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Four Things You Need to Know about Noncompete Agreements

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Genomics companies say they don’t compete with, they complement, others in the industry. Until it comes to employment contracts, that is.

 

By Adrienne Burke

 

As a new hire, should you sign a contract that prohibits you from competing with your employer after you’ve parted ways? As an employer, should you ask such a thing of your employees? In the cozy little fields of genomics, proteomics, and bioinformatics, restricting employees to future employment outside of your competitors can mean banishing them from the sector altogether. Is that fair or reasonable?

That’s what a judge would ask. And whether you’re an employer or an employee, it’s in your interest to be clear about the answer before you get so far as a courtroom.

Signing an employment contract can be like getting married, says Suzanne Tsintolas, an employment attorney in Rockville, Md.: “It’s like, I really love you, dear, but you have to sign this prenuptial.” Tsintolas, who has a client whose former bioinformatics employer is suing him over a noncompete agreement, says she has fought on both sides of employment contract cases.

Tsintolas’s bioinformatics client admits to being naive about the consequences of the agreement he signed several years ago: “I suspect there are an awful lot of people who signed these things because they didn’t know better or were told it was no big deal. Knowing what I know now, would I sign another noncompete agreement? Only if it was very clearly defined,” he says.

Here are Tsintolas’s answers to GT’s question, “What would you tell employers and employees who are about to draft or sign a noncompete covenant?”

 

1Employers should customize contracts for each employee. Especially for upper-level positions, Tsintolas says employment contracts should be individualized. Companies put great effort and resources into recruiting the right person for the job, but then drop the ball when it comes to the employment contract.

Tsintolas, who worked as an executive recruiter before becoming an employment attorney, says, “I used to get corporate CEOs looking at me saying, ‘Did we get ’em?’ I’d say, yes, but now we have to draft the contract. They’d say, ‘Don’t we have something in the can?’ It’s like saying, we got Princess Diana, let’s take her to Wal-Mart and dress her.”

“I advise employers to look very carefully at each individual and not to do these blanket noncompetes,” says Tsintolas. Corporations need to look at individuals, she says. “Sit down and think about the individual you are hiring. What are the company’s interests that would be at risk if this employee went to work someplace else?”

 

2Be reasonable. Founders of small companies tend to be emotionally invested and are apt to be unreasonable about protecting their interests. But a noncompete clause should be no broader in scope than is necessary to protect the business. Employers have to be able to show that they have a legitimate interest in preventing someone from working for a competitor.

“Contracts that say someone can’t work anywhere in the world for the rest of his life are generally considered by any jurisdiction in the country to be a restraint on trade,” says Tsintolas. Covenants not to compete are enforceable only to the extent that they can be shown to be reasonable. “You can’t say that they can’t work for anybody else in any capacity when all your company does is manufacturing. You can’t say that you won’t allow them to be consultants. The objective is that Joe Jones won’t go out and compete with you.”

Remember: The purpose of a noncompete covenant is to protect the employer against unfair trade competition by the employee, but at the same time not to unreasonably restrain the former employee from making a living.

Not surprisingly, Tsintolas advises, “Get an employment lawyer! A general attorney is not going to have the degree of expertise” that you need to draft such a contract.

 

3Be able to show why you are reasonable. The burden of showing that this covenant is reasonable rests on the employer, Tsintolas says. “This is their most difficult burden,” she says, because the law generally looks upon noncompete agreements unfavorably. In fact, in some jurisdictions, including the state of California, there are already laws on the books prohibiting them. “To restrict us there has to be a good reason,” Tsintolas notes.

That’s why employers rarely pursue legal action. And when they do, it’s usually because the violation is egregious, she says.

In court, Tsintolas says, a judge will consider three aspects of a noncompete covenant to determine if it is reasonable: duration, geography, and scope. Of those, Tsintolas says geographical restrictions are probably the most scrutinized.

Tsintolas’s bioinformatics client says his noncompete clause is vague and bans him for two years from working for what could be a large number of companies. “It basically says that I cannot participate as an employee or as a consultant to any company that participates in the following activities: bioinformatics, virtual drug design, and other stuff like that.”

“There’s going to be more and more case law made in this area of employment law to address the global economy issue,” Tsintolas predicts.

 

4Be willing to negotiate. In contract law there has to be some give and take, says Tsintolas, who tells her corporate clients to take the time to explain their contracts to new employees and to get the employee’s feedback. “That’s when you have that give-and-take kind of discussion and negotiations, then it’s more difficult for an employee to say later that he didn’t know what he was signing,” she explains.

What if the employee balks? “I would advise employers to think carefully about someone who would not sign a noncompete. It should be laid out in such a way that they understand that it is a legitimate business interest.”

Employees have to be realistic too, Tsintolas says: Expect that a company is going to want you to contract with them in this area of law. It’s part of doing business at that level.”

That said, employees should “read the contract very carefully and find out … in this jurisdiction it is a void contract?” If it’s not, and if you’re still serious about going to work for this company, Tsintolas says, “Signing it when you know it won’t hold up is just game playing. You need to go to them and say, ‘This is not going to work. Let’s work together to come up with something we’re both comfortable with.’”

Negotiating the noncompete clause shouldn’t be any different from the rest of the contract, she points out. “People are more interested in polishing their negotiation skills in compensation but they completely forget that part of their contract could be these covenants. It’s just one more button on the shirt.”