Last week, The Boston Globe wrote an editorial entitled, “Easing up on non-competes, iRobot helps region, itself” applauding local employer iRobot for declining to enforce non-competes against some of its work force. In the editorial, The Globe cited Silicon Valley’s success as proof of the damage of non-competes on efforts to innovate and urges Massachusetts to adopt the California model. As December is traditionally a busy time for employee departures, and by extension, disputes over the enforcement of covenants not to compete, it seems as good as any time to ask the question, do non-competes really hinder innovation?
Why is This Important? The question is an important one because many states are considering whether they should adopt the California model, which strongly disfavors non-competes but allows robust trade secret protection as a safeguard against the theft of intellectual property. The Globe’s editorial cites the success of Silicon Valley, which it attributes (at least in part) to the greater employee mobility afforded by the absence of non-competes, and the resulting entrepreneurial culture that incubates as a result.
As our economy appears to continue to trend from an industrial and manufacturing one to one more heavily rooted in intangible services and products (i.e., intellectual property), the protection of that IP and the tools to protect that IP, whether in the form of patent protection, trade secret laws or covenants not to compete, become even more important.
The debate, like many today, engenders strong emotions and as a result, biases tend to heavily color the arguments, which in turn makes an analysis of the question fairly challenging. Based on my experience and review of the articles and posts in the debate, those favoring non-competes obviously tend to be employers, inventors, the HR community, and the attorneys that represent them (no huge surprise there). On the other side, employees, attorneys who represent them, and academics have consistently lined up against non-competes (no surprise here either). I have been on both sides of this litigation (admittedly more frequently on the side of the employer seeking enforcement) but think I have the benefit of that experience to at least consider the question from each perspective.
As one might expect, this debate can’t be resolved in a single post, if it can be resolved at all. What I hope to do over the next few weeks (or months) is identify a number of the key arguments that both sides have advanced and carefully look at those arguments in a series of posts. As always, I encourage my readers to join in the debate and comment.
Are Non-Compete Cases Increasing? I think the first question one has to ask is whether there is truly a problem here. In other words, are covenants not to compete being used with a greater frequency today? And, assuming that is the case, are they “over-enforced” to the degree that their detractors claim?
My experience is that disputes over non-competes are in fact arising more frequently, if not necessarily taking the form of litigation, certainly in terms of jockeying prior to litigation. Admittedly, there is a chicken-and-the-egg quality to my observations, because I can’t truly discern whether there are simply more of these disputes or whether as these cases have become a larger part of my practice, I am simply involved in more of them. Nevertheless, my own anecdotal experience tends to align with the concern of those opposing non-competes — that they are being used more frequently.
My experience seems to be supported by the only real empirical research done on covenant not to compete and trade secret litigation, the studies undertaken by David Almeling and his colleagues from O’Melveny & Myers regarding federal and state litigation for the Gonzaga Law Review in 2010 and 2011. (Links to the two articles, “A Statistical Analysis of Trade Secret Litigation in Federal Courts” and “A Statistical Analysis of Trade Secret Litigation in State Courts” can be found here and here). For those unfamiliar with these important studies, David and his team analyzed the frequency of this litigation, as well as a number of key factors and holdings that appeared to reoccur in those cases.
David and his team found that covenant not to compete and trade secret litigation was growing exponentially in federal courts and steadily increasing in state courts. In the federal court survey, they found that this litigation was effectively doubling every 7 to 9 years and was expected to double again by 2017. In the state court survey, they found that litigation was steadily growing, still a noteworthy finding because it is conventional wisdom that litigation generally is on the wane due to the impact of tort and class action reform legislation directed towards what was perceived to be a tide of litigation engulfing the business community in the 1980s and 1990s.
A couple of caveats. First, it is unclear from the research how much of the litigation was driven by disputes over non-competes or over simply trade secret disputes. As a general matter, the surveys noted that most of the cases involved disputes between employers and employees (78% in the state court cases and 53% in the federal cases), which would most likely include both non-compete and trade secret claims, except of course in California.
Second, it is important to remember that the issues driving this debate are being fueled by the radical changes in technology, the transformation of our economy, and evolving perceptions about IP, phenomena that have really only begun to manifest themselves over the past 5 to 10 years. While David’s studies remain very important, things are unfolding at a pace that makes it difficult to discern the growth of this litigation over this time.
Stay tuned for the next installment, which will focus on the identity of parties most frequently involved in this litigation and the impact that has on the debate, as well as the related question of whether non-competes are being used excessively by employers.