When a New Job Comes with a Lawsuit: Non-Compete Agreement Litigation Increasing

By Kent Berk on October 17th, 2013 in BLOG, CONTRACT LAW, EMPLOYMENT DISPUTES

Thinking about looking for a new job in your current field? Considering starting your own business? You might want to double-check to see if you have signed a non-compete agreement and if so, brace yourself for the possibility of a lawsuit.

Employers frequently require new hires to sign non-compete agreements in order to prevent the employees from taking trade secrets and other internal data to competing companies when they leave.

Most employers consider this type of agreement necessary to protect their business. But, a Wall Street Journal article reports, “some worry these clauses are having an unintended damping effect on U.S. entrepreneurship, by preventing people from leaving the corporate world to launch their own businesses, or hire workers when they do.”

The article includes the stories of both employees and business owners who have felt the strain of non-compete agreements.

One Virginia startup owner, Rami Essaid, was sued by his former employer, which said that he violated their non-compete agreement. Essaid stated that these agreements are a real obstacle to entrepreneurship because they “limit your ability to grow and tap your networks.”

Another business owner, founder of a software company in Massachusetts, lamented that recruiting can be complicated by non-compete agreements: “We’ve had inquiries from many people we’d otherwise like to hire, that we cannot because of their non-compete agreements.”

Litigation of non-compete agreements has been rising in the last decade. Since 2002, the number of published court decisions involving these agreements increased sixty-one percent, to 760 cases. This number is likely lower than the total, as cases are settled and certain opinions are not made public.

The worry that non-compete agreements stifle entrepreneurship and innovation does not seem to be unfounded: several studies have found that startups are rarer in states that enforce non-compete agreements than in those that don’t.

As a result, multiple states are looking into enacting laws that make non-competes more difficult to enforce, if not void under certain conditions. States including Massachusetts are considering bills that would limit the enforcement of non-compete agreements to six months.

In Arizona, non-compete agreements must be reasonable in terms of duration and geographical scope. It is a delicate balance: just as companies must be able to protect their legitimate business interests, employees must be able to take advantage of their skills in the marketplace and earn a living.

If you have questions about your rights as an employee or a business owner, please feel free to give us a call.