Ken Muse

Beware the Non-Compete Agreement

One of the more controversial parts of the technology career is the non-compete agreement. Like copyright clauses. The non-compete is essentially an agreement not to work within a given industry or set of industries for a period of time. Generally speaking, a non-compete clause provides a benefit for the company – preventing you from continuing your career in some manner – while offering no benefit to the employee. Like copyright contracts, these are important to understand because they can take away employment rights for some period of time.

What does it mean?

Non-competes were intended to keep you working from a competitor for some period of time to protect you from sharing details that might allow them to better compete with your former company. Instead, many companies use these to make it difficult or expensive for employees to leave the company. The do this by limiting you in three key areas:

  • By geography (“within 50 miles”, “anywhere in the world”)
  • By time period (1-2 years)
  • Within certain industries or careers

Despite this, most technology professionals don’t understand the terms. More surprisingly, many companies do not present employees with a non-compete until after they accept the position. The challenge is that they are difficult to challenge. At the same time, its not unusual for companies to write them in a way that renders them unenforceable! All of that said, a non-compete may broadly restrict you from working in your chosen field for a period of time.

Can they do that?

It depends on the state. Some states have prohibitions on non-compete contracts. Even if they are signed and specify that they operate under the laws of a different state, they may be prevented from being enforced. In other states, legislatures have added amendments to the state constitution to ensure that the contracts can be enforced as much as possible. In short – you’ll probably need to consult an attorney to understand how enforceable the contract is.

Will they use it against me?

The harsh reality is that many companies will enforce these provisions. I’ve known more than a few people in the technology industry that have suddenly found themselves confined to working in service industry jobs because they did not understand the seriousness of these provisions. They also found out the hard way that because they have a contract, their employer can seek to enforce it. Whether or not they choose to do this is a different matter. Just be aware – it’s no uncommon and these clauses are not intended to protect workers or give them rights.

What can they prevent me from doing?

In extreme cases, the contract can force you out of your chosen career field for 1-2 years. For example:

For a period of twelve (12) months from the date of the employee’s separation from Company, employee will directly or indirectly compete with, sell, provide, be employed by, own, manage, operate, join, or be connected with any business activity that will be competitive with the Company.
Figure 1. Sample contract non-compete clause.

The difficulty in a clause like this is the combination of “directly or indirectly” and “be connected with any business activity that will be competitive”. While this is likely to be considered overly broad by a court, the terms limit your ability to work with nearly any technology company if it might compete with the company. That said, particularly aggressive companies might take such a clause even further. For example, consider a new company creates a product that uses the cloud and a previous employer that assisted with cloud migrations. The previous employer might claim that building the product reduces the chance that the new company will need the services provided by the previous employer. Consequently, the former company decides that this is prohibited by the contract and sue the previous employee. As a result, they decide to sue.

What happens next?

In the event of a lawsuit, the former employer may pressure the employee to agree to further conditions or remedies. In this situation, it’s important to have a quality attorney that can help you defend your position. In a worst-case scenario, the case proceeds to court with expenses accumulating for both sides. Depending on how the contract is written, the US states (or the countries) involved, and the claim, a judge will determine whether the clause was breached and the appropriate remedy.

In many cases, the contracts may be determined to be overly broad and therefore unenforceable. In the clause above, if the contract was enforced to stop an employee at Venmo from going to PayPal (both finance companies), it may be enforced. For a consultancy touching numerous technical areas, the same clause may be deemed overly broad since it touches numerous different types of companies in different fields. Similarly, consider a clause applied to every country where the company operates. Because the geography covers the entire United States, it includes states where the employee (and likely the business) never worked with customers. This often makes it considered unreasonably broad. In a similar case that happened recently, the court evaluated the entire US as a region. This meant considering California laws against non-compete clauses and resulted in a ruling for the employee. In another case, the court ruled that remote work allowed the employee to legally accept a job in a state where the employee had no business activities while working for the former company. In most of these cases, the court determines that a less restrictive approach would have properly protected the company’s interests against one or more competitors. As a result, they declare the overly-restrictive or overly broad clause to be unenforceable. The courts have consistently held that employees have a right to earn a living.

A ruling for the employee can make the company liable for the the court costs and any damage. For example, if the new employer feels damaged by the lawsuit (or the employee loses their job while the case is in progress), the former employer may find themselves dealing with legal problems. In some cases, the new employer will take legal action to protect the new employee, creating substantial hazards for the previous employer.

At the other end of the spectrum, the courts can rule that the employee is subject to the terms of the non-compete. In this case, the employee may be forced to immediately resign from the new employer and the courts may award fees or damages to the former employer. The courts will decide a reasonable amount (if any) based on the actual losses from the brach of the non-compete.

Are they even required?

For some companies, they believe this will make them more competitive. At the same time, larger organizations (such as Microsoft) have determined that such clauses damage employee morale and create a bad public impression when enforced. That is, it can discourage qualified talent from considering working for the company due to the risk of legal action in the future. It also creates a risk for the company, since counter-suits can create legal liabilities. Worse, the unfavorable press can cause higher losses than the claimed “anti-competitive” behavior.

As a result, there’s an industry shift towards eliminating these clauses (and not enforcing existing ones). The June 2021, President Biden signed an executive order encouraging the Federal Trade Commission (FTC) to limit the use of non-competes. In June 2022, Microsoft announced that they would stop enforcing non-compete clauses in the US. The US Congress has introduced the Workforce Mobility Act, which would prohibit non-competes. States are also taking action. California, Illinois, and Oregon have passed laws placing limitations on non-competes or which grant the state the ability to intervene in these kinds of cases.

In short, they are not required, and both state and federal efforts are underway to end the practice.

What about now?

For now, these rules exist and the laws enforcing the vary significantly by state. With as much as 40% of the US subject to non-competes, workers are often forced to consider the threat of legal action when deciding on a new employer. From the company perspective, the emerging trend is to highlight the lack of a non-compete to create a welcoming environment for employees. From an employee perspective, it’s important to understand what you’re signing, that you have the right to negotiate the agreement, and that you are under no obligation to work for companies that provide these kinds of contracts. Especially when their competitors are eliminating those clauses …