Where covenants go wrong
- By Carl Peckinpaugh
- Mar 18, 2001
After decades of playing catch-up, the Washington, D.C., area — and particularly Northern Virginia — appears poised to overtake California's Silicon Valley as the center of U.S. technological innovation.
But before the Old Dominion can transform itself into the "Silicon Dominion," it needs to consider whether some of California's success might be attributed to that state's progressive laws. One California statute in particular, which restricts the use of noncompetition covenants, may play a role in its ability to attract highly talented workers.
Generally, a noncompetition covenant is an agreement between an employer and an employee that restricts the employee from working for a competitor for a specified time after the job has ended. Historically, these arrangements were looked upon unfavorably in law because they were seen as an unfair restraint on trade.
Such agreements were also thought to harm the public; they interfered with normal commerce and could make it virtually impossible for affected workers to practice their chosen professions after their first job. But more recently, most states have accepted using such covenants so long as they are narrow in scope, geographic application and duration.
The most common rationale given by those who promote noncompetition covenants is their purported value in helping protect an employer's trade secrets from improper dissemination to a rival. But other laws are far more effective.
For example, an owner of intellectual property who believes it may be misappropriated can ask for an injunction to stop it and can sue for damages if necessary. Moreover, in most states, stealing intellectual property is considered a crime, punishable by fines and prison terms.
Trade secret protection laws are as strong in California as in any other state. If not, there would not be so many high-technology companies in the state. Clearly, using noncompetition covenants is not required to protect an employer's trade secrets.
Most employers like such covenants simply because they make it harder for employees to go elsewhere, where they might be treated better. Such employers often will write their covenants as broadly as possible to restrict their employees. Fortunately, most courts won't hesitate to reject overly restrictive covenants as contrary to public policy.
Also, the courts will look beyond the plain words of the covenant to the facts at hand. For example, at least one court has noted that the dynamic nature of the Internet industry calls for a shorter duration in such agreements than in other circumstances.
In any event, many companies that could use these covenants choose otherwise. That's because many of the best and most productive workers will not take a job if doing so requires them to restrict their futures in that way.
These companies realize they are ultimately better off when they treat their own employees right. California has adopted a similar approach for its employers. Other jurisdictions should consider following its lead.
Peckinpaugh is corporate counsel for DynCorp, Reston, Va.