Reasons for Reasonable Covenants-Not-To-Compete

Large and small technology-creating businesses rely on trade secret law to protect strategic information. Lawyers recommend a variety of legal tools to protect trade secrets, including tools that allow firms to share secrets as safely as possible. One of those tools is an employee covenant-not-to-compete (“non-compete”). Non-competes are controversial because they restrain an employee’s freedom to earn a living and restrict so-called “knowledge spillovers” between technology businesses that affect the pace and magnitude of innovation. A few states ban the enforcement of non-competes[1] but most enforce them to the extent they are reasonable.[2] As such, “reasonableness” provides the touchstone for enforceability analysis.

Many lawyers believe that the Rules of Professional Conduct (“RPC”) set a tone for client counseling that makes it difficult to counsel clients toward reasonableness. In my forthcoming article “Reasons for Counseling Reasonableness in Deploying Covenants-Not-To-Compete,” I argue that failing to effectively counsel clients toward reasonableness may actually amount to professional irresponsibility rather than the professional responsibility that the RPC seek to foster.[3] There are three areas where client counseling about non-competes typically comes into play: counseling clients about whether to adopt non-competes; drafting non-compete documents; and advising clients about whether to send a demand letter or to litigate a non-compete case.

Counseling clients about whether to adopt non-competes requires nuanced a discussion rather than an air of inevitability that “of course every business should use non-competes.” Technology businesses prize their star knowledge workers because they give the firm its creative, comparative advantage. Thus, a wise lawyer will counsel clients to consider the impact of adopting non-competes on recruitment of these workers. The lawyer should ask: Will deploying non-competes signal a “yuck” factor that scares away superstar creators and inventors who want to work in an inviting environment that values them? In some industries the value of using a non-compete to bolster an NDA and other trade secret protection measures is less than the potential negative impact on recruitment of knowledge workers.

If a client decides to adopt non-competes, then the lawyer must draft contract documents that address the non-compete’s duration, geographic reach, and scope of work prohibited. Some lawyers are tempted to draft restrictions that are as long, far-reaching, and encompassing as possible. However, hardball contract drafting can backfire.   A hardball-style non-compete may signal an unfriendly work environment which may be unpalatable for some rising star creative workers. In litigation, a trial court may be prohibited by law from enforcing or elect not to enforce an unreasonable non-compete rather than “blue pencil” or partially enforce it. Moreover, the RPC should push the lawyer away from hardball contract drafting and toward reasonableness. Rule 4.4 requires the lawyer to examine the motive for and consider the likely effect of drafting a broad prohibition—if the motive or likely effect is to discourage an employee from doing work that does not actually compete or work that does not endanger trade secrets, then that drafting approach may fail to satisfy the lawyer’s duty under Rule 4.4.

Once the lawyer drafts the non-compete contract, the client forgets about it until a key creative worker departs to join an established firm or to start a new venture. Then, the client faces the decision of whether to send a demand letter to the departed employee. Several RPC come into play that affects the decision to send as well as the content of the demand letter. Rule 3.1 prohibits asserting frivolous claims and Rule 4.4 condemns practices primarily intended to intimidate a third party.   For instance, the demand letter should not threaten litigation for using general skills and knowledge or employment activities outside the scope of the covenant as drafted. Further, Rule 2.1 suggests that lawyers should serve as a voice of reason rather than placate a vindictive client.

Apart from these Rules, other factors should nudge lawyers toward counseling reasonableness. One significant factor is the public relations risk. Particularly in our interconnected digital age, the recipient of a demand letter can post the letter on the Internet and social media to shame the sender. The harsher the letter’s tone and content, the more the sender looks like a bully, which creates a negative vibe that can turn off and turn away prospective creative workers who want to work in the best environment possible. Acting as a bully may also deter the departing employee from later returning to the firm which is short sighted because knowledge workers often boomerang back to a prior place of employment.

If the demand letter does not have the intended effect, then the client must decide whether to litigate. Lawsuits cost the client money: attorneys’ fees; court reporter and expert witness fees; and court costs. Lawsuits also tax the client’s time, energy, and focus and that of his or her employees. Technology businesses face another risk as well by entering into litigation: counter-litigation. The employee might seek to recover unpaid overtime wages or, for a large technology firm, the employee might assert an unfair competition claim. These counterclaims persist even if the client decides to drop the non-compete case.

The costliness of litigation is complicated by the uncertainty of the outcome. The rule of reason test for non-competes tilts toward employees in many jurisdictions, either by the particular instantiation of the rule or the actual practice of the courts. The more uncertain the outcome on liability or remedy, the more unreasonable that the client devote the resources to a non-compete case. Compounding this uncertainty is the near certainty that suing the departing employee will create a yuck effect for prospective creative workers, as well as jettison the boomerang effect for that particular former employee.

In the final analysis, counseling technology businesses toward reasonableness in deploying non-competes is congruent with wise and professional lawyering.


[1] California’s ban is discussed in an influential article by Professor Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. Rev. 575, 575 (1999).

[2] In a recent article, I argue that the “rule of reason” approach provides a legal infrastructure for innovation that rivals and in some respects surpasses California’s ban on non-competes. See Robert W. Gomulkiewicz, Leaky Covenants-Not-to-Compete as the Legal Infrastructure for Innovation, 49 U.C. Davis. L. Rev. 251 (2015).

The preceding post comes to us from Robert W. Gomulkiewicz, UW Foundation Professor of Law; Co-Director, Center for Advanced Study and Research on Innovation Policy (CASRIP), University of Washington School of Law. The post is based on his recent article, which is entitled “Reasons for Counseling Reasonableness in Deploying Covenants-Not-to-Compete in Technology Businesses”, is forthcoming in 20 Lewis & Clark L. Rev. (2016) and available here.

1 Comment

  1. Deborah Maranville

    Prof. Gomulkiewicz’s focus on the lawyer’s professional duty to emphasize reasonableness is most welcome. His analysis should extend far beyond the technology world.

    For many years I supervised students in the University of Washington’s Law School’s Clinical Law program in representing individuals who had been denied unemployment benefits, I was dismayed to encounter businesses represented by the “best” large firms who were requiring low-level employees to sign covenants not to compete. “Reasonableness”? None that I could see. Those who refused were on occasion denied benefits when they refused to do so and lost the job, or job offer.

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