Wednesday, July 13, 2011

Inanity of Non-Compete Agreements

There are a couple of reasons that non-compete agreements are good. They are useful for protecting proprietary information regarding:

  • Technology, and product/service development (new stuff)
  • Contract frameworks, 
  • Special deals with customers and suppliers
  • Financial Strength and Mergers and Acquisitions efforts
I would hope (naively, perhaps) that most former employees would know ethically what they could share with their new employer and what they couldn't. They would also realize that sharing secrets damages their internal reputation in the new firm. Like if you blab secrets, no one's going to trust you with their secrets. If they're not ethical, maybe you shouldn't hire them in the first place. If you find out after you hire them, that they operate unethically, you should quickly get rid of them.

However, most non-compete agreements also have restrictions against soliciting customers, and hiring employees from the former employer. There are quite a few reasons why this makes no sense. To rely on them is a clear sign that the company management is insecure, and maybe should be looking for new employment of their own.
  • Costs and Prices: there are no secrets in the trade. Unless you have a source of material or service that is exclusive to you (which is dangerous because that supplier is highly dependent on you and shouldn't be), your competitor can estimate what your costs are pretty easily. It doesn't take a rocket scientist to figure supply costs, labor costs, overhead burden, etc. for your company. It's not hard for someone else to find out what your prices and discounts are.
  • Sales: it may be the salesperson that gets the new customer, but it's the whole organization that retains the current customer. If your organization is struggling to maintain the loyalty of your current customers, then you're ripe to lose them whether your top salesperson stays or goes but is bound by a non-compete agreement from contacting them. Someone else is bound to pop through your customer's door and steal them away. You need to have your whole organization like a well-tuned automobile--engine purring with no hiccups, wheels aligned, and no slippage in the transmission when the order comes in till it's fulfilled.
  • Marketing: Marketing plans change so frequently that the ex-employee's knowledge of what you're doing is obsolete pretty soon after they leave.
  • Strategic Plans: business conditions change internally and externally so fast that strategic plans should be revised periodically. However, most strategic plans are more tactical in nature, describing new market segments to address with same old product or service that it's more like a marketing plan. Other strategies like vertical integration or acquisitions would be important to protect. Those plans change frequently and on a dime sometimes that the ex-employee's knowledge could be passé pretty quickly.
  • Hiring: it might be worthwhile to have a restriction about soliciting former colleagues, but if you can't keep them, the non-compete agreement is just an artificial restraint to temporarily hold them in place. I've seen some agreements that were written such that the ex-employee couldn't provide an opinion, be involved in the interviewing process, or look at a former colleague's application according to the former employer's agreement. In essence, you'd be worthless to the new employer if they wanted to hire someone else from the former company even if they didn't compete. This can easily happen with companies just down the road from each other, such as Holiday Inn franchise hiring former 3M employees in the area. There's no reason to have this kind of restriction.
If your organization isn't strong enough to compete with other employers or other businesses in your industry, non-compete agreements give you a false sense of security for a short time (1-2 years) with former employees. If that person was so critical that they could damage you, you should figure out what it takes to keep them. Or else make sure you have such robust business processes and strategies that you're ready for any competition that comes along.  Oh, wait, isn't that what we're supposed to be doing anyway?

Disclosure: I have signed non-compete agreements against my better judgment because it was like a gun against my head. I have argued these points to no avail with former employers. Lawyers love all this stuff and of course, advise their clients accordingly. However, it seems lawyers probably don't sign them or it would shut down their professional mobility completely. Seems like a double-standard.

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