Monday, May 16, 2011

To Compete or Not To Compete: Engineers and the Non-Compete Clause

In today’s engineering job market, changing jobs every few years is almost a given because the days of lifetime employment with one firm are virtually extinct, at least in the U. S. If you become a qualified specialist in a certain field, it is more than likely that when you change jobs, you’ll most easily find a new job in the same field, perhaps even working for a competitor to your previous firm, or a new startup founded by members of your previous firm. And if that happens, you had better make sure that you read all those papers your previous employer made you sign when you started work there, because the chances are that one of them contained what is called a “non-compete clause.”

A non-compete clause, also known to employment lawyers as a “covenant not to compete” or CNC, is an agreement on the part of the employee not to compete with the employer after termination of employment. Usually a limited time and even a limited geographic area are specified, so a typical clause might read, “In the event of Mr. Blank leaving the Company, he agrees not to engage in a similar engineering pursuit for any firms in competition with the Company within the state of X for a period of two years following termination of employment with the Company.” Being a matter of civil law, these clauses are governed by state codes, not Federal law. I was not too surprised to learn that, except in the case of equity owners of a firm, California absolutely prohibits any form of non-compete clause in employment agreements. But most other states allow it as long as the terms are reasonable and the purpose is to preserve the firm’s legitimate business interests.

Even in states that allow such agreements, there are definite limits to the clause’s scope. A company can’t bar you for life from doing a specific kind of engineering, nor can they be too general about the kind of work you are agreeing not to compete in. So there is inevitably a matter of judgment involved, and like many other civil-law matters, as long as nobody decides to sue you, you can (from a legal standpoint, at least) do whatever you want. In this aspect, non-compete agreements resemble nondisclosure agreements, which bar an employee from taking or using business-critical information once they leave a firm.

Despite all these restrictions, the fact is that many startup companies are formed around engineers who used to work for larger firms where they were unable to obtain management support for a new technology, or who left for other reasons. The company that many historians regard as the cornerstone of Silicon Valley, Fairchild Semiconductor, was formed when a group of engineers hired by William Shockley for his Shockley Transistor Corporation got tired of Shockley’s incompetent management and left to form a startup. Since none of them were part owners of Shockley's firm, at least to my knowledge, and California prohibits non-compete clauses, they were unhindered by such obstructions and were able to found the Silicon Valley we know today.

But there are clearly ethical questions involved when an engineer considers quitting one company to go to work for a rival firm doing basically the same type of work. Who is affected by this action? The parties to it are the firm the engineer is leaving (call it Company A), the new firm he or she is joining (Company B), the engineer, and the wider customer base and public served by the business both firms are engaged in.

From the viewpoint of Company A, it is a bad thing that the engineer is leaving and will now provide staff resources to B instead of A. That is why Company A insisted on having a non-compete clause in the engineer’s employment contract in the first place. Company B’s interests are more or less directly opposed to those of Company A, at least in the narrow sense. To the extent the engineer in question has rare or unique skills, Company B’s gain is Company A’s loss. Once the engineer leaves A for B, he or she casts in their lot with Company B, assuming there was enough incentive in terms of salary, job opportunities, equity, etc. to make it a good move.

What about the line of business as a whole? Generally speaking, customers and the public benefit from more competition rather than less. Taking things to a fictional extreme, you could imagine an industry dominated by one giant company which maintains extremely restrictive non-compete agreements with all its engineers. This outfit could charge whatever it wanted because nobody could ever hire away its engineers to start up a rival firm.

So it looks like Company A against the world, and that is one reason why, like patents and other forms of intellectual property, there are time and often geographic restrictions on non-compete clauses. The public interest is best served by restricting them, or, as in the case of California, prohibiting them nearly altogether.

My advice to engineers just starting their careers is to actually sit down and read all that boilerplate fine print in your employment contract. Since you signed it already, you are formally bound by its terms, and when the time comes for you to look for another job, you should be aware of possible restrictions on your freedom of movement. Whether or not a non-compete clause should influence your choice of future employment is an ethical as well as a legal question, but one you should make in an informed way.

Sources: I found some useful background on the non-compete clause in the Wikipedia article “Non-compete clause.”

1 comment:

  1. Great post. I was lucky enough to not have a non-compete with my last job. But when push came to shove, I couldn't bring myself to take a position with a direct competitor. I know people do it, but how is the second company expected to trust you?