The Fear Factor of a Non-Compete

As humans, there is nothing that grabs our attention and controls our behavior like fear. Our 24/7 news cycle has leveraged current events and fear with great success. Sadly, fear is also a tactic some companies use to control their employees. We see companies abuse the prospect of litigation to inject fear when the topic of non-compete agreements is approached.

The root of fear is a lack of understanding.

Non-compete laws vary significantly from state to state. It’s no accident that highly competitive Silicon Valley thrives in California, where non-competes are not allowed. At the other end of the scale, Michigan has the strictest pro-corporate non-compete laws, and we have the beleaguered automotive industry anchored in that state as a likely result.

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For street-level insights into non-competes in the LBM industry, we spoke to attorney Teresa Thompson and LBM pro Russ Kathrein. Teresa is a shareholder and lawyer with Fredrikson & Byron, and has more than 20 years of courtroom experience in non-compete and trade secret law. As CEO of Aurora, Ill.-based Alexander Lumber, Russ has been on both sides of non-compete agreements, as an employee and LBM leader. He has hired Teresa to represent him, and below they share suggestions on how you can protect yourself and your company.

Slow down, think it through. The anxiety that surrounds career moves often leads people to move too quickly. It’s important to read and understand non-compete clauses in order to understand what the company is trying to protect, and to know what is covered by applicable state law.

Does an employment separation agreement apply? The professional prenup. It’s ironic that the idea of a prenuptial agreement in a marital relationship is a known and accepted practice, but the same concept for an employee and employer relationship is not. After all, odds are 50/50 with the marriage, but 100% that at some point you will leave your current employer.

Control your ego, seek council. Money invested in understanding what can be complex laws and agreements prior to signing any legally binding document is a wise investment. It’s difficult to become excellent at non-compete law when you address it only a few times in your life. The key is not to forget the value of having an objective third party to keep you from negotiating against yourself. Teresa Thompson said, “One of my first questions is whether or not there was consideration for the agreement while understanding the circumstances around signing it. Because no matter what state we are in, the court is going to look at when you signed the agreement, and what the new employer gave you to sign it. Did you sign it before you started? Did they give you a signing bonus? Did they agree to provide you with training or relocation expenses? What sort of tangible thing did they give you in order to the sign the agreement? In many states, the offer of employment is not enough.”

Take nothing when you leave. Wrap your company cell phone, laptop and every flash drive in a bow and present it as your last gift to your employer. Russ Kathrein states: “People make the mistake of saying, ‘Before I quit, I’m going to download a bunch of files then erase everything.’ Understand these three points: If you downloaded files 30 days ago on a thumb drive, we will be able to tell. It’s a federal crime to delete any information from a device that is company property. And it’s a real easy claim for a lawsuit even if we don’t have an agreement.”

Ethical action under pressure. Russ counsels: “Leave honorably. If you are leaving because you are confident in your abilities and think you can do better elsewhere, then go for it. But if you think your worth is defined by your customer relationships and some secret competitor information, your career could be short lived. Your customer relationships are likely valuable to the company you are leaving, and a pricing war may redefine your perceived value. Also, competitive information usually has a life for 30-60 days. So now you have taken significant legal risk for little short term return.”

From my experience working with some of the best companies in our industry, top companies do not feel the need to repress their people with one-sided agreements. The best companies are confident in their business model and ability to compete for top tier talent and customers. Professionals remember: Life is not about being comfortable, it’s about being honorable and being free. Know your best career opportunities.

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Top five steps companies can take to protect themselves:

1. Consider non-solicitations agreements. Teresa clarifies: “A non-solicit is for two different purposes. One is to keep employees from soliciting other employees, so it’ll say that you agree you will not solicit or encourage or attempt to coerce our employees or any of our independent contractors from ending their employment agreement or their contractual relationship with us. The second purpose for a non-solicit pertains to customers or clients we see regularly in industries especially around sales positions. Non-solicitations are enforceable in almost every state. And we see courts regularly enforcing them.”

2. Over-reaching agreements. Teresa: “A common problem is that agreements cover an excessively long time frame. Two years is commonly negotiated to a shorter period of time. Courts commonly accept six months with employees, and three years if it’s an owner selling a business. Other situations are often litigated. When the court asks ‘what is the legitimate business reason for the non-compete?’ many companies fail to meet the court’s qualifications.”

3. Not all information is confidential. Information readily available to the public is not confidential. Many companies get their sales leads from public sources like professional directories and the internet, which are available to anyone in the industry. Any employer who claims they are protecting their valuable secret client sources is going to have to show that the information was not available to everyone else in the industry. Existing customer lists or unique sources are protected, but anything found through Google is not.

4. Don’t use a blanket agreement. Teresa: “We find a lot of companies doing business in multiple states that use the exact same agreement in different states. Since laws vary by state, the same agreement may be enforceable in one state but not the other.”

5. Employer breaches their own contract: Many non-compete provisions are part of a contract spelling out compensation, insurance and other conditions of employment. If the employer breaches the agreement by failing to pay all compensation due, failing to fulfill the insurance requirements, or failing to meet some other obligation, the employee is relieved of all obligations under the contract. It is important for the employer, particularly upon termination, to make sure all obligations under the contract on the employer’s part have been met.

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