michael A. Gamboli, a lawyer with Partridge Snow & Hahn LLP in Providence who specializes in employment law, said disputes over noncompetes are becoming more common with the rise in employee mobility and lower barriers to starting companies.
But he doesn’t see that driving the agreements away.
“I think there are always going to be noncompetes,” Gamboli said. “Massachusetts has had that legislation bounce around for some time because there always seems to be a push to extend the prohibition on noncompetes beyond doctors and lawyers. I don’t see any kind of significant prohibition on noncompetes being enforced in Rhode Island anytime soon. It would have to be really tailored.”
Gamboli said he represents companies on both sides of noncompete cases – the one whose employee left and the one who hired him – and worked on five in the last three weeks of November. In most of these cases, the company whose employee left for a rival goes to court for a preliminary injunction to block the ex-employee from working at his new job. Whichever side the judge rules for on the preliminary injunction then has the upper hand in negotiating a settlement.
In ruling on the injunctions, judges have discretion to balance the fairness and equity to both parties and Gamboli said most cases hinge on how reasonable each noncompete clause is.
Often a court will say you don’t need a noncompete, so we are not going to enforce it,” he said. “As long as he agrees to keep information confidential, it’s not fair to prevent someone from earning a living.”
As a result, contracts often feature a wide range of conditions, time periods and provisions, depending on the industry.
While the growing economic prominence of the technology businesses has drawn much of the political attention to noncompetes, Mark Freel, a partner and commercial litigator at Edwards Wildman Palmer in Providence, said it’s a misconception to think the entrepreneurial world is uniformly against the agreements.
“In the tech sector it cuts both ways,” Freel said. “On one hand they want to hire people with ideas and entrepreneurial people. But when someone comes to work for you, you want to be protected from them leaving and taking your ideas with them.”
If there is one mistake companies make with noncompetes, Freel said, it is usually getting too “greedy” and making the clauses too long and restrictive.
The number of lawsuits and animosity created by noncompetes often makes them seem more costly than they are worth, but Gamboli said most companies believe they remain a powerful deterrent.
“The fact is that for every person who challenges it, there are 10 who didn’t because they signed it,” Gamboli said. “You lost eight salesmen that year, but realize only one is competing against you.” •

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