How Non-Compete Agreements Really Work

Part of the ritual of starting a new job is signing all the paperwork: the acceptance letter, I-9, W-4, insurance forms, direct deposit.

Oh, and the non-compete and confidentiality agreements.

When we accept an offer for a new job, signing a non-compete agreement as a condition of employment seems like a footnote at the end of a long chapter… something that surely we don’t need to actually read.  Non-competes are ubiquitous — and, we assume, mostly harmless.  However, these agreements are so common (and so one-sided) that I wanted to spend a few minutes describing how they really work in practice.

Social scientists who study non-compete agreements have generally concluded that non-competes reduce job mobility, regional economic growth, and salaries while maximizing companies’ short-term gains.  Enforcement of non-compete agreements varies substantially by region.  California is unique in disallowing enforcement of non-competes in all but the most egregious cases.  Enforcement in other states varies widely (though somewhat predictably by red state/blue state).

If you find yourself in a potential bind with your non-compete agreement, there is a wealth of advice out there… but don’t mistake analysis of the technical legal points for advice on how the civil justice system actually works.  For example, this very informative post describes how a Texas non-compete is likely unenforceable if your employer is a local or regional business but you go to work for a competitor in another part of the state, and  Wikipedia’s entry on non-competes describes how out-of-state non-competes are likely unenforceable.  It’s also commonly held that non-competes are enforceable only for senior-level employees and managers.  This kind of information may make you think you’re in right.  As we’ll see, however, these facts have little to do with how the system actually works and what your outcome will likely be in the event you challenge your non-compete.

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OK, so let’s say you’re an individual contributor in a management consulting company in Texas (or Nevada, or New York) and accept an offer of employment with another management consulting company in California.  Additionally, you never even SIGNED a non-compete — only a puny confidentiality agreement.  You’re in the clear, right?

No, you are not in the clear.

Now let’s say your former Texas (or Nevada, or New York, or other non-California) employer decides to sue you for going to work for a competitor, despite your advantaged legal position.  Here’s what’s likely to happen next:

First your former employer files an injunction in their own state, not in California.  You will most likely be prohibited from working for your new employer until a hearing takes place, typically within two weeks of the injunction but this varies by state.  During this time, you’ll have to hire a lawyer (in your former employer’s state) to defend you and prepare your case.  Your new employer may or may not pay your salary or your legal fees while the case is ongoing. You will have to defend yourself in court to avoid a default judgment against you.  The fact that you work in another state or that you never signed anything is irrelevant at this stage.

Cost to you just to avoid getting a default judgment against you: between $10,000 and $20,000 out of pocket plus any lost wages.  (Keep in mind, your former employer’s brief doesn’t necessarily even have to specify that your new employer is based in California.) You may also have travel expenses.

At this point, the judge may or may not allow the case to continue; however, in many states, judges are likely to err on the side of allowing the plaintiff to engage in discovery.  Why?  Because if your former employer is suing you, they are probably going to claim that you intend to provide confidential knowledge and materials to the competitor. The injunction against you working for your new employer may or may not be lifted, but if the judge allows the lawsuit to continue, plan on at least another couple of weeks of not being able to work.

But you never even signed a non-compete agreement, right?  Ironically, that probably doesn’t matter either — many state courts have ruled that if you signed a confidentiality agreement, it can be assumed that you will inevitably disclose such confidential information, and therefore going to work for a competitor ipso facto violates your confidentiality agreement.  Same outcome as if you’d signed a non-compete agreement.

Ah, but you went to work for a California employer where non-competes aren’t enforced, right?  Again, it doesn’t really matter.  It depends entirely on which judge you get.  Once you get into the thick of things in the legal system, here’s what the lawyers will tell you: “It’s not about the merits of the case, it’s about which judge you draw.  You probably have a 50/50 chance.”  Sure, you can argue that your case should be dismissed under California law — and you can pay your lawyer to research and present that argument to the court while the other side makes their own case for keeping it in their own state.

(If you win that argument, note that you may get to do the first part of this all over again in a California court.)

Cost to you to for this phase: an additional $20,000 to $50,000 out of pocket if you have to go through discovery.

There are a few more considerations as well: Your new employer may tire of this and terminate your employment at any time.  Also, your previous employer may claim that they believe you absconded with confidential information with the intent to provide it to your new employer.  As part of the discovery phase, you will have to turn over your personal laptop and the hard drives from your personal computer to the plaintiff’s legal team and provide them passwords to your personal email accounts.  They will comb through all your files and correspondence, from work and from your personal accounts, and if you’ve ever mumbled a cross word about your former employer in email, rest assured they’ll ask you about it in front of a judge.

In the event your new employer bails on you, they may also contest any unemployment claims you subsequently make with the state.  You may even be ineligible for state unemployment benefits — or have a tough time qualifying for them — again depending on the state.  Meanwhile, your previous employer may give you the extended runaround on retaining any life insurance benefits and applying for COBRA.  Also, keep in mind the plaintiff still likely has your computer and logins to your email accounts — so applying for new jobs may be difficult.

So what’s the total calculus?

Minimally, the cost of trying to keep your new job is likely to be in the $30K to $70K range.  This is entirely out-of-pocket.   The plaintiff will say they had a legitimate claim, so you are very unlikely to be able to recover those costs with a counter-suit — which could take months or years in any case.  So the calculus is this: Can you afford to write a $50,000 check to your lawyer, today, in exchange for a 50% chance of keeping your new job?

Most of us don’t have that kind of cash laying around.  If you can’t write that check, you’re better off minimizing your costs by resigning your new position and getting started finding another job.

What are some ways to avoid all this trouble?

  1. Live and work in an area where non-competes are not enforceable.  If enough people vote with their feet, more states will improve this aspect of their public policy.
  2. Never tell an employer where you’re going.
  3. If you’re in talks with a company that can even remotely be represented as a competitor, mention it to the hiring manager.  And this is a broad definition: are they both telecom companies or are they both social networking companies?  If so, and if the prospective new employer is unwilling to indemnify you in writing against all potential risk, then you shouldn’t take that risk either.
  4. Never provide your personal email address to your employer.  Never forward anything from your work email to your personal address or vice-versa.  Block all email from your employer’s domain to your personal email account.  Maintain a secondary personal email address, IM account, and Skype specifically for each job and turn those accounts over to HR on your final day of work.
  5. Never go to work for a competitor (as liberally defined by your employer) unless you live in California.

In the end, our civil justice system is a pay-to-play system.  If you aren’t already living and working in California, don’t chance it.

—-Thanks to the friends and acquaintances with expertise and/or hard-earned experience on this topic.

5 thoughts on “How Non-Compete Agreements Really Work”

  1. Hi Jeb – remember me from when you were at Match.com and I was with comScore?

    Nice post. It reminds me of two laughable stories from my past – both market research companies.

    When I joined the first company the President told he didn’t believe in non-competes because they weren’t enforceable. After I left a couple of years later (on good terms, just moving to a different city for family reasons) my boss – somewhat embarrassed – asked if I’d be willing to sign a non-compete! This was after I’d left. I just ignored the request.

    The other company was somewhere I didn’t want to work – and I’m very glad because they have a terrible reputation (both for market research and for poor treatment of employees). In our initial discussions, the President told me that I would need to sign a non-compete, but I shouldn’t worry about it because he (the owner) had also signed one. What a laugh.

    Take care,
    Mike

  2. Hey Mike, great to hear from you!

    I wish I’d spoken with you before I posted. Your stories are great and bring out a couple of points I should have addressed.

    As your old President said, non-competes often aren’t enforced by the courts — however, they don’t always make it to court. In many cases the employee can’t afford to fight the lawsuit. Asking you to sign a non-compete after leaving is fantastic! Interestingly, at least in Texas, that wouldn’t be enforceable at all because the employee has to receive something in exchange — typically an offer of employment, or in this case, maybe a sucker 🙂

    I don’t know what to think about the second story… it takes all kinds, doesn’t it?

    -Jeb

  3. I just saw a great keyword referral and wanted to take the opportunity to address it.

    The keyword is:
    can a temp agency hold me to a non compete contract if i never signed it

    Answers:
    1) If you signed a confidentiality agreement or NDA, then probably (see the full post above.)
    2) If you signed paperwork acknowledging that you were responsible for it (remember those one-pagers saying you received each of these documents?) then again, they can probably hold you to it even if you didn’t sign the non-compete itself. Why? Because this is a document — signed by you — that says you signed the non-compete. There’s no arguing with that.
    3) In general, individual contributors stand a decent chance of winning a non-compete lawsuit. The question is, do you have that kind of money?

  4. Quick question. I worked for a company for four years the only paperwork I ever signed while I was there were my tax documents. Six months after walking away and taking a job with a local competitor they tried so stick me with a lawsuit on non compete. The issue has been resolved.. but would they have had a leg to stand on if nothing had ever been signed and there was proof the lawsuit had been started out of spite and revenge because I left their company?

  5. I must say this is right on. I have been to hell and hard to come back….with jobs with NDA’s / Non-Compete / Non-Solicitations / Confidentialities / Trade Secrets.

    The law is so amazingly 1 sided that attorney’s have so many ways to make your life hell, notably by scaring your new employer. Eventually everyone knows where you are going.

    The best defense is to be offensive in the beginning. If you have a grievance and the reason why you left, go for it. Spend their money before they spend it against you.

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