The Position of Non-Competion Agreements

On Behalf of | Apr 18, 2023 | Business Law

Protecting Trade Secrets

Non-competition agreements assure businesses that employees will not be able to take the intellectual property gained while working with them and establish their competing companies. These contract clauses are becoming increasingly common as the economy becomes increasingly technical. Performance of jobs increasingly involves the use of trade secrets, specialized custom-written intellectual property, and devices. Employers argue that when an employee takes this specialized training or knowledge with him or her on leaving the workplace it amounts to theft. In the classic workplace, employee theft of tangible property caused major losses to business. Many employees who leave larger companies take with them the personal relationships with clients they have gained in the course of their work. In organizations whose competitive edge relies on specialized proprietary solutions, methods, or applications, the transfer of knowledge out of a company by an employee who has been laid off or terminated can cost an organization its competitive advantage.

The non-competition clause or contract does not specify what secrets or technology employees are not permitted to take with them on leaving employment. They generally forbid a former employee from establishing a competing company or working for a competing company. The non-specificity of the non-competition agreement has made the enforceability of these agreements problematic. A side effect of the practice of forcing new employees to sign these agreements is that the practice has spread to non-technical occupations and reduced the ability of blue-collar workers and service workers to find employment within their customary industries.

A United States Treasury Report (March 2016) concluded that non-competition clauses “can protect trade secrets, reduce labor turnover, impose costs on competing firms, and improve employer leverage in future negotiations with workers.” The report also said that practices like non-competition clauses in the contracts of low-wage workers or workers who are not made aware of them can be very detrimental.

Impediments to Employment

Increasingly, non-competition agreements have begun appearing in the contracts of low-wage employees such as cooks. They have been a growing roadblock in the job searches for many who have lost employment in a tight economy. Someone is forced to resign a low-wage job and begins a new job only to be contacted by the previous employer who threatens to sue over a non-competition agreement casually signed.

In one case, for instance in 2017, a man took a job in a private security firm and signed a non-competition clause buried in his contract.  He worked at the firm for only 13 days. During that time, he received several days of training before being assigned a night shift as a guard. Because the man was a single father and needed child care at night he could not accept that shift and applied for an alternative. The company denied his request and the man had to resign. He did find a job with another security company, but was immediately sued for violation of his non-competition clause for bringing the training he received with him to the other firm. Lawsuits and countersuits were initiated about the enforceability of the non-competition agreement.

No-Poaching Agreements

The non-competition clause or contract has begun to contribute to anti-competitive practices by serving as a block to the mobility of unspecialized workers. A current variation of the non-competition agreement called the no-poaching agreement has come to the attention of state attorney’s general across the United States. These are agreements signed by fast-food franchises not to hire workers from other locations within the same franchise.  Legally-binding action by states to stop the use of no-poaching agreements are slowly coming into effect. However, non-competition clauses have proven more difficult to curb. Courts in some states like California, North Dakota, and Oklahoma will not enforce non-competition agreements. However, these clauses still show up in employment contracts and they serve to discourage workers who are not aware of their rights.

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