What do athletic shoe designers, sandwich-makers and summer camp counselors have in common?
Over the past several years, all of them have been the subjects of lawsuits involving noncompete agreements.
One of the most recent involves three shoe designers for Nike Inc. The Beaverton, Oregon-based footwear and apparel giant claims the trio broke yearlong noncompete agreements after they quit in fall 2014 and announced plans to start a design group for rival Adidas. The designers countersued in March, claiming parts of the noncompete are unenforceable under Oregon law.
Once used almost exclusively in employment contracts with highly skilled workers and top executives, noncompete agreements have become commonplace for all types of employees, including those in minimum-wage jobs and at companies of all sizes and industries.
The increase has seen a related rise in lawsuits. In 2012, noncompete agreements were at the center of 760 published U.S. court decisions, a 61 percent increase from the previous decade, according to research that Boston-based law firm Beck Reed Riden conducted for The Wall Street Journal.
Employment law experts disagree on the advantages that noncompetes provide. Some maintain the agreements are essential for companies to remain competitive and protect trade secrets. Others believe the agreements stifle innovation and entrepreneurship.
“Everyone understands winning the talent war is what gives companies their competitive edge,” said Orly Lobel, a lawyer and University of San Diego employment law professor. But “when we reduce mobility, moving from one job to another, we’re reducing knowledge flows in an industry and the whole industry develops and grows at a slower pace.”
The debate hasn’t kept companies from adopting noncompetes as part of the normal course of doing business. At employers that use them, it falls to the human resources departments to make sure agreements are integrated into their people management practices, including recruiting and onboarding.
State Laws Vary
State laws governing noncompetes vary. Employers in states such as Louisiana, Oregon and South Dakota can in certain circumstances legally bar ex-employees from joining a competitor in a specified geographic area for up to two years, according to a 2013 Beck Reed Riden survey. By contrast, four states — California, Montana, North Dakota and Oklahoma — have either severely restricted noncompete agreements or banned them outright, according to the survey.
Depending on the state, companies may need to notify prospective employees of noncompete agreements in an engagement letter or employment contract. In states such as Oregon, employers must also provide two weeks’ notice of a noncompete agreement before a new hire’s start date or in advance of a promotion.
In certain situations, companies may include noncompete language in a job application to protect themselves from a prospective employee sharing trade secret or other information from a previous employer, according to Dan Forman, an employment lawyer and partner with Carothers DiSante & Freudenberger in Los Angeles.
Whatever companies choose, it’s important to make employees aware of policies and to provide HR and managers with mandatory training on a regular basis on policies and how they should be enforced, Forman said.
Noncompete agreements have become so common, the Society for Human Resource Management is conducting a survey to learn more about how member companies use them. SHRM public affairs manager Kate Kennedy said results would be available later this year.
States with noncompete agreements generally have three “reasonableness” standards covering length of time, distance from a previous employer, and type of work an ex-employee is prohibited from doing. States’ interpretations of what constitutes reasonableness differ. “I remember before 2008 seeing covenants that basically identified the known universe as the geographical region. I doubt any court would hold that as reasonable,” Forman said.
Employees at fast-food sandwich chain Jimmy John’s pushed back over what they claim are overly broad and “oppressive” restrictions in the noncompete agreement. The agreement prevents employees who quit from working for any business deriving more than 10 percent of its revenue from selling subs or other “wrapped or rolled sandwiches” located within 3 miles of a Jimmy John’s shop for two years.
In September 2014, Jimmy John’s workers filed a class-action lawsuit over the agreement. A lawyer representing the workers told Huffington Post that because the chain has 2,000 locations, the noncompete agreement effectively covers 6,000 square miles in 44 states. In October 2014, Congress asked the U.S. Labor Department and Federal Trade Commission to investigate. The company filed a motion to dismiss the case, and in April a federal judge in Illinois declined to grant an injunction that would have stopped Jimmy John's franchises from enforcing the noncompete agreements.
Companies such as Jimmy John’s may ask low-skilled, low-wage workers to sign noncompetes as a way to protect trade secrets such as recipes or sandwich-making methods “using all the means they have,” Forman said.
Legal experts say some employers shifted to using trade secret agreements to achieve the same effect as noncompete agreements, especially in states that restrict noncompetes. Trade secret agreements generally prohibit ex-employees from sharing trade secrets they learned on the job with a future employer.
Lobel said her research on noncompete agreements has shown that employees who are bound by them feel unmotivated and view their career trajectories as limited. Her research also has shown the agreements have the unintended consequence of leading the least desirable employees to stay “because they don’t see external options.” More desirable employees “sought after and fought after, they’ll leave and be indemnified,” with a new employer paying for a breach of noncompete agreement as part of the cost of doing business, she said.
That appears to be what’s happening in the Nike case against its three former design employees, whom the company claims breached their contracts and took trade secrets and “a treasure-trove of Nike product designs, research information and business plans.” Nike’s lawsuit alleges that the ex-designers showed Adidas copies of their noncompete agreements and that Adidas promised to “pay an outside law firm to help manage the situation” and represent them in any lawsuit.
Nike is seeking $10 million in damages and back pay. An attorney for the company declined to comment, and a Nike spokeswoman did not reply to a request for comment. Matt Levin, a trial lawyer with Markowitz Herbold PC in Portland who is representing the designers declined to discuss the case while litigation is pending, adding: “We have done our best to state our position in the documents we have filed with the court.” A trial is slated for late June.
Updated May 27, 2015, with Jimmy John's ruling.