Non-competition covenants’ restriction on innovation

Non-competition covenants’ restriction on innovation

An interesting article concludes that non-compete agreements may be bad for innovation. Agreements outlawing non-compete agreements in California prevents companies from making and enforcing restrictions on their departing employees. The article concludes that the inability to restrict job-changing high tech employees contributed to the fertility of Silicon Valley’s creations. It also argues that those companies were forced to find non-punitive ways to retain employees, and led to widespread equity sharing arrangements.

In Maryland, non-competes are enforceable if they are supported by a business necessity, and are no broader than necessary to protect the business’s interest. The courts agree that employees with special skills, access to company trade secrets, and intimate customer contact can be restricted from taking a job with a competitor for a reasonable time, and in a reasonable geographical area, to prevent trade secrets and customers from departing with the employee. On the other hand, efforts to stop lower level employees or those unlikely to convince customers to transfer their business to a competitor are often unavailing. A restrictive covenant is not a legitimate way to prevent an employee from using his or her experience at a new worksite.

Covenants not to compete are cited by employers as necessary to protect their investment in their business development. The employer has paid the employee to pursue leads and develop relationships with customers, and therefore the employee should not be free to use those relationships to harm the employer. On the other hand, these agreements, which are seldom negotiable, can be very disruptive to an employee’s ability to pursue a career. When a reduction in force occurs, a laid off employee suffers a double hit, by being laid off in a weak economy, often financially unable to relocate outside of the restrictive area, and unable to take a job near home. And sometimes the employer is the one taking unfair advantage of the highly skilled or plugged-in employee. It expects an experienced employee to join the workforce, bring his or her contacts in the industry, and then leave those relationships behind if he leaves, regardless of the reason.

Maybe it’s time we enact a law similar to that of California. If all employers in the state are forbidden to restrict post-employment competition, everyone is on an equal footing, and no company gets a competitive advantage by having a restrictive contract. Then employers have to find effective ways to retain employees, other than by the threat of a lawsuit if they leave.

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