What you should know about noncompete agreements
Editor’s Note: Nearly 40 percent of Americans have signed a noncompete agreement.
But do employees always know what they’ve signed and what it means for future employment prospects?
Many don’t, according to a new report by U.S. Department of the Treasury.
By signing a noncompete agreement, an employee agrees that they will not go to work at a rival company if they quit. For this week’s Making Sen$e, special economics correspondent Duarte Geraldino reports on noncompete agreements and the bind it puts on workers — from lamp shade manufacturers to foster parents.
Geraldino sat down with attorney Russell Beck, who specializes in business and intellectual property litigation and has an influential blog on the subject, to discuss why businesses use noncompetes. Read that conversation below, and tune in to tonight’s Making Sen$e for more. The following text has been edited for clarity and length.
— Kristen Doerer, Making Sen$e Editor
Duarte Geraldino: In the 25 years that you’ve been working this, have you seen the number of these noncompete contracts increase, decrease or stay the same?
Russell Beck: I’d say overall there has been an increase in use of noncompetes in the past 25 years.
Duarte Geraldino: Why the increase?
Russell Beck: I think with the increased value of trade secrets, which noncompetes are used to protect, and the increased mobility of the workforce, companies have determined that they have a need to protect their information, and the way to protect it is through locking down employees.
Duarte Geraldino: So you have these noncompete contracts, and you have trade secrets contracts. Are noncompete contracts considered trade secret contracts?
Russel Beck: Yes, they are trade secret contracts. They are called nondisclosure agreements or confidentiality agreements. Those are used to prevent employees and anybody else who has access to your information from using the information or disclosing the information. What noncompetes do is they add a layer of protection on top of that. They prevent an employee from leaving your company and working for a competitor in a role in which they might be using that information.
Duarte Geraldino: So would it be correct to say that the base level are these nondisclosure contracts, these trade secret contracts. Above that are these noncompete contracts, is that correct?
Russell Beck: That’s exactly right. The noncompete contracts offer greater protection, but for a limited time. Nondisclosure agreements or the trade secret contracts last for as long as the trade secret lasts.
Duarte Geraldino: So when we look at just the noncompete contracts, what percentage of American workers are bound by these?
Russell Beck: So the studies show there about 20 percent of American workers are bound by them.
Duarte Geraldino: Twenty percent of 100 million people, that’s 20 million people. It seems almost absurd that you would have 20 million American workers who have at one point signed these contracts. How many people will have signed these during the life of their career?
Russell Beck: The studies again show about 37 percent.
Duarte Geraldino: How did it get so large?
Russell Beck: Over the course of the past 20 years or so, trade secrets have become an increasingly important aspect of a company’s business, and couple that with the fact that they are now easier to move. So if you think about recipes or production processes, they are all recorded by electronic means, and they are very easy now to move out of a company. You have a workforce that is increasingly mobile and increasingly changing jobs, and over 50 percent of them admit to taking information when they leave, so companies are very concerned about information moving when the employee moves, and so I think it’s because of that, that you’ve seen an increase in noncompetes.
Duarte Geraldino: What type of information would someone take with them to a new employer that might give that employer some type of competitive advantage?
Russell Beck: The quintessential example that people always use is the secret formula to Coca-Cola, and that’s obviously a prime example. But anything can be a trade secret as long as it’s information that provides some value to the company and that the company takes reasonable measures to protect. Recipes for cookies, profit margins, customer lists, all business information that provides a company the ability to be more effective in the marketplace.
Duarte Geraldino: Noncompetes seems to vary from state to state. Why is there so much difference?
Russell Beck: So there is no federal law on noncompetes; every state has its own noncompete law. Some states, like California, don’t enforce noncompetes at all; they favor employee mobility over the protection of former employer’s information. Other states, like Florida, are at the other end of the spectrum in terms of the willingness to enforce noncompete agreements. They favor the employer’s protection and growth of their information as opposed to protecting the employee’s ability to move and change jobs.
Duarte Geraldino: Is there any reason why it would be so different? Is the labor market different in these particular areas?
Russell Beck: There really isn’t a tremendous difference. California has the tech industry obviously, and people point to the lack of noncompete as the reason for the existence of the tech industry there. Others dispute that. But, other than that, no, there is nothing that seems obvious for why California might choose one way and Florida might choose another. Typically, the noncompetes are used and seen as more favorable if a state is trying to encourage larger companies to thrive.
I think from a policy standpoint, a state has to make a determination as to whether it’s looking to encourage employee mobility. And a state like California has decided that employee mobility is important.
Duarte Geraldino: Why is so much attention being focused on noncompetes now?
Russell Beck: Well, that’s a good question. There have been a number of states that are looking to change their laws, and they have been looking at a lot of abuses of noncompetes. You’ve seen in the news the company Jimmy John’s, which used noncompetes to restrict its sandwich makers from moving to a competitive company. Those kind of abuses exist, and they make headlines. As a consequence of that, I think a lot of states have been looking to rein in those types of abuses.
Duarte Geraldino: But you have actually defended companies and employers who are saying that a noncompete has been breached. In what circumstance is it actually defensible?
Russell Beck: So different companies will enforce noncompetes for different reasons. Some will enforce them to protect their trade secrets. Some companies will enforce them to protect what are called other legitimate business interests — the protection of customer relationships that a company has invested in. When a company comes to me and asks me whether they should enforce their noncompete, I will take a look at the agreement, understand what the facts are and advise them as to whether they should enforce it or shouldn’t enforce it. Oftentimes companies will assume that they are going to move forward with the enforcement of a noncompete, only to find out that really they shouldn’t be moving forward with it for one reason or another. Either the employee doesn’t really pose a risk, or the agreement is just not valid for some other reason.
It really comes down to the particular language of the agreement and the state that you’re in, because the jurisdiction that will control the enforcement of the agreement and may have laws that will make it hard to enforce in one state, whereas in another state it might actually be enforceable.
Duarte Geraldino: So what’s the trend so far? Are most states moving in the direction of making these contracts unenforceable, or are they actually getting stronger?
Russell Beck: Most states are looking for ways to curtail the use of the agreements to some extent. There are about nine states that are looking to put some sort of restrictions on the use. There are about five states that are looking to outright ban them, and there are three states that are looking at making them easier.