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Bloomberg Got the Non-compete Wrong


A few weeks ago, one of my favorite authors at Bloomberg, Justin Fox, dropped the ball on his analysis of the growing trend of non-compete agreements. In his article, The Tyranny of the Noncompete Clause, Fox argues that a non-compete agreement reduces job mobility and entrepreneurship and causes a brain drain from certain regions (having individuals under non-compete leave that region). Furthermore, he states that individuals become significantly less motivated and get worse results on effort-based tasks because the limits on future employment dim a worker’s external prospects and also decrease the perceived ownership in their jobs. Finally, Fox argues that a non-compete generally lowers wages presumably because employers believe they do not have to pay top dollar for retaining talent if they have a non-compete.  Although these arguments are initially quite compelling, they're also absolutely wrong.

Non-competes are very common in engineering and technical occupations, which require a significant amount of research and development. Having meaningful non-competes allows companies to invest significant amounts of money into worker training and education, and fully promotes research and development, without the fear of these top employees jumping ship for a marginal increase in compensation. At present, there are 46 states that enforce non-competes. California, however, does not. The argument then is that the state with Silicon Valley is the best bellwether of non-competes. However, in the last decade, Silicon Valley has been losing significant portions of its tech base companies to other states, including Texas. Ironically, Texas has gone from a state that disfavored non-competes to beginning to enforce them. In fact, it is arguable that under Texas' present non-compete law, which requires a judge to reform a non-compete that is too broad in time, geographic scope, or activity, courts will more likely than not enforce a valid non-compete.

Fox argues that an employer should provide some type of consideration for non-compete. On that point, we agree. Texas requires that a non-compete to be part of or ancillary to an otherwise enforceable agreement. These types of agreements may involve providing confidential information, financial benefits, stock options, or a variety of other considerations the employer may choose to award. Furthermore, Texas has recently adopted the Uniform Trade Secrets Act, which also protects the confidential information of a tech-savvy business.

It is not surprising that Austin and San Antonio are seeing an inflow of technical-based companies. Although Austen always was a mini Silicon Valley, San Antonio is developing business in the medical/technical and oil and gas sector.

The basic issue regarding a non-compete for employers is very simple: does an employer want to invest time, effort, and technology in a senior employee/manager if that person will become that employer's competitor tomorrow? The reasonable and reasoned answer to that question should be no. There would be no incentive to invest in a person if there's a likelihood that he or she may then work for a competitor or open up a competing business to the employer who has invested so much time, effort, and treasure in that person.

From an employee's perspective, a naked non-compete that does not provide the employee any additional training, confidential information, or other consideration, should not be enforced. Such a non-compete is a naked and blatant attempt to restrain trade without any goodwill basis by the business to do so. So, while valid non-competes are certainly valuable in the marketplace, and, I believe, should be enforced on reasonable terms, a naked restraint of trade should be set aside as patently unreasonable.

For more information about the non-compete agreement/clause in a contract, contact our business lawyers at the Vethan law firm, PC.

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