Understanding Non-Compete Agreements

By: Gerard Simington
Submitted: 2007-01-17 16:23:42
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When it comes to business law, there are a number of areas that make sense at first glance, but become complex when you get into the heart of the matter. Non-compete agreements are such an area.

Understanding Non-Compete Agreements

Every business has certain fundamental secrets that make it stand out over competitors. These secrets are usually held closely by the people running the business. They can include things such as business strategies, the key elements of a product, the development of future products, client lists and so on. Any business wants to protect this critical information, but employees have to be given access to it to work. The problem that arises with this situation is one or more of the employees will eventually leave the business and go work for a competitor. Do you think that competitor is interested in the business secrets? Oh, yes.

In an effort to protect business from this scenario, there is something known as a non-compete agreement. A non-compete agreement is pretty much what it sounds like. The agreement basically keeps one party from competing with another for a certain amount of time. In our example above, it keeps an employee with knowledge of your business secrets from heading off to a competitor and spilling the beans.

At first glance, a non-compete agreement sounds like a fairly simple document and strategy. It is not. Why? The problem lies in the restrictive nature of the agreement. While it makes sense businesses should be able to protect their secrets, what about the employee? Don’t they have a right to work? Yes, they do. In fact, there is a legal axiom known by this very name.

So, who wins in this situation? The business or the employee? The answer depends almost entirely on what state you are in. There is no simple answer, so states tend to take positions all over the board on this issue. In some state, non-compete agreements are enforceable and can be used to protect business secrets. In other states, they are rarely worth the paper they are written on as the states heavily favor the employee’s right to work. Let’s look at an example.

Microsoft and Google are two large competitors that are well-known for having a go at each other. Over the last few years, Google has been hiring former Microsoft executives. In some situation, they executives haven’t even quit Microsoft yet! This brings us to the case of Kai-Fu Lee, an executive at Microsoft who up and quit to work at Google. This gentleman had intimate knowledge of Microsoft’s plans for its internet efforts and other products, particularly as they applied to applications for the huge market in China. Google offered him a ton of money and allegedly even offered to pay his legal bills should Microsoft try to enforce a non-compete agreement Lee had signed. While Google has proven to be an extraordinary search engine, there legal efforts have left much to be desired. This case was no different.

Microsoft is located in Washington, while Google is in California. Washington favors businesses in legal matters and enforces non-compete agreements. California is right to work state and generally discounts non-compete agreements. Lee was working in Washington when he informed Microsoft he was quitting to work at Google. Microsoft sued in Washington and Google tried to fight it. Smartly, the non-compete agreement contained language wherein Lee agreed the place any dispute would be heard was the State of Washington. The case never made it to trial, but Google essentially lost. The settlement barred Lee from working on key products with Google for a year and one can guess that Google shelled out more than a minor amount of money to make the situation go away.

If you run a business, a non-compete agreement is potentially a tool you can use to protect yourself from employees who go to work for competitors. The exact answer, however, depends on the state you live in.

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