Tag Archive: Non-compete

NON COMPETE AGREEMENTS SPREAD

FROM THE NY TIMES, MAY 13

How Noncompete Clauses Keep Workers Locked In
Restrictions once limited to executives are now spreading across the labor landscape — making it tougher for Americans to get a raise.

By CONOR DOUGHERTY
MAY 13, 2017
Keith Bollinger’s paycheck as a factory manager had shriveled after the 2008 financial crisis, but then he got a chance to pull himself out of recession’s hole. A rival textile company offered him a better job — and a big raise.

When he said yes, it set off a three-year legal battle that concluded this past week but wiped out his savings along the way.

“I tried to get a better life for my wife and my son, and it backfired,” said Mr. Bollinger, who is 53. “Now I’m in my mid-50s, and I’m ruined.”

Mr. Bollinger had signed a noncompete agreement, designed to prevent him from leaving his previous employer for a competitor. These contracts have long been routine among senior executives. But they are rapidly spreading to employees like Mr. Bollinger, who do the kind of blue-collar work that President Trump has promised to create more of.

 

The growth of noncompete agreements is part of a broad shift in which companies assert ownership over work experience as well as work. A recent survey by economists including Evan Starr, a management professor at the University of Maryland, showed that about one in five employees was bound by a noncompete clause in 2014.

Employment lawyers say their use has exploded. Russell Beck, a partner at the Boston law firm Beck Reed Riden who does an annual survey of noncompete litigation, said the most recent data showed that noncompete and trade-secret lawsuits had roughly tripled since 2000.

“Companies of all sorts use them for people at all levels,” he said. “That’s a change.”

Employment lawyers know this, but workers are often astonished to learn that they’ve signed away their right to leave for a competitor. Timothy Gonzalez, an hourly laborer who shoveled dirt for a fast-food-level wage, was sued after leaving one environmental drilling company for another. Phillip Barone, a midlevel salesman and Air Force veteran, was let go from his job after his old company sent a cease-and-desist letter saying he had signed a noncompete.

Then there is Mr. Bollinger, whose long-running legal battle is full of twists and turns that include clandestine photography, a private investigator, a mysterious phone call and courthouse victories later undone by losses in appeals court.

“This is the strangest noncompete case I have ever been involved with, or even heard of,” said Michael P. Thomas, Mr. Bollinger’s lawyer and a partner at Patrick, Harper & Dixon in Hickory, N.C.

Alan B. Krueger, a Princeton economics professor who was chairman of President Barack Obama’s Council of Economic Advisers, recently described noncompetes and other restrictive employment contracts — along with outright collusion — as part of a “rigged” labor market in which employers “act to prevent the forces of competition.”

By giving companies huge power to dictate where and for whom their employees can work next, noncompetes take a person’s greatest professional assets — years of hard work and earned skills — and turn them into a liability.

“It’s one thing to have a bump in the road and be in between jobs for a little while; it’s another thing to be prevented from doing the only thing you know how to do,” said Max Burton Wahrhaftig, an arborist in Doylestown, Pa., who in 2013 was threatened by his former employer after leaving for a better-paying job with a rival tree service. He was able to avoid a full-blown lawsuit.

Noncompetes are but one factor atop a great mountain of challenges making it harder for employees to get ahead. Globalization and automation have put American workers in competition with overseas labor and machines. The rise of contract employment has made it harder to find a steady job. The decline of unions has made it tougher to negotiate.

But the move to tie workers down with noncompete agreements falls in line with the decades-long trend in which their mobility and bargaining power has steadily declined, and with it their share of company earnings.

When a noncompete agreement is litigated to the letter, a worker can be barred or ousted from a new job by court order. Even if that never happens, the threat alone can create a chilling effect that reduces wages throughout the work force.

“People can’t negotiate when their company knows they won’t leave,” said Sandra E. Black, an economics professor at the University of Texas at Austin.

The Right to Walk Away

In 2011, Timothy Gonzalez started working as a labor hand for a company called Singley Construction. He was 18 years old and already a father, and the extent of his education was a high school equivalency test. In other words, he needed money and did not have many options.

Mr. Gonzalez started at a little over $10 an hour in a job he described as “pretty much shoveling dirt.” Nevertheless, he signed an employment contract that included a noncompete clause, enforceable for three years within 350 miles of Singley’s base in Columbia, Miss.

“All I heard — at that age and the situation I was in — was just, ‘If you want a paycheck, sign here,’ and so I signed there and went to work,” said Mr. Gonzalez, who is now 24 and lives in Milton, Fla.

Mr. Gonzalez was later promoted to a job where he operated an environmental drilling rig. After leaving the company two years ago, and subsequently taking a better-paying position with a competitor, Mr. Gonzalez was sued for violating his agreement not to compete.

 

Mr. Gonzalez’s new boss, Gary Hill, owner of Walker-Hill Environmental, an environmental drilling company, said he ignored the suit for two weeks because he didn’t believe it was real.

“I said, ‘There’s no way this will happen,’ but I’ll be danged if I didn’t have to attorney-up and fight the thing,” said Mr. Hill, who settled the case out of court. “It’s ridiculous — it’s slavery in the modern-day form.”

Representatives of Singley Construction declined to comment.

The surprise Mr. Gonzalez got is not uncommon. Many workers, not just blue collar but people who went to college or have an advanced degree, have only a vague understanding of what a noncompete is, and they are often asked to sign one when they have little chance to negotiate.

In a 2011 paper that surveyed technical workers who had signed noncompetes, Matthew Marx, a professor at the Sloan School of Management at M.I.T., found that employers typically presented workers with noncompete contracts when the employees lacked negotiating leverage, on their first day at work, for instance.

“By then, they had said yes to their company, and no to the other companies they were negotiating with,” Mr. Marx said.

Companies have always owned their employees’ labor, but today’s employment contracts often cover general knowledge as well. In addition to noncompete clauses, there are nonsolicitation and nondealing agreements, which prevent employees from calling or servicing customers they have worked with in the past. There are nonpoaching agreements that prevent employees from trying to recruit old colleagues.

Put it all together, and suddenly some of the main avenues for finding a better-paying job — taking a promotion with a competitor, being recruited by an old colleague — are cut off.

Companies say this is a natural reaction in an economy that is more about knowledge and less about sweat. Data makes up a larger share of many companies’ assets, and the more people work around the clock, and remotely, often switching between company-owned and personal devices, the more difficult it becomes to guard it.

“When a person takes a trade secret and walks across the street to another company, how am I going to know that?” said Paul T. Dacier, a longtime technology executive who was once general counsel for EMC Corporation (now Dell EMC), and today serves in the same position for an agriculture technology start-up called Indigo. “And when I do find out, it’s too late.”

The problem is that it can be hard to distinguish true intellectual secrets from the accumulated skills that make workers more valuable. And since few companies want to lose good workers or give out huge raises, these agreements are making their way down the economic ladder to people like hairstylists and sandwich makers, far removed from what is thought of as the knowledge economy.

Noncompete enforcement varies from state to state, and economists have used that disparity to study how they affect businesses and the economy. The results are almost universally negative: Wages, employment and entrepreneurship are all diminished when workers have little leverage to bargain with their employer or leave a job for a better opportunity.

Some workers end up idle, collecting unemployment and using programs like Medicaid. Many others take jobs well below their means, robbing the nation of their skills.

“Two years ago, Phillip Barone left his job doing sales and marketing for a military magazine to take a similar job, with a pay increase of about 10 percent, at a rival publication. A few months later, his old employer sent a letter saying he had violated a noncompete agreement that barred him from working with other military publishers.

Since his new company was unwilling to defend him, and since he was unable to pay the legal bills himself, Mr. Barone resigned and lived on unemployment while looking for a new job, but found nothing. When his unemployment ran out, he took a $15-an-hour job with a landscape firm, where he whacked weeds and planted flowers.

“My whole mission was to do whatever I could to bring in some money to take care of my family and make sure nobody could take my house from me,” said Mr. Barone, who lives in Lake in the Hills, Ill.

Mr. Barone left his landscaping job this year and is now a sales manager elsewhere. And he will be free of his noncompete eventually.

Still, there is evidence that these agreements can reduce wages far beyond the terms of one job or contract. In January, Mr. Starr, from the University of Maryland, and others produced a study showing that technology workers who began their career in a state where noncompetes are strictly enforced made significantly less than their colleagues, regardless of whether or not they left.

“These things slow your ascent up the job ladder,” Mr. Starr said.

Moreover, many burn through their savings and pile up debt while searching for a job from a weakened negotiating position. Several years ago, Patricia O’Donnell, a market researcher in Philadelphia, spent 18 months unemployed after being laid off by a company whose noncompete prohibited her from working for a number of major pharmaceutical companies, thus limiting her prospects in a major local industry. She finally found a job, but only recently got clear of the bills she racked up.

“It took years to get rid of that credit-card debt,” she said.

Noncompetes damage regional economies as well. States with strict enforcement end up suffering a brain drain, by encouraging their best and smartest workers to move elsewhere for better pay.

The great counterexample, which comes up in just about every discussion of the subject, is the growth of Silicon Valley.

California law prohibits noncompete clauses, contributing to the inveterate poaching with which the state’s technology industry was founded. It can be brutal for employers, but it helps raise wages and has created a situation where any company looking to hire a bunch of engineers in a hurry, be it an established giant or a start-up, feels it should locate there.

“It’s not just that it allows employees to leave their company for another job,” said Mark A. Lemley, a professor at Stanford Law School. “It allows them to leave to start new companies.”

Recognizing this, several states have moved to curb the use of noncompetes. This includes Democratic-leaning states like Massachusetts as well as Republican-leaning ones like Utah, which last year passed a bill limiting the scope of the agreements.

Mike Schultz, the bill’s Republican sponsor, framed it with the most conservative of talking points: the right to work. “If an employer can fire anybody for any reason,” he said, “employees also need to have the right to walk.”

Mr. Bollinger, the factory worker in North Carolina, started working when he was 14, and by his senior year of high school, he was the assistant manager of a local shoe store. He didn’t like retail, so in 1982, shortly after graduating, he took a job in the textile industry.

He began in a position that entailed pulling the fabric off cardboard rolls, and worked his way up from there, one job to the next, hourly wages to a salaried position, until eventually he was the quality control manager for two plants owned by a company called TSG Finishing.

TSG is a 115-year-old, family-owned company that works with textile manufacturers and others. It doesn’t make fabrics but is an intermediary, treating them with chemicals and laminates, giving them special finishes and properties like fire resistance.

Mr. Bollinger, as quality control manager, worked with customers to make sure they got what they wanted. Still, he said, the job was about learning a general process, not absorbing any specialized knowledge.

“I don’t know how to make the goop, I just know how to apply the goop,” he said.

TSG would disagree. The company declined to comment beyond an emailed statement, but its lawsuit described Mr. Bollinger as instrumental to the company, and said he knew important details about things like pricing, proprietary processing methods and customer preferences.

In 2007, in exchange for a $3,500 bonus and a $1,300 annual raise that brought his salary to a little over $70,000, Mr. Bollinger had signed an employment agreement that included a confidentiality clause and noncompete agreement. The list of prohibited territories began with a list of states and ended with “North America.”

Then the financial crisis struck, leading to bankruptcies and layoffs across the textile industry. “I saw people get laid off that I didn’t think would ever lose their job,” Mr. Bollinger said.

His pay shriveled, and by 2013, after TSG had gone into and out of bankruptcy, he was on pace to make about $61,000, according to income statements he provided. Six miles away, however, the economic recovery was taking hold.

The assets of Premier Finishing, a TSG competitor that had also fallen into bankruptcy, were purchased by American Custom Finishing, which was owned by a chemist and entrepreneur named Gary Harris.

The two spoke, and eventually Mr. Harris offered Mr. Bollinger a job and a raise, to $75,000, a little above his pre-recession pay. Mr. Bollinger said American advised him to check his employment agreement, and a lawyer he hired said that the noncompete was probably unenforceable.

He assumed his defection wouldn’t go over well, so on the day he gave notice, while his boss considered the rival’s offer, he quietly packed up his office and loaded things like his family pictures and a framed B.B. King concert ticket into his car. It turned out to be a good idea; a few hours later, he was escorted off the property.

Two months later, he was served papers at work: TSG had sued him for violating his confidentiality and noncompete agreements, and had asked a court to remove him from his job. The suit did not allege that Mr. Bollinger had stolen anything, but said he knew so much about TSG’s business that he would “inevitably” disclose trade secrets that the company wanted to protect.

Calvin E. Murphy, a superior court judge, did not grant TSG’s wish. In a written order, Judge Murphy said, “Enforcement of the noncompete provision in the manner articulated” by TSG would effectively bar Mr. Bollinger “from seeking employment anywhere in North America in the only profession he has practiced since graduating high school.”

TSG appealed, however, and the North Carolina Court of Appeals reversed the decision. A little after that, Mr. Harris, American’s chief executive, called Mr. Bollinger at home and told him not to return to work.

“My heart was broken,” Mr. Bollinger said.

About a year after the Appeals Court decision, TSG filed an amended complaint against Mr. Bollinger and others, alleging that he had quietly continued working for American even while the injunction was in place, and asking the court to prohibit him from working there ever again.

The new complaint cited evidence, like photos of Mr. Bollinger’s wife’s car parked at American’s facility, and a phone call TSG had received from “a female who would not reveal her identity,” who said Mr. Bollinger had continued to work there. At one point, TSG hired a private investigator to look into it.

“It is regretful that a great deal of money and resources have to be spent in our court system which could be otherwise spent on employee raises or investing in new equipment to make us more competitive,” Mr. Harris said in an emailed statement.

Perhaps more important, the whole ordeal had caused a “strain” between TSG and its customers. The complaint said that in 2015 one customer had said it planned to transfer its business to American; another had asked TSG to resolve the dispute in a way that allowed Mr. Bollinger to continue at his new job.

“When a competitor has the opportunity to poach that knowledge without making the investment in research and development, it gives them an unfair advantage, which a three-judge panel agreed happened in this case,” said Jack Rosenstein, TSG’s chief executive, in an emailed statement.

As with everything else in business, the case came down to money. This past week TSG accepted a $200,000 offer of judgment from American and the other defendants, freeing Mr. Bollinger from the lawsuit. The case had gone on so long that the noncompete has lapsed, and Mr. Bollinger has found another manufacturing job elsewhere.

But the financial scars remain: Mr. Bollinger and his wife, Sandie, drained their savings to pay the legal bill. They have borrowed from friends and relatives, and racked up $50,000 in credit card bills and other debt.

Mr. Bollinger said the saddest part to him is that such a small sum of money, the $14,000 raise from American, could have started the whole dispute in the first place.

During a recent interview, he talked about his last day at TSG and the emotions of walking away from a plant where he had worked for two decades. That job, and the advancement that came with it, had given him the means to raise a family, as well as middle-class luxuries like the musical instruments in his house and the framed concert tickets he hung on his office wall.

“If all they would have said is, ‘Keith, we want to keep you, and we are going to reinstate your pay,’” he said, “I would have taken all that stuff out of my car and hung it back up in my office.”

Non-compete

Reprinted from Legal Tech News

There is no question that the legal technology industry is getting more competitive. As more middle-market service providers get absorbed by larger, cash-rich and venture-capital-infused players, many seasoned legal technology sales professionals will exit from the space.
This has caused vendors to fight more aggressively than in years past for top business development professionals and revenue-generating consultants—which also means more strictly enforcing non-compete agreements. Some service providers are even contesting project manager hires because of non-compete issues. In this fierce climate of non-compete enforcement, coupled with the general lack of understanding of or appreciation for the dreaded non-compete, legal technology professionals should examine their current and future employment obligations and legal constraints.

Here is a non-compete checklist if you are considering 
a change of employment.

1. Did you sign a non-compete, a non-solicitation agreement, or both?
If you are not in sales, often the answer is, “I’m not sure.” Your non-compete agreement is sometimes part of your employment agreement that covers the full gamut of terms.A non-compete should not be confused with a non-solicitation. The distinction is that a non-compete prohibits you from working for a direct competitor, while a non-solicit prohibits you from soliciting clients or employees of your former employer to join you at your new place of employment.

Non-solicits are often buried as a clause within your employment agreement, while non-competes are usually a separate document. This is not always the case, but it is worth noting. It is essential that you read (and highly recommended that you have an attorney read) any employment agreement or document you plan to sign before accepting a position.

2. Do you have a copy of your non-compete?
Shockingly, the answer is “no,” more than 50 percent of the time. When you accept a new position you should have digital and paper copies of your non-compete. Save them. Send a copy to your attorney, your agent or a family member you trust.
The worst situation for any candidate is having an offer in-hand and then being unable to produce a copy of your current non-compete, causing an offer to be rescinded. Candidates often choose to delay making a job move, or decide not to explore opportunities, because they either do not know if they have a non-compete or do not have a copy. More employers are now asking that revenue-generating legal professionals provide a copy of their non-compete at the time they submit a resume as part of their employment consideration.

3. What are the geographic and temporal variables of your non-compete?
All non-competes address two variables: the territory and the length of time in which the non-compete will be in effect after employment ends.
Non-competes are usually effective for one year, some for two years. Some are nationwide, others specific to geographic areas, such as the New York Tri-State area.
Non-competes are governed by state laws, and in most states, non-competes are enforceable. California non-compete clauses are generally illegal.
If you are a project manager or non-revenue-generating employee, and your non-compete is specific to your city or state, moving to another geography is an easy and viable way to evade conflict. It can be a bit trickier if you are a sales professional, because future employers generally want you to work in the geography where you have a network of relationships, and moving a sales pro to a new territory often doesn’t translate to success (and if it does, it can take years to reestablish previous sales success).
Some business development professionals and consultants do “sit on the bench” and then try to re-enter the legal technology industry, but things change quickly in this arena, and often relationships, no matter how personal, are hard to quickly monetize after being out of the game for 12 to 24 months.

4. What are the parameters?
How broad is the scope of the non-compete? Can you work in legal technology sales as long as your future employer doesn’t directly compete with your previous employer? If you sold service and consulting for your former employer, can you sell software and enterprise licensing for your future employer?
It is to the employer’s benefit to keep the parameters as broad as possible, and to the employee’s benefit to narrow the scope. This is an area for sales professionals to carefully 
negotiate in their contracts—and a place where negotiation is often both viable and entertained by the employer.
Carefully considered wording around breadth of the market can help a business development professional change employers down the road and still leverage the same relationships, but not violate the terms of his or her non-compete.

5. What is the climate of non-complete enforcement in your state? 
 With California in a category of its own, it is the responsibility of you, the employee, to research rulings in your state related to non-compete litigation. Public record will point to trends, and there are states that strongly lean toward the employee in non-compete disputes, while others typically favor the employer.

6. Does your current employer have a history of enforcement?
If you did not do this homework when you took your current position, it is never too late. Hopefully, there are people you work with, who you can trust to answer this question. There may also be former employees in your community who can advise you as to the track record of non-compete enforcement by your company. Online research can often point to this too, but nothing is more valuable than insight from people who work for, or have worked for, your employer.

7. Does your future employer have a history of enforcement?
This is when it is invaluable to have a really honest agent, or to be very well connected within your industry’s community. Ask the question and ask around. Certainly, within legal technology, there are organizations that are notorious for enforcing their non-compete clauses. There are also others who maintain a reputation for not enforcing their non-competes.

8. Does violation of your non-compete result in binding arbitration or can it lead to litigation?
This is usually outlined in your employment agreement, and if it is not, it should be! There are several big differences when resolving a non-compete issue through arbitration versus litigation; carefully consider this part of your contract for a “worst-case scenario.”
Key differences include privacy, time, cost and ability to appeal. Arbitrations are private between the parties. Litigation is public record and held in a court of law. Arbitrations usually resolve quickly, but litigation can be drawn out over long periods of time, delaying your ability to gainfully work in your field. Arbitrations can cost attorney fees, but those can be nothing when compared to possible discovery and litigation fees. Arbitrations are usually binding, while litigations offer the opportunity for an appeal.
The question of arbitration versus litigation is often one professionals do not consider thoroughly when starting a new job or negotiating an employment agreement. Remember that both parties are forced into spending money and time to battle a non-compete clause in court, but typically the employer has deeper pockets.

9. Will your future employer indemnify you in the event the non-compete is enforced?You can ask, but few legal technology companies indemnify new hires. When a company indemnifies an employee, it is essentially agreeing to assume the cost and responsibility of defending you if you violate your existing non-compete.

In addition to the potentially large attorney fees, there is always a risk the company will lose the battle, resulting in an inability to employ you.
Some larger organizations, particularly big consultancies and accounting firms, will offer indemnification for wildly successful individuals, but as the gap widens between big and boutique providers, fewer organizations will find a desired return on investment, post indemnification.

10. Can you go to work “in-house” at a law firm or corporation to avoid non-compete issues?
Yes, but few law firms and corporations are hiring ex-sales professionals, no matter how consultative or managerial their experience. It is very challenging to move from a vendor business development role into a law firm business development role. Those lucky enough to make that transition usually have meaningful corporate relationships, a track record of selling into corporations at the highest level and often a willingness and ability to take base salary cuts to facilitate the transition.
For non-revenue-generating talent fearful of their current employers’ enforcing a non-compete if they go to work for competitors, the pathway to law firm or corporate employment makes sense.
However, in 2014 there were significantly fewer roles available in the Am Law 200 than in years past. Partly as a result of the rapid adoption of managed service contracts and partly as a result of the continued commoditization and price compression of legal technology services, operational and consultative staffing is moving to the service providers.
That is where the most jobs will be in 2015 and where most talent currently working at a vendor will have the greatest opportunity for vertical and financial mobility.