Planting a Seed: Setting a New Direction for Tech Noncompetes

Posted by Q McCallum on 2014-10-07

Tech noncompetes can raise thorny issues. We offer some ideas to smooth things out.

I co-wrote this piece with Clint Hodler in 2014. In early 2023 I moved the article from its original home on Medium to my personal website.

Disclaimer: We’re not attorneys. This is an opinion piece, and does not constitute legal or career advice. Please review any such matters with your legal counsel. The ideas presented here are our views, and do not reflect those of our past or present employers.

Think back to each time you’ve started a new job. Did you ever read your employment contract? All of it? You get double points if you retained an attorney to review and modify the document.

Employment agreements can raise a variety of concerns. One particularly prickly section is the noncompete clause: it outlines what you cannot do once you leave the company. This is ostensibly to inhibit you from providing undue assistance to the competition — say, by providing knowledge of weaknesses or other secrets, effectively becoming a corporate spy — but they sometimes cover a lot more ground than that.

Non-compete clauses are common in highly competitive fields, especially those in which knowledge workers may create significant intellectual property (IP) while on the job. This certainly holds true in our work, which keeps us knee-deep in technology and data. Just days after a casual conversation on IP and employment contracts we stumbled across a New York Times article on the same topic. (Yes, we actually talk about these sorts of things in our free time. We also sit around dissecting business models for fun. Believe us, we’re the life of the party.) The article surprised us in two ways:

  1. A number of people mentioned in the article hadn’t reviewed their contract, and
  2. Non-competes had spread to industries and roles we hadn’t expected.

Combined, our careers cover three decades of full-time work, contracting, and consulting across technology and finance. We’ve signed our share of employment contracts and noncompete clauses, and spoken with enough colleagues about theirs, that we’ve come up with some ideas to improve noncompetes in the tech field. (For the purposes of this discussion, that includes data folks, too.)

What’s wrong with noncompetes?

It’s easy to demonize noncompete agreements. In some states, such as California, they’re pretty much unenforceable. (You can read California’s Business and Professions Code, Section 16600 for the legalese version, or an attorney’s website for a plain-English review thereof.) But we’re hesitant to say that any contract is necessarily “bad.” Put another way: the only bad contract is one that works against you, yet you sign anyway. If your attorney clears it, and you understand what you’re getting into, then all’s fair. This is why it’s wise to retain an attorney to review your contracts.

Still, while noncompetes are not necessarily bad, they can still have issues. In our experience, those issues stem from three main sources:

  1. **The name doesn’t quite fit. **We need a term that better expresses “what to do when you leave here,” because for employees it’s less about “I want to help the competition” and more about “I just want to work elsewhere.”
  2. In our experience, people rarely engage an attorney to review them. A lot of people simply agree to a contract’s terms (whether explicitly, though signature, or implicitly, through accepting employment). This sets them up for a rude shock when they leave the company, because they don’t realize that they’ve signed away their right to work for what their previous employer considers a competitor. Caveat (non)lector.
  3. Some agreements don’t reflect the realities of employment. Even in a company heavy in knowledge workers, there’s relatively little secret sauce. In turn, there are relatively few people who contribute heavily to that sauce, so binding all employees to a constricting agreement doesn’t really solve a problem.

The worst noncompetes are rightfully seen as the flip-side to (clandestine, possibly illegal) non-poaching agreements between companies, as they make it damned near impossible to get a job in your field after you leave. What if your employment contract forbids you from working for a competitor or client, and your employer considers everyone else in your industry a competitor or client?

On an individual level, this prevents people from circulating throughout the industry. On a macro level, this can lead to artificially-depressed wages and even harm innovation, as people aren’t free to break out to join other companies, or even create new companies, in the sector they know best.

Borrowing contract language from another field

We have ideas on how to define agreements that reasonably support both employer and (ex-)employee. The first step would be to standardize terms across the tech industry. If every tech company adopts similar contract language and concepts, prospective employees would know what to expect. In turn, we can build on the terms from other, more mature industries.

Think that couldn’t work? Talk to someone in the highly competitive, IP-sensitive world of trading. (It’s where we have the most experience.) There, most employment contracts hold departing employees to the following:

Don’t blab company secrets. We’ll call this “The Vegas Principle.” If your company is working on something in secret, then it should stay secret. Similarly, if the company is experiencing trouble, keep it to yourself.

**Don’t take code you wrote for this company. **Your employer paid you to write that code for them, so it belongs to them, so you shouldn’t walk out with it. As more companies open-source certain internal tools — say, LinkedIn’s DataFu and Twitter’s Summingbird — it’s increasingly likely you’ll still get to play with the fun stuff after you leave. Also, some agreements implicitly permit you to create a “clean room” implementation, which means you’re free to rebuild something you wrote elsewhere, so long as you do it from memory. (We realize this typically falls under intellectual property agreements, but it’s still seen as a competitive issue, so we’ll lump it in with noncompetes for this discussion.)

**Take a couple of (paid) months off. **You go on a few weeks’ _paid _“garden leave” before you start your next job. This addresses the thorniest part of other fields’ noncompetes, because you are compensated for the time you cannot work for someone else.

A concrete example

As an example, say that Tammy Trader gives her notice of resignation, as she has accepted a position at another company. Her manager, along with HR, would explain that Tammy is still an employee of the bank for the next 60 days. (Sixty days is the typical period of notice in the trading industry.) She will continue to collect her salary during this time, but she is not permitted to enter the office, interact with clients, nor start her new job.

In the trading arena, such noncompete agreements express the reality that this is an established field with established, common practices. Industry players are quite similar, with a _minimum _of company-specific secret sauce, so people moving from one shop to another isn’t _that _big of a deal.

We hope tech firms take this approach, if they choose to require noncompetes at all. By supporting people moving throughout the industry, they keep employees happy and improve the industry as a whole.

Time will tell

Employment contracts in general, and noncompete agreements in particular, can be thorny issues. If tech firms continue to define noncompetes, we hope they borrow ideas from more established fields and define terms that protect everyone’s interests. Such healthy relationships between employer and employee will stimulate innovation and cross-pollination throughout the industry.

What are your thoughts? If you had to design an employment contract, what would be your ideal terms for people leaving the company? Feel free to reach out and tell us.