Compete, Solicit, Tell Secrets: Is It Legal? Is It Wise?
This was originally published at GoingConcern.com on July 21, 2010.
Blessed are the forgetful: for they get the better even of their blunders. Friedrich Nietzsche
Non-compete, non-solicitation and confidentiality clauses are common in professional services. You were probably asked to agree to them when you signed your offer letter and will be asked to sign again to get a severance payment.
Non-compete and non-solicitation clauses restrict your ability to go to work for a perceived competitor or related business for a period of time (often 1 to 2 years, sometimes more). They also attempt to prevent you from soliciting business from former clients or soliciting staff from your former employer for your new employer or firm. Confidentiality clauses give firms the right to protect certain company information and bona fide trade secret s.This is most often translated in accounting firms to mean client lists, methodologies, pricing, and other proprietary documents such as engagement letters and proposals.
Professionals who’ve left their firms involuntarily – some of the thousands cut by the firms in the last three years – worry about the legal issues associated with working for former clients as employees and consultants.
Let me get the easiest part out of the way first. Contract or not, as a professional I believe you have an ethical obligation, as well as often a contractual one, to keep confidential information confidential. Taking client lists, sales and profit data, pricing, or methodologies to a new employer or your own firm and passing them off as your own or using them against your former employer is not kosher.
That being said, a big reason you went to work for a big firm is to learn big. Once methodologies, competitive strategy, rates and revenues are in your head, there’s no preventing that information from informing and illuminating your future strategies and decisions. There’s no “Eternal Sunshine of the Spotless Mind” machine that can erase the indelible mark audit firm experience has made on your psyche.
My advice: Don’t do evil.
When it comes to non-compete and non-solicitation clauses, many judges will favor the employer and a signed contract by what is assumed to have been an otherwise lucid and sane individual over your whining unless your arguments are strong and except when it comes to preventing you from earning a living. You may have signed an overly broad, onerous list of conditions that seemingly shackle you in indentured servitude for the indefinite future but that doesn’t mean your former firm will bother enforcing them or be able to when they hit a court of law.
Some states are more understanding than others. California has pretty much decided that with very few exceptions, these clauses are unenforceable.
“In a widely watched decision involving the now defunct accountancy practice of Arthur Andersen, the Supreme Court invalidated any agreement that seeks to restrict the right of an employee to go to work for a competitor or solicit a former employer’s customers using non trade secret information.”
In New York, clauses such as these are often enforced if you were terminated for cause. If you were laid off or left voluntarily, they’re generally unenforceable if not for valid reasons. Other states like Pennsylvania often use a “blue-pencil” to adjudicate such disputes, often striking out parts of the agreement that are too restrictive and leaving others in to strike a balance.
For example, when it comes to how long a firm can keep you from working for a competitor or from “competing” with the firm – if that’s even a practical issue with a non-partner or non-business development executive – most judges follow the “tequila shot” rule of thumb:
“One is not enough, three is too many…”
My most recent former firm harassed me over non-solicitation. I left an innocuous voice-mail message for a former colleague about a networking opportunity. That former colleague, who I didn’t realize had mechanical pencil lead instead of blood running through his veins, reported this “solicitation” to my former partner. It seems even mere knowledge that a bigger, brighter world exists outside the hallowed halls is enough to cause some firm natives to become anxious and paranoid.
Do your homework, get legal advice if the stakes are high, and make sure you are doing the right thing rather than trying to do any harm and you’ll probably be fine.
I am a small business owner in a field that heavily relies on the knowledge I pass on to my employees and the technology that we provide them. Unfortunately, no matter how hard a business owner tries to protect themselves from intellectual and physical theft, it still happens very often. Your “do no evil” statement is right on, however, it is unfortunate that most people feel that once they left, whether they signed a non-compete or not, that what they have learned (including client contacts) is theirs to bring with them. The only true way to protect from this type of theft is to have solid relationships with your clients. Non-compete are expensive to defend but a good relationship is just part of doing business properly. A good relationship “makes you money”, while worrying about non-competes and defending them ends up losing you money in the long run.
Non-competes are bad for the economy. They stifle innovation and protect entrenched incumbents from competition. I would argue that one reason Silicon Valley is Silicon Valley is that California does not enforce non-competes. In Massachusetts we have seen them used to prevent summer interns from seeking full-time work with other employers in the same industry, and to prevent hairdressers from going to work at nearby salons. They are often written so broadly as to prevent you from working in the industry where your skills are valued most — or even in an industry your former employer has considered entering. Interestingly, I have read that lawyers are generally not subject to non-competes. Can you image having a law degree and being told you can’t practice law for three years if you leave your firm? That’s what non-competes are often designed do to everyone else.