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In these times of unprecedented mobility, employers are increasingly turning to non-compete agreements in an attempt to slam the door shut on would-be job-hoppers. Yet as the use of these agreements explodes, their enforceability under New York law remains largely uncertain. “It’s a crapshoot,” said Daniel A. Weisberg, a partner in the New York office of Brobeck, Phleger & Harrison LLP who has advised employees as well as both new and former employers. “Cases are won or lost at the preliminary injunction stage,” he said, adding that as a result, “a lot depends on the judge you get and the facts you gather early on.” Despite their unreliability, non-compete agreements, which forbid a former employee from working for a competitor for a limited period of time, have become practically de rigueur in the technology and Internet sectors, and their popularity is increasing among bricks-and-mortar businesses as well. Lawyers point to increased job mobility as the principal force driving the use of non-competes. Indeed, according to the Saratoga Institute, a California-based human resources consulting group, today’s employees are nearly 40 percent more likely to change jobs voluntarily than they were just five years ago. In the high-tech field, statistics are dramatically higher still: Philadelphia-based human resources consulting company The Hay Group recently reported that last year’s 20 percent annual turnover rate is almost double the industry-wide rate of five years before. “The new economy has really cast a greater need for companies to recruit and retain talent,” said Richard J. Reibstein, a partner in the New York office of Wolf, Block, Schorr and Solis-Cohen LLP and co-author of a book on employment law. EASY TO STEAL The current ease with which employees can abscond with trade secrets is also prompting employers to require their employees to sign non-competes. “Proprietary information is so easy to steal these days,” said Michael B. Golden, a partner at Robinson & Cole LLP who represented the defendant in the recent, closely watched case of EarthWeb Inc. v. Schlack, 2000 U.S. App. LEXIS 11446 (2d Cir., May 18, 2000). “An employee can put software that a company has spent millions of dollars to develop onto a CD-Rom and then stick it in his briefcase,” he added. The prevalence of computers has made the other most commonly coveted item — the customer list — also remarkably easy to filch. And competitors can use modern forms of trade secrets, such as software, “much more quickly and profitably” than before, Golden said. In contrast, even if a competitor obtained the secret formula for Coca Cola — the prototypical trade secret — it would need to build a plant to use it. Employment lawyers are also noticing a sharp rise in the number of actions seeking to enforce non-compete agreements, especially in the high-tech and Internet arenas. “Rarely a day goes by where I don’t see at least one non-compete or trade secret case filed,” said Michael B. Carlinsky, a partner in the New York office of Orrick, Herrington & Sutcliffe LLP. At first glance, the increase in litigation of non-compete agreements seems counter-intuitive to the realities of the high-tech marketplace, where, as Brobeck’s Weisberg noted, companies “can very quickly get a bad name for going after ex-employees.” And, as Carlinsky pointed out, companies on one side of a non-compete agreement may find themselves on the other side in short order, when recruiting new talent to replace those who have left. Golden surmised that the upsurge in cases may be due in part to companies suing to throw a wrench into the plans of the would-be new employer, who is often a competitor of the plaintiff. The New York courts have always eyed employee non-compete agreements with suspicion, as “anti-competitive,” and to be treated with a “general judicial disfavor,” as the New York Court of Appeals put it in American Broadcasting Companies Inc. v. Wolf, 52 NY2d 394 (1981). Courts will make an exception for a company’s legitimate business interests, such as protection of trade secrets and customer lists, as long as the non-compete agreement is not “unreasonable in time, space or scope,” the Court of Appeals stated in ABC. PRO-EMPLOYER DECISIONS However, two recent decisions have given employers some hope. In the 1999 case of Ticor Title Insurance Co. v. Cohen, 173 F3d 63 (2d Cir., 1999), the 2nd U.S. Circuit Court of Appeals upheld a non-compete agreement on the grounds that the employee, an extremely successful salesman of title insurance, qualified as “unique.” Observers regard the case as reviving the “unique employee” doctrine, which had been thought to be almost irrelevant, “reserved for movie stars and athletes,” Weisberg said. Several weeks later, the New York Court of Appeals decided BDO Seidman v. Hirshberg, 93 NY2d 382 (1999), upholding a restrictive covenant protecting the employer’s interest in client relationships that it had devoted resources to developing. Steven M. Kayman, chair of the non-compete and trade secret practice group at Proskauer Rose LLP, who represented the plaintiff in Ticor, said that since the two decisions, “the lay of the land has changed quite a bit.” He predicted that the field would see courts making “a clear-cut division between boilerplate and negotiated contracts, with more ready enforcement” of the latter. Employers barely had time to celebrate Ticor and BDO Seidman when they were brought crashing back to earth. Earlier this year, the Second Circuit affirmed a lower court ruling in the EarthWeb case, finding a one-year non-compete agreement to be too long “given the dynamic nature” of the Internet industry, and refusing to “blue-pencil” the agreement to a shorter restrictive period as courts had done in the past. The EarthWeb decision demonstrates how important it is “that employers get it right the first time,” said Philip M. Berkowitz, head of the employment group at Salans Hertzfeld Heilbronn Christy & Viener. “Judges have a knee-jerk bad reaction to overreaching non-competes,” Kayman said. Courts will more readily enforce a negotiated contract that is tailored to the company’s interests and no broader in scope or duration than necessary. “Don’t get greedy,” Weisberg said, adding, “You buy yourself a lot of good will with the judge” if you tailor the agreement to the company’s needs. Not every employee should have to sign a non-compete agreement. They are usually appropriate only for senior executives, salespeople, engineers and programmers, Kayman said. The agreement should also list the specific interests it is protecting, such as the type of trade secret, customer data or other confidential information. Once it has identified the confidential information, the company would be wise to actually treat it as confidential, Berkowitz said. “Keep trade secrets in separate files, marked ‘secret’ and accessible only by necessary people.” CONSIDER ALTERNATIVES Companies should also consider alternatives to traditional non-compete agreements, such as the British-born “garden leave.” Under this arrangement, the employee must remain under contract, and on the payroll, for a fixed period following his or her resignation notice, removing a frequently cited concern of the courts that the employee will not be able to earn a living. Another device is the “golden handcuffs,” where the employee’s bonus, stock options or other benefits vest only after a certain period of employment. A variation on the “golden handcuffs” is a tactic favored by IBM: the “forfeiture-for-competition” clause, under which the employer can cancel unpaid or deferred benefits, such as stock options, if the employee goes to work for a competitor. Perhaps even more important than the non-compete agreement itself is the circumstance surrounding the employee’s departure. “It shifts the balance in these cases if the plaintiff can show bad faith or untrustworthiness of the departing employer,” said Carlinsky. The 1997 case, DoubleClick Inc. v. Henderson, 1997 NYMisc. LEXIS 577 (Sup. Ct. NY Cty., Nov. 5, 1997), in which Carlinsky represented the plaintiff, brought this point home. In granting injunctive relief against two high-level executives of the on-line advertising agency, the judge found that the executives had been planning to abscond with a laptop full of proprietary information in order to start a rival business. The court’s decision to enjoin the defendants from competing for a six-month period after they left was especially remarkable because there was no non-compete agreement in place at all. For its part, a company considering hiring someone away from a rival should assure itself that the employee is as above suspicion as “Caesar’s wife,” Berkowitz said. CERTAIN UNCERTAINTY At the end of the day, however, the one thing that is certain with a non-compete agreement is that nothing is certain. Because disputes over non-compete agreements are usually resolved with a threatening letter or at the preliminary injunction stage with an oral decision from the bench, “there are a zillion disputes that don’t result in published decisions,” Kayman said. And the published decisions are all over the map. “Frequently, courts will just split the baby,” he said, adding, “People are left to guess.” He suggested that industry would be well served by a statute codifying the doctrine, such as the one recently passed by Florida. That way, “it would allow people to predict what is going to happen” when an employee leaves, Kayman said.

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