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As non-compete agreement use expands, backlash grows

Patrick Thibodeau | Feb. 9, 2016
Legislative opponents say noncompetes can derail careers and damage people financially.

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Noncompete agreements are becoming boilerplate in employment contracts, and for employees, there's nothing good about them. They create enormous uncertainty about future job options and worry about launching a new business.

Their use is spurring legislative fights in leading tech-industry states.

Employers see noncompete agreements as a "low-cost measure to bind their workforce," said Massachusetts State Rep. Lori Ehrlich (D-Essex), in an interview. She has been trying to get noncompetes banned in that state for years.

The use of noncompete agreements may be increasingly common.

One recent survey, with more than 11,500 respondents, that was conducted by three law professors found that about one in five workers have signed noncompete agreements.

"They have been controversial forever," said Norman Bishara, a law professor at the University of Michigan, and one of the researchers reporting on the data. "They are clearly anti-competitive, so courts have always looked at them kind of askance because they are on their face designed to restrict competition," he said.

But courts do look at competing factors, Bishara said. Noncompetes go back many years, and stem from issues where, for instance, a former bakery employee sets up a competing bakery across the street.

Bishara, along with fellow law professors Evan Starr at the University of Maryland, and J.J. Prescott also at Michigan, are working on a paper on noncompete agreements, but a final conclusion awaits.

The answer, at least to opponents of noncompetes, seems apparent in the case of California, which has long banned them. The state continues to see tech sector growth, for example, in most recently by automakers building connected and self-driving vehicles. But Bishara cautioned that there are many factors, such as access to capital, contributing to California's success.

In Washington state, home to Amazon and Microsoft, state Rep. Derek Stanford (D-Bothell) is attacking noncompetes in legislation (HB 1926) that would restrict their use. His bill received a key committee approval this month and faces one more committee vote before advancing to a vote by the full House.

Stanford said he has heard from programmers and others in the tech sector -- "quite a few and very loudly," he notes -- who are upset with these agreements.

A major problem with noncompetes is the uncertainty they create, Stanford said. "It is essentially unknowable at the time you sign a contract what exactly is the standard you will be held to when you leave," he said, in an interview. Employees, "can't really be sure if they are complying or not."

In Massachusetts, opponents of noncompetes have packed hearings to support legislation that would ban the agreements, Ehrlich said.

 

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