'I signed a noncompete - but now I want a new job'

April 8, 2009: 2:10 PM ET

Is a court likely to uphold a restrictive noncompete agreement? It depends on where you live.

Ryan H. from Fort Wayne, Ind.
When I started my current job, I signed a noncompete agreement without really reading it. After reading it in full, I discovered that it sounds like they're trying to keep me out of the entire Web design industry, anywhere in the U.S., for two years after leaving. I am looking for a new job right now - should I be worried about this? Would a judge ever uphold such a sweeping contract, in spite of my signature on it?

By Kathleen Ryan O'Connor, CNNMoney.com contributor
A business has the right to protect its intellectual property, but the terms must be reasonable. Unfortunately for employees looking for clarity on their noncompete deals, what counts as "reasonable" is often left up to a judge's discretion.

On your side is the current legal trend against overly broad noncompete agreements. California courts, where Silicon Valley litigation over top tech talent often ends up, have led the charge by effectively making such covenants unenforceable. The most high-profile recent case was that of Dr. Kai-Fu Lee, a former Microsoft IT executive whom Google hired away in 2005 despite a one-year noncompete agreement. The two software giants battled it out in California courts all year, until a private settlement was reached.

To find out about issues that might be specific to your geographic area, we spoke to Sam Hasler, an attorney in Anderson, Ind.

"Let's assume they do business in the Marion County," Hasler says of your former company. If you try to serve clients in the same area before your agreement runs out, having a lawyer at the ready is a wise move.

"I know people hate hearing that, but an ounce of prevention is worth a pound of cure," he says.

But if you are trying to establish a relationship with a client in, say, New York, and your previous employer has never done business there, you have a very strong argument for a judge that preventing you from pursuing that work is simply punitive.

For workers thinking of using the soft job market as a catalyst to fly solo and launch their own business, are noncompetes an obstacle? A group of academic researchers studying the issue say there's some evidence that their use inhibits entrepreneurship.

"It's the chilling effect," says Matt Marx, a doctoral student in business administration at Harvard. Very few companies actually take former workers to court over the agreements, but simply having them in place can discourage ex-employees from launching new ventures. "They think, 'I better play it safe. There is no upside for you; you have to protect yourself.'"

Marx and two co-authors published a 2007 study examining commerce in Michigan before and after the 1985 repeal of a state law barring noncompete agreements. By studying investors' patent records, they found a significant drop in employment mobility after the state began enforcing noncompetes.

The issue is a personal one for Marx, an active inventor in the speech recognition field.

Before embarking on his Ph.D., he worked at a Boston company and was bound by a noncompete agreement when he was recruited by another firm. Because the new employer was in California, he was able to disregard the contract. But, in an ironic twist, when Marx returned to Boston years later to attend business school, his original employer wanted to hire Marx as a consultant but couldn't because of his concern that Massachusetts courts would enforce the noncompete deal that the California company had Marx sign.

"You have California at one extreme and then you have a bunch of states at another extreme," says Lee Fleming, a Harvard professor and one of Marx's co-authors. He and Marx believe businesses would be better served by ditching noncompetes and focusing their energy on enforcing covenants that specifically protect trade secrets.

The researchers hope the economic pressures of the recession will help weaken noncompetes. Companies are laying off workers en masse but insisting that those workers respect their noncompete deals, they say. That's a hard position to defend.

"Is that reasonable?" Fleming asks. "Do we really want to prevent [job seekers] from getting work where they can be productive?"

Give us your advice: Check out recent "Ask & Answer" questions.

Join the Conversation
Search This Column
View all entries from this: Week, Month
Powered by WordPress.com VIP.