Noncompete Agreements: What's the Deal?

When you sign a noncompete agreement, you agree that you won't go to work at a rival company if you quit or, in some cases, you agree that you won't start a competitive business.
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Noncompete agreements are used to protect trade secrets. With the increased mobility of the workforce, companies have determined that they need to protect proprietary information. You could look at noncompetes as trade secret contracts.

Nondisclosure or confidentiality agreements are used to prevent employees and anyone else who has access to information that the employer considers to be proprietary or confidential, such as underlying technology or data about products in development, from using that knowledge or disclosing it.

What's the difference? Noncompete agreements prevent an employee from leaving a company and working for a competitor in a role where the information might be used. Such agreements can last a limited time — generally, two to three years at most. Nondisclosure agreements last as long as the trade secret lasts.

Over the course of the past 20 years, trade secrets have become an increasingly important aspect of a company's business. If you couple that reality with employees being so mobile today, you have a workforce whose knowledge can worry companies. For example, what type of information would someone take to a new employer that might give that new company a competitive edge?

The quintessential example is the secret formula to Coca-Cola. Anything can be a trade secret as long as it's information that provides value and that a firm takes reasonable measures to protect. That might include recipes for cookies, profit margins, customer lists, upcoming products, marketing plans or any business data that gives a firm that extra oomph in the marketplace.

There's no federal law on noncompetes. Some states, such as California, don't enforce noncompetes at all; it wants to keep employees free to easily leave and join a new company. Other states, such as Florida, are seen as being more employer-friendly, favoring the employer's protection and the privacy of their information.

Does that mean the labor market differs to a wide degree in different states? California is well-known for being the headquarters of many companies who focus on the tech industry, so people point to the lack of noncompetes as the reason for their existence there. Other than that, there's nothing that seems obviously different in the labor market there. Often, noncompetes are seen as being more favorable if a state is trying to encourage larger companies to thrive. Different experts dispute how necessary noncompetes are, and whether they have a substantial effect on the economics of a particular industry.

Some states are considering changing these laws, saying that there have been a lot of abuses of noncompete agreements, so they are trying to rein the noncompetes in. Approximately nine states are working to put some restrictions on their use, while about five other states are seeking an outright ban on them.

Still, companies will enforce noncompetes to protect trade secrets or to protect legitimate business interests, such as customer relationships, for example. It comes down to the particular language of the agreement and the state you're in.

Some agreements are enforced to prevent former employees from entering into work in a similar industry, even if it doesn't involve the disclosure of trade secrets. Most states adopt some sort of standard holding that a noncompete agreement mustn't be egregious in its length of time or geographic scope and shouldn't meaningfully restrict a worker's ability to find employment.
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Be sure to consult with a qualified authority before signing — or having a new hire at your company sign — a noncompete.