The Problem of Non-Compete Agreements

Topic Overview and Current State

The issue that is going to be investigated in the paper at hand is related to the problem of non-compete agreements or covenants not to compete. In contract law, the term refers to a specific clause under which an employee signs a document restricting his/her ability to occupy the same (or similar) position in a firm that competes with the current employer for a particular period of time (Mullins 26).

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The use of this restrictive clause is based upon the assumption that an employee may bring competitive advantage to another party by revealing some confidential information about his/her former employer. Depending on the position, it may be related to business practices, client lists, strategic management, leadership peculiarities, etc. The major problem with exercising this prohibiting practice is that the abuse of over-broad use of it may result in preventing a person from changing an occupation at all since it may result in legal proceedings (Marx et al. 396).

Although the common practice is to use “reasonable limitations”, there are still numerous exceptions since it the boundary between reasonable and illegally binding remains unclear and varies per jurisdiction (Ghosh and Shankar 311).

Currently, the majority of states in the US recognize non-complete covenants, except Montana, Oklahoma, California, and North Dakota, where all forms of such clauses are banned. Non-compete agreements are closely related to non-disclosure agreements, which specify all types of information that the parties entering a contract cannot disclose to a third party. For having legal validity, both agreements must be supported by consideration, be reasonable in terms of their scope, time, and geography, and protect legitimate interests of both parties (Mezrich and Siegel 149). The case to be analyzed reflects how contradicting interests of the parties involved may complicate the process of resignation.

Case Summary

The case described in the article “Former ​IBM Cloud CIO Sued for Violating Non-Compete Agreement, Taking AWS Job” involves two parties: IBM company and Jeff S. Smith, its former CIO. The company has sued Smith for violating his non-compete agreement after he decided to take up an executive position at Amazon Web Services (AWS), one of the major competitors of IBM. The organization claims that there was no one-year mandatory delay (agreed upon in the contract) before Smith could work for any industry rival, which allows accusing him of breaching fiduciary duty and misappropriation of trade.

However, the case is not as simple as it may seem to be. When Smith announced his decision to the CEO of the company and faced objection (with a reference to his signature of a non-compete covenant, binding him to wait for minimum a year), he agreed to delay his resignation. Yet, since he had open access to all the confidential data that could undermine the company’s position in the market, it made IBM suspect that he could have wiped his tablet and smartphone issued by the company to cover up his tracks (Dawn-Hiscox).

Despite the fact that Smith was initially prohibited from taking up his new position in AWS until a full hearing of the case takes place, he was later allowed to start training without authorization to recruit new employees or look for clients. The court will have to decide if he will have to wait until May, 2018 and return IBM $1,714,800 worth of the company’s shares due to the breach of the contract (Dawn-Hiscox).

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Historical Precedents and Potential Future

In 1414, English common law (after considering Dyer’s case) decided to prohibit non-compete agreements since they put limitations on free trading–the situation remained unchanged until 1621, when the restriction was limited by a particular geographic area. In 1711, the modern framework was established after the case of Michel v. Reynolds, which led to the comprehensive enforcement of non-compete covenants (Ghosh and Shankar 307).

Smith’s case is not the first one for IBM. In 2008, the company started non-compete clause case against Mark Papermaster, Vice President of the Blade Development Unit with the same complaint concerning misappropriation of trade secrets and the breach of contract. The reason was that Papermaster accepted the position of Senior Vice Presidents of Devices Hardware Engineering offered by Apple.

Furthermore, it had remained unknown until the first hearing took place that he had already entered his new office. After hearing the case, Judge Kenneth Karas announced that the lawsuit had been settled between the company and Papermaster and that he could replace the Senior Vice President of Devices Hardware Engineering at Apple (Bell 24). However, Papermaster was required to testify that he would not disclose any trade secrets of his previous employer by making two court certifications.

In the case of IBM v. Visentin, which took place in 2011, the company tried to prevent its general manager, Giovanni Visentin (who worked for IBM for 26 years), from quitting his position to work for Hewlett-Packard, another big rival of IBM. Like Smith, Visentin signed an agreement that banned his engaging with any party competing with IBM in all geographic areas where he performed his duties working for the company. IBM claimed that Visentin possessed a lot of client data by the virtue of his leadership position and therefore could sell some secret information to the competitor (Marx et al. 401). However, the court permitted him to join HP due to the fact that the company was unable to specify what exactly the employee knew, misappropriated or could use in his new position.

The general tendency for the future is that non-compete agreements will become more and more popular in the business world since a lot of companies see their potential to protect their privacy issues. Furthermore, it is also possible that enforceability laws will be more standardized as now they differ considerably from state to state. There is also another opinion that restraining covenants will lose their popularity due to the fact that they stifle entrepreneurship. The problem is that employees who are required to sign them are restricted in their ability to start their own business venture or come with a new product, using their creativity to their benefit. They simply cannot leave their companies since they have poor chances to win such cases in court.

Personal Perspective

Although the cases reviewed in the present work related to the employees who performed leadership roles, one may be asked to sing a non-compete agreement even holding a much more humble position for any reason the company considers profound. That is why, if you do not understand the terms of the agreement, you are in your right to have a professional lawyer study and clarify it. It is also highly important to bear in mind that a non-compete agreement should not prevent one from seeking another position since there are always reasons making its enforcement doubtful that can be cited in court in case of legal proceedings.

Works Cited

Bell, Joseph R. “A Random Walk through Silicon Valley: Non-Compete Agreements.” The Journal of Private Equity, vol. 20, no. 3, 2017, pp. 22-25.

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Dawn-Hiscox, Tanwen. “Former ​IBM Cloud CIO Sued for Violating Non-Compete Agreement, Taking AWS Job.” Datacenter Dynamics. 2017. Web.

Ghosh, Suman, and Kameshwari Shankar. “Optimal Enforcement of Noncompete Covenants.” Economic Inquiry, vol. 55, no. 1, 2017, pp. 305-318.

Marx, Matt, et al. “Regional Disadvantage? Employee Non-Compete Agreements and Brain Drain.” Research Policy, vol. 44, no. 2, 2015, pp. 394-404.

Mezrich, Jonathan L., and Eliot L. Siegel. “Noncompete Clauses: A Contract Provision That Has Exhausted Its Usefulness?” Journal of the American College of Radiology, vol. 11, no. 2, 2014, pp. 145-152.

Mullins, Reggie. “Non-Compete Agreements: Don’t Just Sign on the Dotted Line.” Journal of Property Management, vol. 79, no. 4, 2014, pp. 26-27.

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StudyCorgi. "The Problem of Non-Compete Agreements." March 31, 2021. https://studycorgi.com/the-problem-of-non-compete-agreements/.

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StudyCorgi. (2021) 'The Problem of Non-Compete Agreements'. 31 March.

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