In 2020, Amazon sued an ex-employee for violating the non-compete clause and moving to Google to take on the same role in less than 18 months. Marketing VP Brian Hall was certain AWS would not enforce the restrictive covenant for a marketing role, but Amazon had other plans. They stated that the non-compete agreement was necessary as Hall couldn’t market Google products without drawing on proprietary information used to develop AWS’ product roadmap in 2020, as per CNBC. The case is a sign for employees everywhere to understand what they’re agreeing to when they sign a non-compete agreement.
The term is simple to understand. It refers to a contractual agreement that restricts an employee from joining a competitor company or setting up a new business in the area for a specified duration. Also known as the non-compete agreement (NCA), the clause applies to a specific geographic area and ensures that an employee cannot leave to help competitors out with insider information or spread their “trade secrets.” While it is seen mostly commonly in the tech industry, Amazon being a prime example, any company can decide it wants to include the detail in their hiring contract, if their state laws permit it.
Non-compete Clause Is a Type of Restrictive Covenant
The non-compete clause is just one form of the restrictive covenants that are available today. Restrictive covenants essentially include certain restrictions that are agreed upon in a contract between two parties. Other examples include:
Non-disclosure clause: This restricts the sharing of sensitive data, client lists, internal numbers, or any other company information with a third party when the association between employer and employee is terminated.
Non-solicitation clause: This restricts former employees from seeking to work with past clients who are associated with the employer or from asking other employees to work for/with them in a different setting.
How Do Non-compete Clauses Work?
During the hiring process, companies design detailed contracts that include restrictive covenants. The non-compete clause can include a detailed description of what the employee can or cannot do after leaving the company and might also mention specific competitors that the employee cannot work with. Thankfully, these aren’t permanent and have a time period mentioned, often between 6 months to a year, sometimes longer. The covenant not to compete also specifies the geographical area in which they cannot compete, and this is more likely in cases where local competition is very high.
When an employee chooses to leave a company, whether voluntarily or involuntarily, the non-compete agreement clauses will come into effect and employees will be legally bound to adhere to it. There is no governing body to oversee its enforcement, so it is up to the company to take legal action against you and prove the terms were violated.
What Makes a Non-compete Clause Unenforceable?
Enforcing a non-compete clause falls to the employer and they are free to seek legal action if the terms are violated. However, if the clause violates the laws of their state, especially in terms of duration, geography, and scope, they may become unenforceable. States like California do not allow any form of non-compete clause. Some states like Hawaii have restrictions on such agreements in specific industries. Others restrict the contract duration or have additional benefits. Depending on the laws of the state, non-compete contracts in violation of the rule will be unenforceable.
If a company’s trade secrets can easily be obtained from a different source, then the non-solicitation clause of a non-compete agreement becomes invalid and cannot be enforced.
Additionally, if an employee feels the restrictions lack sufficient consideration and entirely interfere with their chances of employment, they may find courts sympathetic to their condition. Agreements are expected to include some form of benefits for the employee.
Why Has the American FTC Proposed Banning Non-compete Clauses?
According to the Federal Trade Commission, one in every five American workers face non-compete clause restrictions that limit their growth. While companies insist on protecting their trade secrets from outsiders, the Treasury’s Office of Economic Policy maintains that below 50 percent of the workers locked under non-compete agreements do not have trade secrets that might risk the company. This puts a very unnecessary restriction on the employee, forcing them to stay with their company or work very hard to find new work without violating restrictions.
The Commission has proposed to add a new subchapter J to Title 16 of the Code of Federal Regulations that will supersede state laws. The proposed subchapter states that the clause is an “unfair method of competition.” It indicates that employers will have to rescind any existing non-compete clauses from their established restrictive covenants within 180 days if the rule is passed. The rule-makers believe that the rule could increase worker earnings between $250 billion and $296 billion per year.
How to Get Around a Non-compete Clause?
Contracts are legal documents that indicate the commitment between two parties and working around it can be a challenging task.
Read and Review It
A non-compete clause is usually very detailed and the first step to working around it involves a thorough reading of the content with attention to its wording, to get a clear understanding of exactly what it implies. Some might restrict your work in a competitor company if you take on the same role but may not explicitly forbid you from working in a different capacity. Seek legal counsel if you need assistance, as they will be better equipped to help identify loopholes.
Renegotiate the Restrictions
Leaving a company on good terms may give you room to renegotiate the terms of the non-compete agreement to allow you to take a new role. Some employers might also agree to write a formal release agreement from the contract terms so ensure you have a formal signed document to verify their consent.
Challenge the Enforceability of the Agreement
If you are able to prove that the restrictive covenants are unreasonable and exceed the jurisdiction of the company, you can challenge its validity in court with hopes of a renegotiation or termination of the non-compete clause.
Wait it Out or Ignore It
There is always the option of waiting for the contract period to pass and stepping back into the industry once it does. You can also choose to go ahead and work but there is a significant chance of legal repercussions.
Ultimately, the covenant not to compete is a way for companies to protect their data and their interests while also convincing employees to stay with the company. Any discomfort faced is usually by the employee and it falls to them to decide how they want to navigate this legal minefield.
If the FTC is able to pass its new rule, however, companies might find themselves hard-pressed to limit their contracts to other restrictive covenants to serve their needs.