Is Your Non-Compete Ethical?
“Non-compete agreements have always bothered me,” Brandon Rodman, CEO and cofounder at Weave, recently said in a LinkedIn post. “I understand the need to protect intellectual property and trade secrets, but 99 percent of the time non-competes are not used for those purposes. Instead, they are used to lower the market value of individuals who are exercising their right to change jobs.
“Even worse—much worse—non-competes are sometimes enforced when a company lays off an employee. That is flat out kicking someone when he or she is down, largely because you (the employer) failed.”
His post got my wheels turning… are non-compete agreements ethical? And how do they affect companies and employees? Companies typically don’t pursue legal course over non-compete agreements―it’s not worth their time, money, or potential reputation risk―but if that’s the case, why have them in the first place?
What exactly are the legal ramifications of a non-compete?
According to James R. Moss, Jr., partner at Payne & Fears LLP, a non-competition agreement prohibits an employee from joining an organization and using the knowledge and relationships gained from a prior employer to compete with that employer. It also allows the employer to recover economic damages against an employee who breaks the agreement by diverting customers from the former employer to the new employer.
However, the Post-Employment Restrictions Act isn’t the only means of legal recourse. According to the Act, “the employer was liable to pay that employee’s damages, costs, and attorney fees,” says Ben T. Welch, a commercial litigator at Snell & Wilmer. Not the case if they repurpose the same type of claims as a “misappropriation of trade secrets.” By doing this, employers tipped the scale back in their favor, placing all liability on the former employee.
“If you look at those two statutory schemes [Post-Employment Restrictions Act and UTSA],” says Welch, “the non-compete statute is employee-friendly, but the UTSA is a little more skewed in favor of the employer because whoever wins a trade secret case can get attorney fees.”
Why some employers support non-compete agreements
I contacted Bryan K. Benard, a partner and the practice group leader for the labor and employment group at Holland & Hart LLP, who was also involved in “Current State of Non-Compete Agreements in Utah,” a 2017 study commissioned jointly by the Utah State Legislature and the Salt Lake Chamber.
He had been representing a coalition of clients opposed to the initial legislation to ban non-compete agreements in Utah when he was asked to be a part of a group searching for a compromise and solution, which resulted in the Cicero study and his involvement as an employer-side attorney.
“During the legislative session, there was a lot of anecdotal evidence and examples being talked about—and many out-of-state examples of abuse of non-compete agreements. The desire was to get a Utah-specific survey of how employers were using non-competes, to get the views of non-competes from Utah employers and employees, and to provide this one-of-a-kind study to help inform business leaders and legislators on the issue,” says Benard.
Benard contends that non-compete agreements can certainly be ethical. Businesses work hard at creating brand recognition and goodwill in their markets. Many expend significant time and money investing in training, creating confidential information (such as client lists and pricing structures), creating business plans, and supporting employees with such training and information, he says.
Properly protecting a business’ investments is not only ethical but makes good business and market sense. Proper non-compete agreements can prohibit the unscrupulous employee from taking such confidential information and unfairly competing, he says. But they can also be abused.
“Non-competes should be narrowly tailored to meet the specific business needs the employer is trying to protect. If they are not reasonable in their geographic or market scope, or in their duration, then they can be unfair. Also, they can be abused if they are used with, for example, back-end employees, in common jobs, that do not have access to confidential information, do not impact the goodwill of the company, etc.”
Benard says non-compete agreements are not necessary when dealing with very low-level employees who don’t have access to confidential information or goodwill. Which brings me to the very real issue of non-compete abuses.
What slighted employees have to say
Not surprisingly, many of the disadvantages of non-compete agreements are on the employee side. They can restrict employee mobility, and restrict an employee from working in a chosen field for a time. They can also restrict the open market and business climate. And from what I discovered, there are instances where non-compete agreements have been abused right here in Utah.
J.R. was a sales rep at a company for two years. He had always hit his sales quotas and was never told his performance was in question. The company went through a round of layoffs, and he saw many of his friends lose their jobs and get escorted out to their cars after coming in to work to hear the news.
J.R. was grateful to still have his job, but it was unnerving working there knowing the company was laying people off. A few months later, they went through more layoffs and J.R. was part of that round. He was told that even though he was laid off, the company was still enforcing his non-compete and that he could not work for a list of companies that had any sort of overlap or that they deemed competitors.
“I was furious because I had no book of business, nor did I have any proprietary information, and so I had to look for work outside of the industry that I was familiar with, and had to reject a couple of offers that were more money than I was making, for a lesser pay in an industry outside of what I know,” says J.R.
“I understand non-competes if the owner sells a company, and is held to a non-compete to refrain from starting up a competing business, but for companies to be able to hold any type of employee to a non-compete is just ridiculous. If Utah is an ‘at will’ employer, then the employee should also be allowed to leave if they are not treated fairly and go somewhere else, even if that is in the same industry,” he says.
I spoke to another employee who asked to remain anonymous. She said she was very impacted by a non-compete. “It took me a very long time to get a position I was qualified for with a company that did not fall under the non-compete clause,” she says.
“Most of the positions I was applying for were offering a very low salary because I would have to start at the bottom once again. It was difficult to apply at certain places because they feared they might be sued by the company I had worked for. It truly limited my opportunities to excel and I feel I lost eight to nine months of career advances.
“My position was not one that had vital, detailed information that could harm or produce for a competitor. The company made sure to take advantage of my skills, work ethic, and integrity to help them succeed. I gladly did that. But when it was time for that company to help me succeed, they did not.
“I don’t believe that a company should be able to dictate where an employee can work. Especially if that company laid the employee off [alongside] 78 others. I feel that the non-compete is to protect the company and its important information but excludes the employee in the process… When an employee that has given 100 percent to the company and has been a very successful employee in providing sales, meeting sales quota, and bringing business and partnerships to help grow the company, they should be allowed to continue to grow and provide that to the next employer.
I spoke to another employee, who I will call “John.” John worked for a company for five years in a very niche industry. Planning to have children with his new wife, he wanted to further his career. “I was told that there was no other position for me to advance within my current company, and that not only should I just wait for the company to sell, but that I should not expect a pay increase either. Upon putting my feelers out there, I learned that most other companies were paying almost double for what I was currently doing at the time.
“As it was a very specific industry and skillset, I was told that if I left to a company in the same industry that had any sort of overlap, or even the potential to become a competitor down the road, that they would sue me for a breach of my non-compete contract. I had the impression that they felt they could pay less than other companies once they got you in the door since they would prohibit you from going anywhere else within the industry.
“I had no intention of doing any sort of harm to the company that I was working for, but just wanted to find a job that allowed my wife to stay home so that we could have kids.”
After reading the in-depth study and conducting my interviews, the issue of non-compete agreements being ethical is clearly, still up for debate, and they can swing either way. Ryan D. Nelson, Utah president of the Employers Council said, “I don’t believe there is a fix-all solution. Instead of a non-compete, a company could instead use a confidentiality agreement. Such an agreement allows the employee to move freely among employers, but prevents the use of confidential information to the benefit of the subsequent employer.”
“Additionally, instead of using a non-compete to discourage employees from leaving, a company should also focus its energy and resources on ensuring employees want to stay. There are a variety of ways to do this from compensation to culture to investing in the employee, to name just a few,” he says.