To what extent should a company enforce a covenant not to compete? Should it enforce against every employee that leaves to join a competitor? Should it enforce the covenant to its full terms or reach a compromise with the departing employee? These are some of the thorny questions that companies and their lawyers face when a valued researcher, manager, officer or sales representative leaves for a competitor.
However, simply because you can potentially restrict someone under a covenant not to compete does not necessarily mean that you should. “Exhibit A” in that discussion is what ESPN described as “Transfergate” — a commotion last week involving University of Wisconsin basketball coach Bo Ryan, who came under withering criticism for imposing a number of heavy-handed restrictions on the transfer request of an unhappy freshman player named Jarod Uthoff.
The National Collegiate Athletic Association requires a player to sit out a year if he or she wishes to transfer to another school, but its rules also give a coach the discretion to “block” an athlete from transferring to specific schools. Ryan wielded that perogative like a hammer. He not only blocked Uthoff from transferring to any of the other eleven schools within the Big Ten Conference, but also barred him from transferring to any of the twelve teams in the Athletic Coast Conference, nearby Marquette, and, in what was viewed as a display of vindictiveness, Iowa State University, a school located near Uthoff’s hometown.
Wisconsin and Ryan ultimately backed down after Ryan’s ill-fated interview on ESPN Radio’s “Mike & Mike in the Morning” Show. Cutting its losses, Wisconsin announced it would allow Uthoff to transfer to any school outside the Big Ten.
You may now be asking, that is all well and good, but what does this have to do with covenants not to compete? Several things. First, don’t let emotion drive the decision-making process. Non-compete disputes are notoriously emotional affairs — feelings of betrayal, rushed decision-making, fears about the loss of a business. It’s easy to get swept up, as Ryan apparently did in wanting to stick it to Uthoff. However, remember that you may find yourself playing to a higher authority (a judge) so it is important to take a deep breath and apply a measured approach.
Second, consider the facts on the ground. An employer may receive assurances from the former employee and his/her new employer that eliminate the need for rushing into court. If they offer proof of their intention to protect the former employer’s trade secrets and not solicit its customers and employees, it may be prudent to find a way to reach a compromise. (See the IBM v. Visentin case for an effective example of this strategy). Conversely, there may be cirmcumstances where compromise won’t be possible — such as situations involving serious misconduct by the former employee or the mass exodus of senior executives — which may require enforcement of the covenant in its entirety.
Third, remember that the actions that you take may ultimately be reviewed under the microscope of litigation. To illustrate, Ryan and Wisconsin lost considerable credibility in the debate when they added Iowa State and the entire ACC conference to their “do not transfer” list. They appeared mean-spirited and unreasonable.
As most non-compete disputes involve considerations other than the letter of the contract, equitable considerations can sway the day. A company may squander the high road if it appears to be punitive in its negotiations or legal position with its former employee. Indeed, many covenant not to compete cases are fought not only in the courts but in the media, so efforts at perceived over-reach can truly boomerang (Witness Cisco’s battle with HP over HP’s efforts to enforce a non-compete against Paul Perez last year).
The takeaway? Consider every potential dispute on its facts, protect your legitimate interests but be open to compromise where appropriate, and minimize the emotion as best you can.