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March 8, 2010 News 18 Comments

Non-Compete Agreements

Non-compete agreements (NCAs) are designed to prevent individuals from leaving a company with valuable information and then using that information in a new job with a competitor of the company to the detriment of that original company/employer.

Sounds reasonable on its face. On the other side, what if you are the employee that with no malicious intent whatsoever, elects to change jobs and move on to bigger and better things? You should be free to do so, right? If on exiting your current job you are presented with the NCA that you signed when starting (and may have forgotten or misplaced) and you are a valuable developer, your soon-to-be former employer may be dropping more than a subtle hint in your lap.

So what is fair and reasonable in light of the two justifiable yet opposing positions?

This is the essence of the determination that courts must make in cases involving NCAs. In general terms, in order for an NCA to be “reasonable” it must protect an employer’s legitimate business interests while not unduly restricting the employee’s ability to work elsewhere. Other key considerations are length of time and geographical area (historically). The first part, protecting legitimate business interests, is satisfied if the employee involved had access to trade secrets of the former employer. Further, if the employer uses NCAs for only certain employees that have access to confidential material or trade secrets, they strengthen greatly their likelihood of support from the courts. As for length of time, six months to two years depending on the situation, is usually found to be acceptable. Anything longer than that would require a stiffer business reason for the restriction. Finally, geographic scope is considered. In the technology industry however, geographical area could include the entire US market. There has been some relaxing of the geographical scope restriction, which is why I used the parenthetical “historically” above.

Note that the NCA is a contract. All contracts must have “consideration”, or something of value, offered by each party and consequently accepted by the other party in order for the contract to be valid. If the NCA was a condition of employment at the point of hiring, then the promise of a job fills the consideration requirement. Introducing the NCA in an existing employer/employee relationship is different. Some courts have held that continued employment is sufficient consideration. In other cases, the execution of the NCA in conjunction with a raise or promotion has served to establish that sufficient consideration is present to enforce the NCA. An employee faced with the new (post-hiring) NCA requirement may not have any reasonable opportunity of negotiation. Some may however. If the employee is a valued software scientist, then ideally that individual could seek a severance package, providing an amount of money sufficient to offset the period of time in which they are prevented (by the NCA) from working in the same field for a competitor. As a general statement, the employee should always review the NCA carefully, even seek legal advice, in order to determine the restrictions imposed and the reasonableness of those restrictions.

The employer should make sure it is seeking to protect a legitimate business interest, and NOT just that it does not want competition. Lack of a justifiable business reason could be argued in the case of an employer having all employees sign an NCA, regardless of position, from receptionist to software engineer. Limited duration and geographical area are also helpful. An NCA of unlimited duration, where the employee can never work for a competitor, would work against the employer. In short, if the employer is careful to make the NCA as tight in scope as possible, in order to make the burden on the employee as little as possible, then they are in much better shape if the NCA is contested. If an NCA is too broad and lacks a sound business reason, its enforceability is strongly suspect.

Where a valid NCA exists, the new employer may also be susceptible to legal action by the former employer. Employers that lose key personnel to competitors often bring action against both the former employee (for violation of the NCA) and the new employer (for tortious interference with the prior relationship evidenced by the NCA). It is not unheard of for a new employer (that lures the key employee away) to belly up and take care of the employee’s anticipated defense, legal bills, and settlements with the former employer. I am not trying to scare people, but it should be understood that if an NCA is valid and you breach it, you are potentially liable for damages to your former employer. In addition, the former employer could seek an injunction preventing you from working for the new employer while the case is decided. Finally, if everything goes the former employer’s way, you could still be prevented from working for the competitor into the future. If you are the employee considering a job change and you asked directly if you signed and NCA, then obviously you must reveal the fact. If not asked and you do not volunteer the information, and the former employer sues the new employer, then the easiest way for the new employer to reduce its exposure is to terminate you. Not a welcome thought.

An interesting twist to consider is the situation where the employer terminates the employment relationship. Assuming that the NCA is valid and reasonable (see above), and would probably be upheld if the employee were the one terminating the relationship, then the issue really comes down to a restriction on the employee’s ability to make a living when the employer terminates employment other than for cause. Keeping in mind that we started with the assumption of a valid NCA, then strictly speaking, the employee is not free to ignore the NCA and the former employer could sue the employee, but then the court would have to look at the fact that the employee did not leave voluntarily and determine the reasonableness of limiting that individuals livelihood. My point is that being “let go” does not nullify the NCA, but enforcement by the former employer will be more difficult than if the employee left on their own.

Note that NCAs should not be feared, but they must be understood. In the HIT industry companies invent things and they try to sell more of these things to the industry than their competitors. They have a right to protect their inventions, know-how, trade secrets and customer bases. Anyone seeking to join such a company really should understand this going in. That said, it is not reasonable to expect a person to work for only one company in a given industry for their entire career. Some do, most do not. There is also the consideration of the type of work that the employee performs. The software scientist should have far more expectation of restriction on the ability to switch to a competitor than an administrative staff member.

Final Comments:

NCAs are not bad. If a company has something worth protecting, something essential to its business that if shared with a competitor would be damaging to its business, then they should be able to protect it. I don’t know how an employee would consider it “OK” to take that information elsewhere. I know it happens, but that does not make it right. Separately, we are all free to work wherever we choose. Absent the malicious factor, people should not be restricted from working for a competitor.

The problem is that you cannot unlock the brain of a software scientist, extract all they have learned at your company, then let them go on their way. Knowledge is retained and there is nothing we can do about that. I once saw it referred to by a BIG hardware/consulting company as “intellectual capital” (and I knew it was time to put that file down for the day). So even if nothing is physically removed, the secrets go right out the door in the scientist’s gray matter. Keeping them from using that knowledge to a competitor’s advantage is fair. Keeping them from earning a living doing what they like is unfair. It is a balancing act, a weighing of the consequences to each side, and a determination of fairness that the courts must perform when ruling on NCAs.

Please understand that even though I expound on valid or enforceable NCAs above, you must note that certain states basically do not permit NCAs (like California), others do but only in limited circumstances (New York and Virginia), while in others enforceability depends on the circumstances. This article has focused mainly on the individuals involved in the technology aspect of healthcare. Many states (like Massachusetts) clearly prohibit by law NCAs for physicians and nurses due to the fact that such agreements restrict a medical professional’s right to practice and also limit the patients’ right to choose their caregivers.

The NCA issue is heating up. Legislation has been proposed here in Massachusetts that would dramatically restrict NCAs by instituting strict guidelines, brightline determinations (clear “black & white” language) as well as safe harbor provisions. One very interesting aspect of the proposed legislation is that it would protect the employee residing in Massachusetts, even if the employer is not located in Massachusetts. I am watching closely as the bill winds its way through the legislature.

Finally, if you are faced with a situation involving an NCA and have serious concerns, please consult with an attorney or your local US Department of Labor office.

William O’Toole is the founder of O’Toole Law Group of Duxbury, MA.

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Currently there are "18 comments" on this Article:

  1. I’m wondering how hospitals get around NCAs when trying to lure away vendor talent… does this not happen as much as i think?

  2. This description seems sort of “employer-biased” in that it assumes that information flow during employment is from the company to the employee, and not the reverse. If a bring my expertise, ideas and know-how to an employer to help them develop a killer software application, does that mean I can’t apply the same expertise, ideas, and know-how to my next employer?

    In my consulting life I was occasionally asked to sign an agreement similar to an NCA. My response has always been: you wouldn’t hire me if I was restricted by previous agreements from doing my best work; so why should you be able to restrict my work in the future?

  3. Good article and sound advice. As stated in the article it comes down to if an NDA is “fair” and “reasonable” it more than likely will be upheld by a court of law. I agree and highly advise as Mr. O’Toole state if you have questions seek legal counsel.

    Today a lot of vendors are using NDA as a means to lock down senior executives it is in your best interest to be studious in executing an NDA with an employer. Once done it cannot be undone.

  4. Excellent description of non-compete agreements.

    It is critically important that the restrictions in an NCA are reasonable, and enforcement decisions are made sparingly. Even the simple act of an employer sending a letter to another employer can have unexpected business consequences. Any action that might be viewed as unreasonable can cause significant morale problems. If a former employee feels he/she is treated poorly, through twitter and other social networks, all other employees quickly learn about the situation.

  5. Epic’s NCA.

    Nearly everyone at Epic signs the same NCA, especially those fresh-faced graduates for which it is famous. There are three parts to this NCA. First, after your departure, voluntary or otherwise, you will not work for a competitor for two years. The list of competitors occasionally grows and has grown since I left Epic. Let me quote Epic’s currently stated list of competitors: “Misys/Allscripts, Cerner, eClinicalWorks, Eclipsys, GE Healthcare, Google (healthcare area), TrakHealth/InterSystems, McKesson, Microsoft (healthcare area), QuadraMed, Meditech/LSS, NextGen/QCSI, Siemens.

    This list includes not only the competitors listed above, but also their parent companies and affiliates. Affiliates are companies that are partially or wholly owned by the above companies (subsidiaries), joint ventures involving these companies, companies resulting from a merger involving or with these companies, and companies that gain control of the above companies through the purchase of stock or assets. A company is considered to be an affiliate of a competitor whether the transaction creating the affiliate is pending or completed.”
    So there you go. A decent list but by no means exhaustive. The NCA states that Epic creates the list of competitors by looking at vendors that they are short-listed with multiple times. Not all of Epic competitors are listed here. This portion of the NCA doesn’t bother most ex-Epic employees because Cerner isn’t really banging down the doors of old Epic implementors with 2.5 years of experience. If you are an Epic developer with 15 years of experience, that might be a different story. But how many of those are there?

    The second part of the NCA is with “Epic Consultants and Cooperative Partners.” You can work with these people for 1 year. This list is: “Accenture, ACS, Beacon Partners, CSC, CTG HealthCare Solutions, Deloitte, ECG Management Consulting, Ingenix Consulting (formerly Healthia), IBM, maxIT Healthcare, Perot Systems, Virtelligence, Vitalize Consulting Solutions.

    This list includes not only the entities listed above, but also their parent companies and affiliates. Affiliates are companies that are partially or wholly owned by the above companies (subsidiaries), joint ventures involving these companies, companies resulting from a merger involving with these companies, and companies that gain control of the above companies through the purchase of stock or assets. A company is considered to be an affiliate of such entity whether the transaction creating the affiliate is pending or completed.”

    This part a bigger pain-in-the-rear. I had applications out to consulting firms such as Accenture when I got the job at Epic and took it. I would imagine that there are more than a few Epic employees who chose Verona, WI over Chicago or Boston. Epic seems like more fun! and probably is. But maybe when you’re looking for a job that you don’t believe will be a long-term solution (this is a large percent of Epic), you should look at the doors that your job will open. Does Epic open doors? I don’t know. I’ll find out in 8 months. I do know that I wish I could apply to Deloitte!

    The third part of the NCA is the real killer. Until your year is up, Epic will flex its muscles to keep you off customer teams and installations. I knew someone who asked for a role re-assignment. He wanted to come off implementation and work on maintenance. When he was denied, he quit and tried to work for his former customer as their maintenance guy. This was a California customer – no NCA here – but Epic asked his customer to not hire him. He wasn’t hired. Even consulting firms not listed above need to have relationships with Epic if they want access to UGM and certifications classes and will not hire ex-Epic employees because they don’t want to cross Epic. Ask Epic implementors– not being able to go to a customer team kills them. A lot of Epic implementors who work for $60,000 per year are billed out at $100-150 per hour to answer the tough questions of consultants who make $90,000 and $120,000 per year. They see the money but won’t make the jump because they don’t know what to do in the meantime.

    Mr. O’Toole points out the suspect legality of NCAs, but the NCA itself doesn’t matter as long as a quiet blackball is in effect.

  6. The best discourse on NCAs that I have read. Thanks for bringing some clarity to this less-than-transparent topic that affects many of us one way or another.

  7. Does job title ever come into play?

    If I spent my years at one company doing IT and for the next company, who is a director competitor, I do finance, does this this trigger a violation NCA?

  8. Not letting employees go to work for a client seems extremely shortsighted. In my younger years, some might say misspent youth, I worked for one of the big eight consulting firms (now big 4?). They almost encouraged you to go to work for a client if you chose to leave for whatever reason. In fact they used to have ‘alumni’ parties once a year a at 5 star restaurant.

    Their thinking, and I agree with it is – if you leave on a positive note, you will someday need consulting /auditing and you will turn to the people you know (and like). Moreover, over your career, as you move thru different employers you’ll do the same.
    I saw it work time and again.

    So I ask Billy Faulkner – if you find yourself as a CIO down the road how will you feel about buying an Epic system if you now feel they are now treating you like a potential ‘criminal’?

  9. Is there not also pressure from Epic for Epic hospitals to not hire from other clients that are in imlementation status? My understanding is that an analyst, who is the key implementation person for an Epic application, can’t bail to another Epic client until 1 month after the live.
    Pressure from Epic can include service agreement issues and the status of certifiactions for other employees?

  10. Well done Bill. One thing to point out is that there are also cases where another company has an agreement with an Epic hospital IE The Christ Hospital. Where they agree to take on the same contract as that hospital. The only reason I know that is because I wanted to be employed by Caretech and they were interested in my abilities until they did a bit further research and what their HR explained to me was that regardless of whether I was working on an Epic project or not their contract prohibited me from being employed by the company. They handled it nicely enough although at the time it was a disappointment.

    To answer HISJunkie I have some major qualms on whether I’d decide to work with Epic. Knowing the fact that they have eager people who want to respond to my ever wish is enticing, the fact that their product is among the best on the market is also enticing. Their price point is not enticing, the lack of experience is also disturbing. Although they gave me my start in the industry I cringe at some of my initial thoughts and ideas and remember being thrown into situations asking to make tough calls with no data. So its a toss up, I couldn’t say I wouldn’t purchase them but I also can’t say I would. It would wind up being the same method as every other hospital uses call for an RFP and look at KLAS and pray.

  11. What I found interesting, was the people who left Epic, and were able to immediately begin working for one of Epic’s Clients (Kaiser) – and that was okay in some cases, but not all. Another former Epic went to a different customer, and was a part of the implementation. Once Epic found out, we were instructed to not talk to him and I think he was transfered elsewhere at the hospital.

  12. I’m sure this seems convoluted for many. Intellectual Property and “Intellectual Capital” are troublesome as concepts, because if recognized, your ability to use your mind, labor, and materials as you like is restricted. Ideally, there should be no restriction on private associations between employee and employer, especially from private parties.
    Since we live in a world that allows routine interference in the affairs of others, recognize that a contract is a contract. No one forces you to sign it.

  13. Personally I have no problems with my Epic contract its restrictive but more than offset what I learned. Also, being a business student with some very technical leanings (Interface Engineer these days) I was used to reading contracts and evaluating whether they were worthwhile to live by.

    My only actual problem with these types of contracts from companies (aside from E) are for the people who have been asked to leave, most have asked and even fought to be allowed to work in the healthcare industry (Not for a competitor) and been denied. That boggles my mind as it seems petty. If the company they are employed by doesn’t want them anymore I can understand denying a competitor but the hospitals would gain a great deal from someone with 4 years experience. Before you say I’m being short sighted and that these people would be bitter and speak poorly of their previous employer, I truly doubt it as they would be making considerably more on the other side of the fence with their respective experience.

  14. Maybe if a company has such a long reaching policy in denying people where they can work maybe they should balance it out with helping employees/ex-employees find where they can work?

  15. A good start but a few points to remember:

    Each state treatst these differently. For example, McKesson lost a huge legal battle in California on a non-compete. California treated their non-competes as threatening. Meaning, McKesson got in trouble for asking people to sign them.

    Another point is NO court has ever upheld a non-compete longer than one year. So if your non-compete says two years, just laugh.

  16. This is the most informative article I’ve ever read on the subject (including all the comments!) Mr. O’Toole’s comments about using the NCA just to limit competition are right on! Thank you for this invaluable information.

  17. I once worked at a company who made the NCA/ND a “material condition for my employement or continued employment”. This wasn’t just to the newbies; but, to employees that had been there for years and had never been required to sign one. It was phrased in such a way that we had no choice to sign because keeping our job was dependant upon signature; yet, so sweetly phrased that if reviewed in court it would appear that we “appreciated and agreed that we shouldn’t be allowed to work”. When pushed, I finally submitted mine with a note that it was required by corporate, when I really wanted to say it was required under duress.

    What about right to work states? Where do those fall in all of this? Several states were mentioned; but, the term “right to work” wasn’t applied. For sales reps – most can’t afford to take a year off – although as bad a year as it was for many, we might make more on unemployment.

    The definition of territory is another issue. If you’ve covered the entire US in a special role or your home state in which you live in another role; how, can the “mason-dixon” line be drawn? It certainly is vague in most NCD’s that I’ve seen. The Epic references above where competitors are spelled out is a new one for me.

    To play devil’s advocate – why is it wrong to solicit clients, some of whom you’ve established relationships built on trust over years? If you’ve left a company because you don’t believe their product or standards are good – are we not doing our clients a disservice by not continuing a relationship of trust with them? I think there is no clear answer on that because there are some sales reps that would sell their mother swamp land just to make quota; but, there are many who are ethical and really want their clients to have the best of what the industry can offer. In this industry – we are going to interact with some of the same clients in various ways whether intentionally or not at some point in time.

    I am going to go out on the ledge and “assume” that some HIT corporations don’t pursue these small sales reps deals in many cases because there may be inhouse dirty laundry that the injured employee could reveal to the public (that has nothing to do with trade secrets) that it’s worth much more to ignore the sales rep or other employee than to have corporate dirty laundry aired…assuming there is some. While that may seem like playing dirty, by fighting back – how can you feed your family, if you’re not allowed to work in an industry that you’ve spent 10-20 years in?

  18. A heartfelt thank you to all who appreciated my work on this HITlaw posting.

    To “Always Curious” – depends on the NCA. If it was tailored for development only then arguably ok to move to finance, but if it was a straight “no competitors” then not so ok.

    To “LawyerGal” Your statement that NO court has ever upheld a non-compete longer than one year is not accurate. One good example would be Philips Electronics North America Corp. v. Hope, 631 F. Supp. 2d 705 (M.D.N.C. 2009), in which the court not only upheld a two year restricted period, but it also extended the term by another 11 months due to a tolling provision in the NCA, whereby the period of restriction was tolled (extended) to match the period of time when the employee was working for a competitor in violation of the agreement. More recently, a court upheld an 18-month restriction period, which it enforced from the date of summary judgment, not from the date employment ended. The court in TEKsystems, Inc. v. Bolton, 2010 U.S. Dist. LEXIS 9651 (D. Md. Feb. 4, 2010) permitted an “equitable extension” of the restricted period, even though the NCA lacked such a provision. I used these two examples to demonstrate that restricted periods in NCAs of more than a year are upheld, and that extensions beyond the already more than one-year terms are also granted. Please understand that I make these comments not to put down LawyerGal but out of concern for all the readers of these comments.

    Again, thanks to all for reading. LawyerGal, feel free to contact me at my office if you wish to discuss.

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