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Key to noncompetes: Know thy worker
Google executive Marissa Mayer left many unanswered questions this week when she gave notice to Google and started working as the CEO at one of the web-search giant's competitors, Yahoo. One of the queries making the rounds on Mayer's Google Plus circles and everyone else's Twitter feeds caught our attention: "Did Marissa Mayer have a noncompete?"
The short answer is: No. California law doesn't permit strict noncompete agreements.
The larger question got us thinking. Noncompetes and restrictive covenants vary greatly from state to state. What lessons can employers and their counsel draw from the discussions Mayer and her new employers likely had before she made her potentially litigious move to Yahoo, a direct competitor?
We spoke with general counsel and advisors across the country for a two-part look at the issue. Today we'll start with tips for how employers can protect themselves when hiring from competing companies. In part two, we'll look at the process from the employee point of view.
How can employers protect themselves when employees make a move like Mayer's? Michael Greco, a partner at Fisher & Phillips, deserves the credit for bringing this to our attention in a blog post explaining why Mayer does not have a noncompete clause in her contract. In short, it's a state-by-state thing.
The first step companies ought to take when luring talent from their competitors is to understand the legal language around noncompetes available in their state. Greco admits there's an enormous administrative burden on a company asked to write 50 different noncompete agreements for every state.
"I think you need to take a thoughtful approach to the terms of the agreement you intend to rule out," Greco said.
In an earlier post on the subject, he suggests employers identify the jurisdictions in which they have employees and group those jurisdictions into one of three categories:
States where covenants are generally enforceable, but courts will modify, sever or "blue pencil" overbroad agreements.
States where courts will not modify overly broad agreements and instead strike down the entire agreement.
"Problem states" where the law is so unique that specific state language is necessary.
Employers should adjust their agreements based on the employees they are concerned about like executives, branch managers and senior information technology officers and draft reasonable restrictions that protect legitimate interests like intellectual property and trade secrets with the position of that employee in mind.
"For senior executives, you may conclude you need a full-blown noncompete," Greco advises. "For someone in your sales force, you need an agreement that says don't solicit or do business with competitors for a period of time. And for your tech folks, all you need is a confidentiality agreement."
Overall, Greco suggests getting counsel involved early and considering the mistakes an employee could make:
Be clear that he or she shouldn't take or sabotage any business records from their employee. Make sure an employee knows he or she should not solicit or tell employees they are departing.
Megan Belcher, vice president and chief employment counsel at ConAgra Foods, agreed that the key is to start early in the process, particularly to protect oneself from being sued by the other company.
"It's a good idea to discuss what, if any, restrictive covenants the person may have in the talent-acquisition phase," Belcher said. "You don't want to spend the money on getting them here, interviewing them, investing time and money, only to realize you can't employ that person."
This happens more than some might think, Belcher said, and it leads to what she considers employers' No. 1 mistake: not finding out a recruited employee is bound by a restrictive covenant early enough to avoid litigation.
Employers need to proactively ask the questions that would get a candidate to disclose these covenants, she said, and before moving ahead with an offer, assess the state law issues.
"They'll hire and take a wait-and-see approach," Belcher said of many employers. "Sometimes that's the right approach. But the key is that you and your newly acquired employee decide that's the right approach to take. You need to all know that, so that you're on the same page."
Logan Robinson teaches corporate governance at the University of Detroit Mercy School of Law and was previously general counsel for the automotive supply company Delphi and Chrysler's international operations. Robinson said companies considering the language of a noncompete agreement for a new employee ought to consider the lessons of Europe's noncompete model.
The EU model requires employers, if they have terminated an employee and decide to enforce the noncompete, to continue paying the employee's salary.
"Maybe that person is sitting in their garden or on vacation or whatever, but they are being paid," Robinson said. "An employer has to really think about how worried they are about this flow of know-how to a competitor and decide they're only going to enforce that agreement in an extreme situation."
Greco, in his post on the Top 10 things to do when an employee joins a competitor, reminds companies that the territory is dangerous.
"An easy mistake can inflame passions of the prior employer, because, let's face it, these cases, in addition to presenting legal issues, are emotional," Greco said.
Elizabeth Dilts writes for Corporate Counsel, a Daily Report affiliate.