Non-competes are evil

by Robin Harris on Monday, 4 May, 2009

Free the American worker!
After a truly wretched New England winter, news that EMC’s David Donatelli is moving to HP’s sunnier climbs isn’t a total surprise. Nor is it surprising that EMC is trotting out its noncompete agreement to keep Dave from HP.

Bad public policy
The theory behind noncompetes is that a company is protecting its intellectual and commercial property such as customer relationships and product plans. But we already have laws protecting intellectual and commercial property — laws that are quite regularly enforced through civil and sometimes criminal action. Nor is it difficult to suss out who major customers are or what v6.4 of product X will look like.

The problem with noncompetes is twofold. First, they interfere with the free movement of labor to the highest and best use. Shouldn’t Mr. Donatelli be free to take his talents to the highest bidder for the maximum benefit of the free enterprise system?

Second, non-competes are bad for the US economy. Unlike Massachusetts California does not honor them. Yet California has managed to create many more jobs and much more wealth than Massachusetts in the postwar period – despite the Bay state’s early lead in computers and telecommunications as well as DoD and DARPA funding.

Looks like EMC lost this one
If you are a California company following HP’s example could be profitable. As a law firm noted:

If an employee with a noncompetition agreement . . . joins a California company, there is a good chance that the California employee and the new employer may sue in California to invalidate the agreement . . . . The former employer will opt to sue in a state that enforces noncompetition agreements. . . . [U]ltimately, it may come down to whichever side can first obtain a judgment in its favor.

In other words: “you have a good case Mr. Donatelli. How much justice can you – and HP – afford?”

Bay state readers: throw off your chains
Bay state readers: contact your state rep and state senator to support House Bill 1794 that would outlaw all non-competes in the state. Yay!

Somehow I doubt EMC’s top brass is supporting this long overdue reform. But it will be good for you and and your children. Maybe EMC and other companies will be more considerate of employees if it is easier to leave.

The StorageMojo take
There is no evidence that non-competes have helped the economy or the companies that employ them, while hurting labor mobility. Let’s end this relic of medieval serfdom and give labor the same freedom accorded capital.

Hiring companies should also think hard about whether EMC execs are worth the hassle. I’ve seen too many EMC long-timers make a mess at their new company because of cultural differences. EMC’s unique culture has served them well, but it isn’t like most other tech companies.

Courteous comments welcome, of course. I wish HP luck with their new hire. Expect culture shock on both sides.

{ 17 comments… read them below or add one }

outsider May 4, 2009 at 7:09 am

Hear, hear! The problem is, though, that companies think that non-competes help them. They also enjoy attempting to control ex-employees (witness the Motorola lawsuit when Rim attempted to hire laid-off Motorola employees). So although it helps the overall economy most companies won’t support an end to non-competes.

For those of us on the outside, though, how is EMC’s culture different from everybody else’s?

Rob May 4, 2009 at 8:51 am

“The problem with noncompetes is twofold. First, they interfere with the free movement of labor to the highest and best use. Shouldn’t Mr. Donatelli be free to take his talents to the highest bidder for the maximum benefit of the free enterprise system?

Second, non-competes are bad for the US economy. Unlike Massachusetts California does not honor them. ”

Agree. And this is why states like Taxxachusetts and other backwards states are losing out to Texas and other Southern tier states. Right to work. Hire and fire at will. I have no problem with that. If you are talented and work hard, you’ll end up somewhere else. Of course if the current adminstration and others have their way , “card check” will become law and fading unions will gum up the works. Pitiful.

Julie May 4, 2009 at 10:16 am

hmmm…somehow I don’t recall EMC screaming too hard when an entire Israeli development team left and started Diligent, taking with them a hell of a lot of personal knowledge in the form of backup technology and methodology. They created a successful product which they OEM’d to several companies before IBM bought them. Free market at it’s best.

Non-compete should have went away when ’employment contract’ moved on to ‘at will’ employment. If the employer can release you at will, then the employee should have that same freedom.

I’m also a big proponent of at will employment at all levels of the executive staff. Executive contracts have long since devolved into documents that remove any risk for performing poorly, and generally provide unjust rewards for running companies into the ground. These people are already richly compensated while they work, there should be no need for ‘protection’ against unemployment.

joseph martins May 5, 2009 at 1:05 pm

Robin,

The notion that California holds a non-compete trump card is false. See “Medtronic, Inc. v. Advanced Bionics Corp” and ask Mark Stultz and ABC how their attempt to make an end run around his Minnesota non-compete worked out in California. I hope HP covered itself in whatever agreement it made with Donatelli. If HP didn’t dot its “I”s and cross its “T”s with regard to its obligations to Donatelli should the non-compete be enforced, it may very well end up paying him to do absolutely nothing at all. Crazy? Not quite. I watched it happen with a non-compete case in 2000. The new employer had to pay the employee a full salary for nearly two years according to its employment agreement, but could not use him in the capacity for which he had been hired due to an enforced non-compete. So he spent two years vacationing on their dime. We should all be so lucky.

This isn’t about non-competes as bad public policy. This is about human beings honoring contractual obligations. At one time, a man’s word was his contract, and his pride and honor meant you could bank on it. Bad apples (both employers and employees) gradually ruined it for everyone. These days we need contracts because, frankly, mutual trust and integrity is virtually non-existent. A man’s word is no longer enough.

If an individual knowingly signs a non-compete agreement in exchange for salaries, options, severance, or other benefits and perks, then he should be held to the contract as long as his employer upholds its end of the agreement. If they don’t like the agreements, they are free to look for employment elsewhere. It is as simple as that. In this context, non-competes do not “interfere with the free movement of labor”. Frankly, executives are free to look for work at companies that do not require non-competes – and many choose to do so. So I don’t buy that argument.

Donatelli signed a contract and enjoyed the perks at EMC, and now he wants out of his obligation so he’s hoping California is the answer to his prayers. Is this not the same sort of slimy, ethically questionable behavior we see in the patent arena when companies file suit in the patent-friendly Eastern District of Texas? Strategically it makes sense for Donatelli since it gives him a better chance of success, but ethically (in my opinion) it says something about Donatelli as a person. Flame away folks, you know I’m right about it. My opinion would be the same regardless the individual or companies involved.

As for the other 90+% of the work force, they are free to move about, and leaving is as simple as giving an employer notice. But then, that’s why the rank and file don’t have access to the compensation and perks that accompany top-level employment agreements.

The net of it is that a non-compete serves as both a deterrent, and as a simple reciprocal agreement. Let’s not pretend that people are unquestionably honest. People ignore confidentiality agreements all the time, and intellectual property flows freely with employees from one employer to the next. It is extremely difficult to prevent it from happening and to discover that it has happened. Non-competes with reasonable time, role and geographic restrictions are not a threat to free enterprise. And, as I pointed out earlier, we are free to look for companies that do not require them.

Perhaps that fact alone will force many companies to reconsider the use of non-competes if it means that they stand to lose available talent to the competition. What we definitely do not need in a free market is more legislation like California’s all- Section 16600.

Anonymous May 6, 2009 at 7:45 am

I tend to agree, in theory, with the free movement of labor argument. However, and Robin you should certainly be aware of this, patent/intellectual property/trade secret litigation is often a lengthy, distracting and resource-draining prospect. Moreover, by the time any would-be settlement is reached, much direct and peripheral damage has already been done. That said, in this instance the ultimate point is this is an intelligent, well paid individual. Surely he read (and certainly he signed) the contract. Why bother, if there is no intention to honor it?

Robin Harris May 6, 2009 at 2:22 pm

Outsider – unlike most tech firm’s EMC’s culture has been sales driven. For years the company looked for high-school jocks from blue-collar families who wanted to make a lot of money in sales. Tucci’s been trying to change this, because it stopped working well once EMC was the incumbent.

Rob – the taxachusetts moniker is more than a decade out of date. Much of the south lacks the schools and amenities that make Mass and CA attractive. And since tech workers are rarely unionized I don’t see the connection.

Julie – I doubt the Israeli government cares much for American non-compete agreements. Still waiting for the XIV acquisition to make sense.

Joe – I get the contract thing, but I don’t agree with it. When you need a job who’s got the power? Is it really an arms-length negotiation? For most people – including, I’ll wager, Donatelli 15 years ago – no. But the larger issue is what’s good for the country vs the corporation. We, as citizens, give corporations their legal rights, and when those rights conflict with what is best for the country we have a duty to change them. Large corporations are immensely powerful and the people who run them have shown time and again a stunning willingness to abuse those powers. Non-competes are an abuse of flesh-and-blood taxpayers. Worse, we don’t need the non-competes: if they’re so wonderful why isn’t California rushing to adopt them? Plenty of big companies there.

And given the outsize impact of a few major corporations on the economy isn’t it even MORE important that our most talented execs be able to move freely? And let’s face it: corporations hate free markets if they’re winning. Legislation to outlaw non-competes is long overdue.

Anon – patent & IP reform is outside the scope of this blog post, but again, look at California. Lots of smart people working their tails off to come up with the next great thing. Sure, information sloshes around – some competitors have married senior execs! – but Apple, for example, keeps secrets despite intense popular and competitive observation. California’s commercial environment has been very good to high-tech. Why shouldn’t the rest of the country learn from it?

Robin

Steve Jones May 7, 2009 at 1:27 am

I don’t like the general idea of “no compete” clauses in principle. In general, over this side of the pond then wide-ranging ones are unlikely to be enforceable. However, some restrictive terms can be enforced. For instance, time-limited clauses preventing the passing on of confidential company information have been upheld, and seem reasonable (although whether they are enforceable in a practical sense is a moot point of course). Also there have contract clauses enforced which prevent the use of sales contacts for strictly limited periods of time. Such clauses will only be enforceable within limited bounds, but for the most part this is all common law enforcement – there aren’t statutes that define precisely what and what are not “reasonable” restrictions, although anything that could be deemed a significant restriction on the mobility of labour would be unlikely to be enforced from my reading.

Joe Kraska May 9, 2009 at 8:22 am

“We, as citizens, give corporations their legal rights, and when those rights conflict with what is best for the country we have a duty to change them.”

We tend to forget that, taking the status quo as the god-given right. But corporations enjoy certain special privileges, including the shield of limited liability, for which we, the People, surely have a right (and I would agree, responsibility) to exact certain obligations and restraints. This statement is of course somewhat distinct from the asymmetry of powers that occurs in proferred contracts in employment, which you also addressed.

As for the subject of noncompetes, I’m fully with California when it comes to these things with regards to the “mere mortal” workers. OTOH, if it were an executive, and the contracts terms were on the level of “2 years pay for each 1 year not working in the industry,” I find little mental trouble or sympathy for the person who signed: the deal is fair and square. One problem is I know of workers who, because of the asymmetry of the situation (fear of being fired, etc), were pressured into signing non-competes without any financial payoff for their noncompete period at all. That’s just evil: the terms of the contract are unconscionable, and all such agreements should basically be illegal to make at all.

Joe.

Dan Frith May 12, 2009 at 6:07 am

I agree! Non-competes are bad for the American economy and bad for American innovation. My firm represents employees fighting unfair non-compete agreements throughout Virginia and write about these issues at our blog, the Virginia Non-Compete Law Blog at:

http://virginianoncompete.blogspot.com/

Dan

Terry May 19, 2009 at 10:56 am

I think non-competes signed up front when hired are more valid than the ones forced on employees getting laid off which they must sign in order to get their severance package. This technique is vile and depraved, but still used by unscrupulous employers and their number is legion. Corporations are in existence for one reason and one reason only. The almighty dollar! Everything else is secondary to making a profit.

Reader May 22, 2009 at 12:28 pm

The flip side of the coin
Let’s take it to the extreme:
How about a citizen of a state decides to immigrate to another country, and in the process give up his citizenship in his old land?
Should be no problem, right? The individual’s rights of free movement, free association etc.
But what if this individual served in a sensitive state’s position (military, intelligence)?
Things begin to get complex.
And what if said individual held a top position in one of those sensitive organizations? What would you think for instance of the chief of staff of USA quitting the service, and next day immigrate to a country unfriendly to the United States and immediately assumes top position in the military or intelligence of the other country?

True, a company is not a country and not a state.
However, the principle remains: what a “regular” citizen can do with no question asked (after all, the US is not the soviet union which controlled movement of its citizens to other countries), is not as clear cut when considering someone with sensitive state secrets.
It makes sense that companies should have some means to protect *their* sensitive secrets from being bought in this manner by “the enemy”.

I agree that it’s infuriating when a company lays off an employee and at the same time tries to prevent this person from getting hired in his or her field due to “non compete”.
However, the circumstance of this case are quite different.

And a small comment:
In your opening statement you said that these news “isn’t a total surprise”.
Anyone familiar with the event realizes that it came as a huge and nasty total surprise to EMC’s CEO and board.
Donatelli was an unequivocal #2 and probably heir apparent, and just a week or so before his surprise resignation was placed front and center in front of the press with the introduction of a major new product which is very central to EMC.

Patrick Osborne June 21, 2009 at 6:17 am

Interesting article in the Boston Globe today highlighting this problem and in the Gaming and Biotech industries as well:

http://www.boston.com/business/articles/2009/06/21/start_ups_stifled_by_noncompetes/

Amrith Kumar July 13, 2009 at 10:16 am

There’s a lively debate going on about this subject at http://hypecycles.wordpress.com/2009/07/12/why-retain-noncompetes/

I don’t think non-competes are evil, they serve a valuable purpose.

They aren’t mandatory, so why are so many companies requiring that their companies sign them? By extension, if by some way California had a judgement that make non-competes (by CA companies for CA workers) enforcible, would CA companies in droves issue non-competes? Or would they prefer to stick with their status quo?

My guess is that it would be the former.

-amrith

Neil Strickland September 8, 2009 at 1:36 pm

“Corporations are in existence for one reason and one reason only.” …- and since it’s truly lousy for them to be all about what they think is the sweetest deal for them, is the solution for us to be the same? That’s not a sane answer unless we see some interest in escalating a mimetic rivalry toward maximum lousiness. Whatever the next rotten habit of the powerful becomes, we will be honor bound to adapt for our use in the name of true relative justice.
Iterations of this kind of worldwise common sense are the middlemen – the self-convinced lawyers within each of us, hired to press our case through to victory on our rights and inclinations (if one of which is in short supply, we’ll admit the other) – and we would never have reached these present heights of indignation and evil and backhanded honor without using them. I feel it’s worth defending ourselves by making the point that people aren’t perfect, since that does a good job of raising the underpinning reality that the incumbent, any incumbent power, is every single time going to have some things wrong enough with it that we really will be able to rationalize the comparative justifice of *our* actions to whatever extent – to whatever content – our hearts demand, should we choose to start that. This is an even less facile and more widely germane point than the Who’s, “Meet the new boss same as the old boss”, and that was not a facile discovery at all.

We can imagine all the thought that went into building the Great Wall, and then imagine the Horde presenting themselves suddenly under a guard tower at night:
“You, Chinaman – signal presence to the next watch station and your selfrighteous brain is on a pike by daybreak – hand us a line and your handy brain has an audience with the grateful khan. When saying your brain I didn’t mean to be at all so crass as to imagine that you think this is all about you, per se, but the way our sector works, you know change is coming and that the way things work we can get through with someone we talk to, so it just doesn’t make sense to let you overlook the situation and pretend we occupy an old-fashioned scenario of powerless balance.”
“You definitely don’t make it sound like I can keep the situation from having a lot to do with me. How can I know that you’ll improve matters for my loved ones?”
“Well, quite. There’s enough room for improvement that it’s not like that’s a worry from where you stand, unless you think so…?”
“It is so true, though, that Chinese progress has stopped doing the world the amount of good it so clearly could at the beginning, and as much as I wish it never were a problem”,
“Totally understandable.”
“- that can only open up with normal – Here you go”
“Forward squad forward. Secured – OK boys, stick ‘im.”
“Wait, what!? Impossible!”
“Whose word is less dear than his life is not worth an audience with our buzzards; he will be the bondservant of every last usurper who offers to sweeten the pot in exchange for a say over what he had no hand in building.”
To try to get a concept of what I would want a kid, meaning ourselves, to get a hold of from this (compared I guess to a story in which the guardian refuses and fails, his work come to nothing, and is totally forgotten), part of me says, about integrity, “That’s my work’s integrity, though, not some emperor’s, and in fact the reason, or a lot of it, we’re doing better than an autocracy is that people like me use their heads about what to contribute and why.” It’s a good argument. My only reply to myself (from this point to the scheme of the larger questions) would be that choosing marriage is not an arm’s-length position. We are each weighing the gravity of being discovered by someone, brought out of ourselves into cocreation with another, and the relief of having reveled in those confidences and of being found; we weight these over against not the other person’s position of the same but over against nothing at all, against not being found. Then, down the road, when I begin to feel less known, less like they are finding me or harboring me in the ways I have worked to build up, does it start to become more a matter of just how amazing and available a man or woman manifests elsewhere in my life for the next few years? Even if I stick to the relief of being found again, and hold that life is a self-expression so it’s healthy to make that choice, I wonder what kind of self I am personally [am I impersonally] expressing.
Even once the legal vehicles of complex enterprise mgmt lighten to make large corporations no longer the natural home of useful chunks of capital ( for sure an interesting community to meet underway), we’ll’ve continued, in divorce and all smaller divorces, to be less and less able to stand and to feel that something still has as much to do with us when we’re faced with the actual or partial betrayal of our dreams. There are neat reveries to have by returning to the first two paragraphs here, yet, as a stranger, I don’t want to make the thought of any second visit to this shared interest become an exhausting one. I’m grateful that you had the nerve to suggest to joseph martins, “Oh, the ‘contract thing'” (minimizing), “but you’ve really got to take the larger view of life:” I only have the nerve to pity you the oncoming winter life and to suggest that the larger view of life will relate to the foregoing.

Ally January 5, 2011 at 2:51 am

If you’re being mugged and someone points a gun to your head and says, give me your money, you have a choice. You can hand it over or get shot. An agreement where one party is offering the other party food and shelter does not represent a fair balance of power.

There is also the issue of Capitalism. I love the way companies rave about the free-market until they find themselves at a disadvantage, even one ever so slight. Without a thought they have no problem rigging the market in their favor if they can get away with it.

Companies may flock to states that promise low taxes and business-friendly (rigged in their favor) policies but eventually the industry will stagnate. Since everybody will make their employees sign these agreements it will become increasingly difficult to recruit talented employees.

You also better have plenty of your own intellectual property to pump into your company. You certainly won’t be getting a free flow of ideas from your employees. Why would they turn over THEIR intellectual property and further limit their options should they find themselves out of a job?

Roger January 18, 2011 at 1:03 pm

Very interesting discussion. I don’t think there’s any question EMC intends to pursue this aggressively. EMC pursues everything that matters aggressively and this clearly matters.

george lemieux February 20, 2013 at 4:19 pm

One issue with non-competes is “defendant takes our customers.” Ok…but how old are the customers? 5 years old? Are customers not able to decide for themselves wheater to stay or to go? I think non-competes are for companies who give customers a bad deal and hate it when a better deal is presented to the customer. If the deal is not “better” …why would customers leave? And why would Plaintiff be scared of if said deal is worse than what they ofer to the customer? Non-competes are for bad companies to stay in business!

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