Noncompete Clauses–California and other states
Colette Buser couldn’t understand why a summer camp withdrew its offer for her to work there this year. After all, the 19-year-old college student had worked as a counselor the three previous summers at a nearby Linx-branded camp in Wellesley, Mass. But the company balked at hiring her because it feared that Linx would sue to enforce a noncompete clause tucked into Ms. Buser’s 2013 summer employment contract. Her father, Cimarron Buser, testified before Massachusetts state lawmakers last month that his daughter had no idea that she had agreed to such restrictions, which in this case forbade her for one year from working at a competing camp within 10 miles of any of Linx’s more than 30 locations in Wellesley and neighboring Natick. “This was the type of example you could hardly believe,” Mr. Buser (pronounced BOO-ser) said in an interview.
Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals. There are plenty of other examples of these restrictions popping up in new job categories: One Massachusetts man whose job largely involved spraying pesticides on lawns had to sign a two-year noncompete agreement. A textbook editor was required to sign a six-month pact.
John Hazen, head of his own paper company, says the noncompete clauses protect businesses. A Boston University graduate was asked to sign a one-year noncompete pledge for an entry-level social media job at a marketing firm, while a college junior who took a summer internship at an electronics firm agreed to a year-long ban. “There has been a definite, significant rise in the use of noncompetes, and not only for high tech, not only for high-skilled knowledge positions,” said Orly Lobel, a professor at the University of San Diego School of Law, who wrote a recent book on noncompetes. “Talent Wants to be Free.” “They’ve become pervasive and standard in many service industries,” Ms. Lobel added.
California bars noncompete clauses except in very limited circumstances, such as when a person sells a business, and payment is made in consideration of that seller not competing.
“Noncompetes are a dampener on innovation and economic development,” said Paul Maeder, co-founder and general partner of Highland Capital Partners, a venture capital firm with offices in both Boston and Silicon Valley. “They result in a lot of stillbirths of entrepreneurship — someone who wants to start a company, but can’t because of a noncompete.” Backers of noncompetes counter that they help spur the state’s economy and competitiveness by encouraging companies to invest heavily in their workers. Noncompetes are also needed, supporters say, to prevent workers from walking off with valuable code, customer lists, trade secrets or expensive training.
Joe Kahn, Linx’s owner and founder, defended the noncompete that his company uses. “Our intellectual property is the training and fostering of our counselors, which makes for our unique environment,” he said. “It’s much like a tech firm with designers who developed chips:
You don’t want those people walking out the door. It’s the same for us.” He called the restriction — no competing camps within 10 miles — very reasonable. “The ban to noncompetes is legislation in search of an issue,” said Christopher P. Geehern, an executive vice president of Associated Industries of Massachusetts, a trade group leading the fight to defeat the proposed restrictions. “They’re used in almost every sector of the economy to the seemingly mutual satisfaction of employers and individuals.”
The legislative fight here pits two powerful groups against each other: venture capitalists opposing noncompetes and many manufacturers and tech companies eager to preserve them.
The United States has a patchwork of rules on noncompetes. Only California and North Dakota ban them, while states like Texas and Florida place few limits on them. When these cases wind up in court, judges often cut back the time restraints if they’re viewed as unreasonable, such as lasting five years or longer. “In most states there has to be a legitimate business interest, and it has to be narrowly tailored and reasonable in scope and duration,” said Samuel Estreicher, a professor at New York University School of Law.
Daniel McKinnon, who had been a hairstylist in Norwell, Mass., lost a court battle with his former employer who claimed that Mr. McKinnon had violated the terms of his agreement when he went to work at a nearby salon. Mr. McKinnon said that he did not think the original restriction — to wait at least 12 months before working at any salon in nearby towns — still applied because he had been fired after years of friction with the manager there. Shortly after being fired, he went to work at a nearby salon.
But a judge issued an injunction ordering him to stop working at his new employer. “It was pretty lousy that you would take away someone’s livelihood like that,” said Mr. McKinnon, who for the following year lived off jobless benefits of $300 a week. “I almost lost my truck. I almost lost my apartment. Almost everything came sweeping out from under me.” He resisted the idea of traveling miles from his apartment to a new salon, saying that would have meant an unpleasant and costly commute. “The salon where I worked was doing just fine — I don’t see why they needed to do this,” he said. “I basically had to give up a year of working.”
Wendi S. Lazar, an employment lawyer in Manhattan, said she saw an increase in litigation to enforce noncompetes. “Companies are spending money, hiring lawyers, to go after people — just to put the fear of death in them.” State Representative Lori Ehrlich, one of the main sponsors of the Massachusetts legislation to bar noncompetes and vice chairwoman of the Joint Committee on Labor and Workforce Development, said that many people had complained to her about the restrictions being set for employees. “It’s hurting growth in the economy by decreasing worker mobility and squelching start-ups,” Ms. Ehrlich, a Democrat, said. “They’re hurting families by making it so people are unable to work for an extended period of time. This has increasingly become exploitative to workers.”
Professor Marx said California’s ban on noncompetes was a major reason Silicon Valley was thriving. If a few employees there have an innovative idea and their bosses don’t want to pursue it, they can leave to found a start-up. But in Massachusetts, if employees with noncompetes bring that innovative idea to their boss and it is rejected, they are stuck — or they would have to leave the company and wait a year before they could pursue their new idea. (Or they could move to California, where the courts would not enforce the Massachusetts agreement.)
Mr. Geehern of Associated Industries of Massachusetts denied that the California economy, with a 7.8 percent jobless rate, was doing better than the Massachusetts economy, with a 6 percent rate. “If noncompetes are so onerous and burdensome, why aren’t we seeing a significant migration of talent away from the companies that use noncompetes toward the companies that don’t use them?” he said. “The companies that use noncompetes still attract plenty of the best and brightest.”
Michael Rodrigues, a Democratic state senator from Fall River, Mass., said the government should not be interfering in contractual matters like noncompetes. “It should be up to the individual employer and the individual potential employee among themselves,” he said. “They’re both adults.”
If you have a noncompete clause issue, or questions about drafting one which would be legally enforceable, please contact our office, for a free initial consultation.