Opinion: No-poach agreements: A new generation of restrictions

Most states allow companies and their employees to agree that, after the employment relationship ends, the employee will not compete with the employer. These agreements, referred to as "noncompete agreements," have been discussed in detail in two prior Computerworld articles: "Don't sign away your future: Noncompetes done right" and "Beyond the noncompete" .

Such agreements place significant post-employment restrictions on what type of work an employee can perform and where the employee can perform that work. Because these agreements provide a bright-line test (either the employee is competing or he's not), little, if any, investigation need be undertaken before a company can ask a court to enforce the agreement. For that reason, noncompete agreements are considered the best available tool for a company to protect its legitimate business interests (primarily, the protection of trade secrets, confidential business information and goodwill).

Even so, because of the impact that these agreements can have on an employee's ability to find gainful employment, many courts are loath to enforce them (and, indeed, California bans them outright). This is more true now, when employees are being laid off at record levels and are lucky enough to find any job -- much less one at a company that does not compete with their prior employer.

This circumstance has left some companies scratching their heads about how to protect themselves from employees who have left to join direct competitors. Enter the no-hire agreement.

Traditionally, no-hire agreements fell into two broad categories: first, an agreement by which a company agrees with another company not to hire the other company's employees; and second, an agreement by which an employee agrees not to hire his former co-workers after he changes jobs. These agreements arise in the context of some ongoing relationship -- either some type of joint venture, consulting agreement or other business arrangements between the companies or an employment relationship.

Recently, however, a third type of no-hire pact, more commonly referred to as a "no-poach agreement," has come into favor. It is an agreement by two unrelated companies to not poach each other's employees. While this can be viewed as a bit of an end run around noncompete agreements, the impact of a no-poach agreement is far less detrimental to the employee. Specifically, unlike a noncompete agreement, which prohibits an employee from working for any competitor, no-hire agreements -- to the extent that they are not part of a larger scheme among multiple companies -- merely bar employees from only one potential employer. From this standpoint, such agreements would appear to be a better alternative to a noncompete from a restricted employee's and a court's standpoint.

That is not always the case, however, and the problem with no-poach agreements is potentially manifold. First, the agreements are likely to be held to the same standards as noncompete agreements. Specifically, a court is unlikely to enforce the agreement where it is not reasonable and necessary to protect both companies' legitimate business interests. Second, particularly where the companies are dominant in their market, they could run afoul of antitrust laws (the laws that make it unlawful for some companies to engage in concerted anticompetitive activities). Accordingly, they must be carefully considered if there is a chance that the companies will be viewed as having violated these laws. Third, the agreement has the potential to be quite pernicious insofar as it may be entirely unknown to the employee. Accordingly, employees of both companies may be under restrictions of which they were unaware and to which they never agreed.

So, what is a company to do? While a company may be able to get away with a secret no-poach agreement, history shows that that is unlikely to last -- and a company can face significant unanticipated negative ramifications from participating in such undisclosed agreements. Thus, to minimize these risks and the perceived unfairness of these agreements, and thereby maximize the likelihood that the agreements will be enforced, the first step is to make the agreements known, have employees acknowledge that they are aware of the agreements, and require that the employees agree to be bound by the agreement. Such agreements still may not fly in California, but they will have a better chance of enforcement in other states. Second, use the agreement as a supplement -- not an alternative -- to other restrictive covenants (noncompete agreements, nonsolicitation agreements, traditional no-hire agreements, nondisclosure agreements and the like). Simply put, while a court might be disinclined to enforce one of the agreements, it may be more inclined to enforce another. Accordingly, using all that applies provides backstops to a court's refusal to enforce the more restrictive of the agreements. In that vein, the benefit of this approach is that the argument can be made that the no-poach agreement is very narrowly tailored to protect both companies against the unfair competition in only one respect: each other. When these two companies are direct competitors, such an argument is likely to carry some weight with a court.

Russell Beck is a litigation partner in the Boston office of Foley & Lardner LLP. He heads Foley & Lardner's interdisciplinary trade secret/noncompete practice and wrote the book Negotiating, Drafting, & Enforcing Noncompetition Agreements & Related Restrictive Covenants (MCLE 2009). He is also a certified mediator, and can be reached at rbeck@foley.com or (617) 342-4031.

Copyright © 2009 IDG Communications, Inc.

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