'Til Lawsuits Do Us Part

Noncompete clauses may hinder you less than you fear

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Last November, Apple happily announced that it had hired Mark Papermaster, a 26-year IBM veteran, to head up its iPod and iPhone hardware engineering teams. IBM immediately sued Papermaster, claiming that his employment contract with Big Blue included a noncompete agreement prohibiting just such a move. A U.S. federal district court quickly ordered Papermaster out of Apple until further notice. The two companies agreed to a settlement in late January; Papermaster will finally sit down at an Apple desk later this month.

Noncompete clauses are essential to protect a company’s intellectual property, especially its trade secrets—after all, they’re not good secrets if employees can leave and tell them to the company’s competitors. But courts are wary of these clauses and balance the protection of trade secrets against an employee’s basic rights.

In its complaint, IBM asserted that Papermaster was ”in possession of significant and highly confidential IBM trade secrets and know-how, as well as highly sensitive information regarding business strategy and long-term opportunities.” Papermaster had been IBM’s top blade-server guru, and the company offered him a substantial raise as an enticement to stay—it even went so far as to promise a year’s salary in exchange for not joining a competitor. In his counterclaim, Papermaster said his work for Apple would not impinge upon the agreement because he wouldn’t be working on blade servers there and because Apple’s focus is on consumer electronics, not large-enterprise applications.

Predicting how a trial court will rule in a dispute over the validity of a noncompete agreement is a tricky business, says Ross Dannenberg, a partner in the Washington, D.C., law offices of Banner & Witcoff. ”There are three types of limitations found in a noncompete agreement—geographical, temporal, or line of business,” he says. ”Courts base their rulings on whether any of them creates an unreasonable restriction on a worker’s ability to earn a living.” Thus, a court may void the contract clause if it finds that forcing you to remain unemployed for more than, say, a year does your career irreparable harm by rendering you a high-tech dinosaur.

Another consideration, Dannenberg says, is whether the agreement was the result of a true arms-length negotiation: ”Prospective employees at the bottom of the food chain have little bargaining power and are in the position where they either sign or don’t get the job.” Dannenberg notes that was probably not the case with Papermaster, who was a company vice president when he signed his contract with IBM in 2006.

What a U.S. court finds also depends on where it’s located. California state courts are unusual in that they generally refuse to enforce such agreements because of a statute outlawing them. This has permitted rapid job switching in Silicon Valley, which in turn has allowed the most talented people to move to the most innovative firms. An interesting wrinkle in the Papermaster case was that although Apple is headquartered in California—which would ordinarily leave IBM little recourse—the agreement he signed made it clear that any dispute would be decided according to New York state law.

This variability in enforcement can lead to a certain amount of schizophrenia for those who cross state lines when they jump from one job to the next. Take the curious case of Matt Marx, a software engineer who is now a Harvard Business School doctoral student. In 2001, still bound by a noncompete agreement he signed when he joined a Boston-based technology firm specializing in speech recognition, Marx was recruited by another speech-recognition firm, in Silicon Valley. He let the noncompete clause in his Boston contract hold him fast until he found out about California’s ban on such agreements. On the other hand, when Marx later returned to Harvard, he declined an offer of part-time consulting for one of the founders of the Boston company because he knew Massachusetts courts would enforce the noncompete clause in his California contract.

No one can say how common noncompete agreements are because, as private contracts, they needn’t be registered with a state authority (unlike a deed or marriage license). We hear only about the cases, like Papermaster’s, that go to court. And even in the rare instance of a David boldly and publicly taking on a Goliath, an out-of-court settlement is sure to follow, to avoid a pretrial discovery process that would require both sides to reveal how the employee in question fits into their business plans and other zealously guarded corporate secrets.

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