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Lynne Curry: Keep an eye out for pirate employees

Lynne Curry

Imagine you're driving down the highway, headed to a new town, and the road map you're relying on dematerializes. Next, your speedometer vanishes. You no longer know how fast you're driving. Then your gas gauge disappears. You don't know how much fuel you have left.

Lacking these tools, your trip takes more effort.

For reasons like the above, many individuals intending to start their own businesses prefer to work for another's business to learn the ropes. It gives them the road map and guiding gauges that speed them on their way.

Often, the businesses that hire these entrepreneurs-in-training ask them to sign a non-compete agreement to guard against the losses they face by incubating their own competitors. According to a Wall Street Journal article, approximately 80 percent of CEO agreements contain non-compete clauses, as do an increasing number of professional employee contracts.

Sometimes the budding entrepreneurs decide against running their own businesses and remain employees. Often these entrepreneurs-in-the-making sign and comply with non-compete agreements because of their own innate integrity. At other times, individuals agree not to start their own businesses for a reasonable time after leaving without intending to keep their promise.

Attorney Brit Weimer compares these start-up entrepreneurs to pirates. Said Weimer, "The owner of a merchant vessel clearly knows when his ship comes under pirate attack. Buccaneers armed with cutlasses board his vessel. In the workplace, employee pirates steal an employer's treasure -- trade secrets, proprietary information and customer relationships."

"Unlike sea pirates," Weimer said, "this theft is often carried out by trusted, supposedly honest employees."

What do employers, departing employees breaking non-competes, and clients caught in the cross hairs between the two need to know?

Courts assess the issue on the basis of fairness. Courts in most states enforce non-competes, considering them a contract between an employee and an employer who gives the employee substantial training, access to intellectual property and introduces him to clients in a way that makes the employee an eventual competitive threat to the employer. In return for the training, introductions and pay, the employee promises to not compete against the employer for a period of time after leaving the employer.

Normally, if that time frame is short -- two years or less -- and the geographic restriction reasonable, courts rule that employers have the right to enforce non-competes. Otherwise, departing employees receive pay for gaining intellectual property and building client relationships they later exploit for personal benefit.

Employers face a strategic business decision: to litigate or not against those who break non-competes. While the former employer may win money from the employee, could the employer make more money by simply running their business and not engaging in a time-consuming legal process? Assuming they win, will they be able to collect from a former employee with potentially shaky financial status?

Further, though non-competes restrict a former employee from starting a competing business for one to two years, departing employees who honor non-competes may eventually become viable competitors while those who break non-competes may do irreparable harm to their reputations and ultimately fail as competitors.

Departing employees breaking non-competes often feel they deserve to start their own businesses and rationalize that they "didn't take much" from former employers. Further, while their business start-ups also harm former co-workers, they may believe those individuals should follow suit and also start businesses.

These new business owners risk a lawsuit. While they often breathe a sigh of relief when the non-compete expires, the legal risk extends beyond the non-compete's expiration date -- when actual damages become easier to prove. Further, they've proved themselves dishonorable and word travels fast in Alaska.

Clients caught in the cross hairs generally wonder if they have skin in the game. After all, departing employees who start new businesses can offer services at lower cost than their former employers because they haven't had to invest time learning how to best deliver services or creating client relationships. Further, clients often prefer working directly with the employee with whom they've built a front-line relationship.

Clients need to consider integrity cost. Do they want to do business with someone who signs agreements they don't honor? Do they want these individuals around their employees? Or do they consider these agreements an unfair restriction?

Has an employer asked you to sign a non-compete? Has a former employee broken one? As a client, have you been caught in the crossfire? Whatever your role, you have a lot to consider.

Dr. Lynne Curry is a management/employee trainer and owner of the consulting firm The Growth Company Inc. Send your questions to her at lynne@ thegrowthcompany.com.


Lynne Curry
THE WORKPLACEBy LYNNE CURRY