NON-COMPETE AGREEMENTS: A PROPOSAL
FOR FAIRNESS AND PREDICTABILITY
By Kevin G. Powers and Linda Evans
Abstract
This article criticizes non-compete
agreements as overly-restrictive and their enforcement as unpredictable. The authors argue that non-competes should be
presumptively invalid, thereby compelling judicial refinement of protectable information and synchronizing the law with
economic developments.
INTRODUCTION
Covenants not to compete
have evolved over the past few centuries from presumptively invalid to
presumptively valid.[1] Standards for upholding non-competition
agreements are applied inconsistently, and courts’ decisions provide very
little predictability. Cases are
decided, not by clear neutral principles, but by the idiosyncrasies of particular
courts. This article argues that the
wiser course is to return covenants not to compete to the status of
presumptively invalid, as
innovation. Non-competition agreements should be
effectively eliminated because
they (1) unreasonably
restrain the mobility of employees; (2) unduly tip the balance of power to
employers; and (3) are out of sync with economic changes.
UNREASONABLE RESTRAINTS OF NON-COMPETES
The Breadth Problem
An employer usually
obtains a covenant not to compete from an employee at the beginning of the
employment period. Unlike a
nondisclosure agreement, which prohibits the disclosure or use of a former
employer’s confidential information, including trade secrets,[3]
the covenant not to compete prohibits employment with a competitor for a
specified period of time and within a particular geographical area. While a nondisclosure agreement may result in
an injunction against disclosing information that is specified in the
agreement, a non-competition agreement attempts to preclude the imparting of
information or the appropriation of good will by preventing the employment of a
former employee with a competitor.
Notwithstanding the
availability of sophisticated trade secret laws,[4]
nondisclosure agreements, and agency law, employers regard non-competition
covenants as the preferred method for protecting alleged confidential
information.[5]
Employers’ preference for non-compete agreements is based in the fact that
these covenants overly protect the interests of employers, at the expense of
employees.
Judicial Erosion of Employees’ Rights
Courts’ protection of
employees has steadily eroded over the past six centuries. Originally covenants not to compete were
presumptively invalid in
Employees’ interests
underwent a decline during the seventeenth century in cases that involved
non-competition agreements accompanying the transfer of businesses.[9]
Courts now distinguished between general and partial restraints, and by 1711,
formulated a “rule of reason,” permitting the enforcement of non-compete
agreements whose geographical and/or time limitation was deemed “reasonable.”[10]
By the nineteenth century, freedom-of-contract concepts were in place; factory
labor required special training; and employers sought to protect themselves
from future competition by their employees.[11]
The “rule of reason,” now applied to employment contracts, as well as to the
transfer of businesses. The transition
from inherent unreasonableness to the “rule of reason” led to a highly
litigious area of law; generated fact-specific inquiries by courts; and tilted
outcomes in favor of employers.
The “Reasonableness” Inquiry
When assessing the
reasonableness of a non-competition agreement, a court typically determines (1)
whether the restraint is designed to protect some protectable
or legitimate interest of the employer and (2) whether the restraint is
reasonable as to the duration, geographical area, and scope of the proscribed
activity.[12]
The first prong of the analysis places the employee’s expertise, technical
knowledge, personality, and experience at risk of being appropriated by the
employer, in the absence of genuine trade secrets or confidential information.
In focusing on the “time, place, and activity” restraints of non-competition
agreements, the second prong of the analysis predisposes courts to impose a ban
on employment for at least some period of time.[13]
Many courts also
“blue-pencil” or rewrite the terms of agreements to render them “reasonable,” a
practice that encourages the drafting of broadly punitive provisions in order
to deter employee mobility -- with or without the intention to actually enforce
a particular agreement.[14] Courts not only fail to sanction unreasonable
employers, but they also fail to recognize the contradiction between their need
to “blue-pencil” non-competition agreements and their repeated findings that
the agreements are “bargained for” restrictions on employees’ mobility.[15]
The Effect of Non-Compete Agreements
Is To Create Numerous
and Unnecessary Burdens on Employees
The onerous effects of
non-competition agreements on employees are multiple.[16]
First, an agreement not to compete enlarges the inherently unequal balance of
power between employers and employees by reducing employees’ primary bargaining
chip, the possible withdrawal of labor from a particular employer. This, in turn, weakens an employee’s ability
to bargain with the employer during employment.
Second, for every non-competition agreement that is litigated, an untold
number of employees are subject to and deterred by an identical agreement. Third, the financial and time costs of
litigating agreements not to compete pose greater hardships for employees than
for employers. And, fourth, employees
who are subject to non-competition agreements are less attractive to potential
employers than are unencumbered new hires.[17]
The collective hardships
imposed on an employee by a covenant not to compete constitute what one court
termed “industrial peonage.”[18] Many courts acknowledge that injunctions
against employment contravene an employee’s autonomy, upward mobility, income-generation,
liberty interests, and “the pursuit of happiness.”[19]
Accordingly, a number of courts refuse to impose injunctions against employees
for various reasons, causing some recent erosion in the enforceability of
non-compete agreements.[20]
Nonetheless, because there are so many different factors that courts may invoke
in their analyses,[21]
including equity doctrines, such as “unclean hands,” when an injunction is at
stake, attorneys are at a loss in counseling clients about relevant criteria
and potential outcomes.
Some courts also discuss
injunctions against employment in terms of the “public’s interest” in or
“public policy” concerns about restraints against competition and the movement
of skilled employees from job to job to improve society’s industrial structure.[22] Notwithstanding dicta on employee- and
societal-interests, courts analyses tend to focus on the employer’s protectable interest, and both hardship and public injury
are for the most part subsumed in the “reasonableness” test.[23]
Courts’ greater emphasis
on the employer’s loss, rather than the employer’s restraint, may either
reflect a court’s elitist bias or an unrefined analysis, which accepts without
question, the greater importance of employer needs. Some courts even distinguish between
employees who voluntarily leave their jobs and those who are fired, holding
that “no balancing of [employer and employee] interests is necessary where an
employee voluntarily quits his job and goes into competition with his former
employer.”[24] As long as non-competition agreements are
presumptively enforceable and subject to the “reasonableness” test, employees’
interests can effectively be thwarted.
Some Paradoxical Trends
Paradoxically, during the 1980’s when a number of factors, including corporate mergers, “downsized” work forces, and off-shored jobs, compelled employees to contend with job insecurity and job mobility,[25] some courts extended the “reasonable” geographical area of non-competition agreements to a nationwide ban on employment.[26] During the last twenty years, other economic changes have occurred, including the proliferation of new businesses, highly skilled jobs, and technological innovations. Concurrently, employers have increasingly invoked the protection of trade secrets or confidential information as the basis for enforcement of covenants not to compete.[27] Irreconcilable problems are embedded in these general trends. First, non-competition agreements over protect employers’ legitimate interests, protect interests that are not legitimate, and thereby restrain competition. Second, future technological innovations and economic growth depend upon enhanced competition, and greater employee mobility, not less.
NON-COMPETITION AGREEMENTS OVER PROTECT EMPLOYERS
Two proffered rationales for non-competition agreements are that they enable employers to communicate confidential information freely to employees without later detrimental use of the information, and the agreements protect employers’ investments in employees.[28] Both rationales support the shifting of business’ risks to employees by impeding future employability. While confidential information and trade secrets do constitute legitimate employer interests, their protection does not require nor merit servitude. There are other, less draconian methods, to protect confidential information and trade secrets. Similarly, investment in an employee’s knowledge both benefits the employer’s business and is often reflected in a lower salary for the employee during the early period of employment.[29] When the employee is impeded in building on this knowledge with another employer, the employee pays twice for the employer’s investment.
Legitimate v. Non-legitimate Interests of Employers
The only interests of
employers that merit legal protection against former employees are trade
secrets, confidential information, and the affirmative solicitation of
customers. Whether or not a customer
list constitutes a trade secret or confidential information depends on state
laws, which focus on the value of the information to the owner or the type of
information involved and the effort the employer made to keep the information
“secret.”[30] Some courts distinguish between customer
lists that require employers to expend considerable time, effort, and money to
assemble and those that may be readily compiled from public sources or result
from employees’ own work.[31]
Employer interests, which
should not be protected, but often are protected by non-competition agreements,
include “good will” and customer contact.
Good will refers to the quality or character of a business that may
cause a customer to choose one business over another.[32] If a customer elects to follow an employee to
a new employer, the good will was generated by the personality or diligence of
the employee and rightfully belongs to the employee, not the former
employer. Customer contacts, which are
maintained or lost by virtue of the employee’s personal attributes, also
rightfully belong to the employee.
A prohibition against the
affirmative solicitation of a former employer’s
customers protects the
respective legitimate interests of employers, employees, and customers, and
assures that the former employee’s good will, and not that of her former
employer is at issue. Pursuant to both
the law of agency and unfair competition statutes, an employee may not actively
or affirmatively solicit customers of her former employer, either while still
an employee or for a period of time after leaving the employment.[33] The employee may, however, inform her
customers about her pending job change and accommodate any customer requests
for her services at the new place of employment.[34]
Non-competition
agreements with non-solicitation clauses routinely prohibit a former employee
from directly or indirectly “approaching” a customer with whom she worked or
servicing a former customer, even at the customer’s request. Such a provision over-reaches the employer’s
legitimate interest. It not only deters
an employee from leaving and being in a position to solicit customers, but if
the provision is enforced, the employee may be ordered out of business, not
merely enjoined against soliciting.
The Redundancy and Over-Reach of Non-Competition
Agreements
Employers’ legitimate
interests in preventing former employees’ use of trade secrets, disclosure of
confidential information, or affirmative solicitation of customers are already
protected by the common law of agency, nondisclosure provisions in contracts,
and state statutes dealing with unfair competition and trade secrets.[35] Phillip Closius and
Henry Schaffer persuasively argued in their article, Involuntary Servitude: The Current Judicial Enforcement of Employee
Covenants Not to Compete -- A Proposal for Reform, 57 S. Cal. L. Rev. 531
(1984) that agency principles should be applied to both contract and
non-contract cases, and the “reasonableness” inquiry, abandoned. An employee’s fiduciary duty under agency law
forbids disloyalty, direct competition, such as conspiring to compete while
still an employee, and appropriating confidential information or trade
secrets. Closius
and Schaffer noted that
[i]f the [non-competition]
restriction is coextensive with the
principal’s protectable
interests, the covenant adds nothing to the
protection provided by the agent’s common law
fiduciary duty.
The contractual covenant is therefore
superfluous. If the covenant
is broader than the protectable
interest, it is merely the principal’s
attempt to overextend rights – an attempt perhaps
made possible
by the principal’s disproportionate bargaining power
in the
preemployment context.[36]
Courts acknowledge that a
former employee can be enjoined from disclosing confidential information in the
absence of a non-competition agreement,[37]
but once a non-competition agreement is before a court, the “reasonableness”
test, along with its pro-employer biases, will be applied.
Since Closius
and Schaffer’s article, state laws on trade secrets have expanded to provide
better roadmaps for courts in determining whether an employer’s interest rises
to the status of a trade secret or confidential information. The elimination of covenants not to compete
would (1) require courts to refocus and refine their analyses (2) replace
injunctions against employment with more diverse, tailored, and appropriate
remedies; and (3) permit employees to be continuously employed and to fairly
compete with their former employers.
A Proper Analysis
First, in the absence of
non-competition agreements, courts would properly focus the analysis on
whether, pursuant to state law, the employer’s interest is a “trade secret” or
“confidential information” and not on whether the proposed restraint on the
employee’s mobility is “reasonable.”[38] If either the information was not a protectable interest, or the employee had no access to the
information, the action would be dismissed.
The employer would be required to show as a threshold matter, in order
to defeat or defend a motion for summary judgment, that it seeks to protect a
genuine trade secret. If the employer’s information is a trade secret, and the
employee had access to the information, the court would then determine whether
there had been actual misuse of the trade secret or confidential information,
or there was threatened misuse.
Alternative Remedies
Second, remedies could be
similar to those available in
These narrowly-tailored
types of remedies provide employers with a shield against actual or threatened
misuse of valuable information while enabling employees to leave jobs, continue
to work in the areas of their expertise; and not fear court actions, unless
they engage in unfair competition through misappropriation or affirmative
solicitation. Non-competition
agreements, in contrast, serve as a sword against employees and enable
employers to enjoin the employment of former employees on the basis of mere
contacts with customers or mere inclusion of a “trade secret” clause and a
non-competition agreement within an employment contract.
The Over-Enforcement of Non-Compete Agreements
Empirical research
findings on the enforcement of non-competition agreements indicate that when an
employee had no exposure to her employer’s customers, the employee’s employment was
enjoined on the basis of the non-solicitation clause in the non-competition
agreement in 25 percent of the cases.[40] Similarly, 13 percent of employees who had no
exposure to an employer’s confidential customer list were enjoined. Evidence regarding the enforcement of trade
secret provisions in non-competition agreements is even more troubling. The employment of former employees who had no access to their employers’ trade
secrets was enjoined in 38 percent of the cases, and among those with access
but no demonstrated use, the non-competition agreement was enforced in 94
percent of the cases.
The high correlation
between enforcement of non-competition agreements and trade secret clauses
reveals the “over-protection” that non-competition clauses provide to
employers’ alleged trade secrets. Courts
imposed mobility restraints on employees in the absence of any real, or even
potential, threat. These empirical
findings indicate why employers prefer non-competition agreements as their
weapon of choice and why it is important to sever the law of trade secrets from
non-competition agreements.
THE BENEFITS OF ELIMINATING RESTRAINTS ON EMPLOYEES
During the 1980’s American workers experienced a shift from relative job security to job insecurity as many large corporations sought to increase their productive performances and/or international competitiveness by “downsizing” their workforces, offshoring jobs to cheap labor markets, and creating “flexible” or contingent cadres of workers.[41] Concurrently, the pace of technological innovations quickened; small businesses created more jobs than large businesses, and the demand for skilled workers grew. All of these factors compelled employee mobility. Now, twenty years later, employees expect to change jobs and careers at an accelerated rate; the market for skilled employees is highly competitive; and many employees are in a position to sell themselves to the highest bidder.[42]
Non-competition agreements are out
of sync with these economic changes.
[e]xcept as provided in this chapter, every contract by which
anyone is restrained from engaging in a lawful profession, trade,
or business
of any kind is to that extent void.
Code 16600.[43]
As a result of California’s strong public policies in favor of unrestrained employee mobility and competition, high job turnover, particularly in communities such as Silicon Valley, is the norm and is regarded as a cost of doing business.[46] Ronald J. Gilson cogently argued in his article, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U.L. Rev. 575 (1999), that a major benefit of California’s unrestrained employee movement is the “involuntary spillover” of tacit knowledge or know-how that accompanies employee mobility. Gilson defines tacit knowledge or know-how as the skill and expertise associated with effectively creating, developing, and implementing a conceptual innovation.[47] Competitiveness often depends on the speed at which new concepts are converted to manufacturable products,[48] and an employee’s tacit knowledge can expedite the creation and/or application of new or related innovations in a start-up or with a new employer.
Gilson argues that
Spillover of know-how not only
benefits employees by enabling them to build upon their acquired expertise in
new jobs, but the Silicon Valley experience also indicates that per capita firm
value is greater where the protection of intellectual property is somewhat
diluted.[49] Contrary to those economic doctrines that
encourage maximum protection of intellectual property and individual employers’
perceived self-interest, knowledge spillovers boost industry-wide earnings and
community standards of living.[50]
The effective elimination
of non-compete agreements would (1) bring greater balance and fairness to the
employer-employee relationship; (2) facilitate innovation, competition, and
economic growth; and (3) enable attorneys to better advise clients about what
constitutes permissible employment-related conduct. Not incidentally, attorneys would also be
removed from the anomalous situation of litigating restraints against trade,
from which they are exempt. The time has
come to once again make it unlawful to restrain the practice of any trade “at
any time, or at any place. . . .”[51]
CONCLUSION
Non-competition
agreements impose undue hardships on employees’ mobility, use of acquired
knowledge, and income-generation. The
“rule of reason” analysis, which permits an array of factors to be considered
by a court, along with some courts’ discomfort in enforcing non-compete
agreements, have resulted in an enormous body of case law that is inconsistent,
confusing, and of no predictive value.
The respective interests of employers and employees can be better and
more fairly protected by rendering non-compete agreements presumptively invalid
and thereby compelling courts to refine their analyses of trade secret
laws. Employers’ other legitimate
interests – confidential information and affirmative solicitation of customers
– are adequately protected by agency law, non-disclosure clauses in contracts,
and unfair competition statutes.
Elimination of
non-compete agreements would not only benefit employees and require more
analytical precision from the courts, but it would also bring the law into sync
with economic changes and exigencies. As
the California experience suggests, public policy that supports unimpeded
employee mobility and unrestrained competition results in the “spillover” of
employee know-how, which in turn, stimulates innovations, boosts productivity,
and elevates the standard of living.
[1] Harlan M. Blake, Employee
Agreements Not to Compete, 73 Harv. L. Rev. 625,
629-46 (1960). A number of states regard
agreements in restraint of trade as invalid.
See, e.g., Cal. Bus. &
Prof. Code §16600-16602.5; Colo. Rev. Stat. §8-2-113;
[2]
[3] Gale R. Peterson, Trade Secret Protection in an Information Age 2.3, at 2-70 (1997).
[4] For overviews of trade secret laws, see generally, id., and James Pooley, Trade Secrets (1998).
[5] Tracy L. Staidl, The Enforceability of NonCompetition Agreements When Employment Is At-Will: Reformulating the Analysis, 2 Empl. Rts & Employ. Pol’y J. 95, 96 (1998).
[6] Mitchell v. Reynolds, I P. Wms. 181, 186, 24
[7] Mitchell v. Reynolds, supra note 6.
[8] Colgate v. Bacheler,
Cro. Eliz. 872, 78
[9] See, e.g., Rogers v. Parrey, 2 Bulst. 136, 80
[10] Mitchell v. Reynolds, supra note 6.
[11] Blake, supra note 1, at 638.
[12] See, e.g., Mixing Equip. Co. v. Philadelphia Gear, Inc. 436 F.2d 1308, 1312-13 (3d Cir. 1971); American Broadcasting Cos. v. Wolf, 52 N.Y.2d 394, 403, 420 N.E.2d 363, 367, 438 N.Y.S.2d 482, 486 (1981); see also Restatement (Second) Of Contracts §188(1)(a) (1979) (restraints should protect promised legitimate interest); Mark B. Wessman, Retraining the Gatekeeper: Further Reflections on the Doctrine of Consideration, 29 Loy. L.A. L. Rev. 713, 798-99 (1996).
[13] Phillip J. Closius
& Henry M. Schaffer, Involuntary Servitude: The Current Judicial
Enforcement of Employee Covenants Not to Compete, 57
[14] E.g., QVC v. Tauman, 1998 U.S. Dist. LEXIS 4383, *6-7 (E.D. Pa. 1998) (reducing duration from perpetuity to three months).
[15] In re Verdi, 244 B.R. 314, 325 (E.D.
Pa. 2000) (lack of consideration bars enforcement of restrictive covenant);
Insulation Corp. of Am. V. Brobston, 446
[16] Blake, supra note 1, at 627; Staidl, supra note 5, at 97.
[17] H.B. Wiggins Sons’ Co. v. Cott-A-Lap Co., 169 F. 150, 152 (Cir. Ct. D. Conn. 1909) (if injunction issues, hereafter no man can work, learn business secrets, and later engage in a rival business “without carrying on his back into that business the injunctive mandate of a court of equity”).
[18] Eutectic Welding Alloys Corp. v.
West. 281
[19] See,
e.g., EMC Corp. v. Cyrus Foote Mineral Co., 899 S. Supp. 1477, 1484
(W.D.N.C. 1995) (freedom to sell expertise to highest bidder is important facet
of individual liberty); Schlumberger Well Servs. v. Blaker, 623 F. Supp. 1310, 1318 (S.D. Ind. 1985)
(relocation potentially devastating to employee and family); Allis-Chalmers
Mfg. Co. v. Continental Aviation & Eng’g Corp.,
255 F. Supp. 645, 652-53 (E.D. Mich. 1966) (recognizing employee right to
change employment for whatever reason); National Hearing Aid Centers, Inc. v.
Avers, 311 N.e.2d 573, 576 (Mass. App. Ct. 1974) (contract restriction at odds
with cultural value of upward mobility); see
also Hal Lancaster, How to Loosen Grip of Noncompete
Pact after Your Breakup, Wall. St. J.,
[20] Some practitioners perceive greater
reluctance by courts to enforce non-competes, but the most recent empirical
study examined cases only through the 1980’s.
Peter J. Whitmore, A Statistical Analysis of NonCompetition
Clauses in Employment Contracts, 15 J. Corp. L. 483 (1990). See
FMC Corp. v. Cyprus Foote Mineral Co., supra,
note 19 (noting injunction would render employee an indentured servant); Minet Ins. Brokers, Inc. v. Rooney, No. 97-0675-C (Mass.
Sup.
[21] Factors that courts may address include the length of the time restraint and the breadth of the activity restraint; hardship to the parties; access to trade secrets, confidential information, or customers; whether the employee quit or was terminated; whether the non-compete was supported by consideration; and public policy. Whitmore, supra note 20.
[22] See, e.g., APAC Teleservs., Inc. v. McRae, 985 F. Supp. 852, 867 (N.d. Iowa 1997) (public has interest in competition that keeps prices low and quality high); Standard Brands, Inc. v. Zumpe, 264 F. Supp. 254, 259, 268 (E.D. La. 1967) (public interest in skilled people moving from job to job to improve society’s industrial structure).
[23] Whitmore, supra note 20, at 517.
[24] American Rim & Brake, Inc. v. Zoellner, 382 N.W.2d 421, 424 (S.D. 1986).
[25] See, e.g., David M. Gordon, Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Management ‘Downsizing’ 69-83 (1996).
[26] E.g., Marcam Corp. v. Orchard, 885 F. Supp. 294, 299 (D. Mass. 1995) (because plaintiff has national market for its products, national geographical restriction likely to succeed at trial).
[27] See Peterson, supra note 3; Pooley, supra note 4; Jay L. Koh, From Hoops to Hard Drives: An Accession Approach to the Inevitable Misappropriation of Trade Secrets, 48 Am. U.L. Rev. 271 (1998).
[28] Blake, supra note 1, at 650-51; Christine M. O’Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislation Solution, 79 B.U.L. Rev. 1215, 1217 (1999).
[29] Gary S. Becker, Human Capital 35-51, 246 (3d ed., 1993).
[30] Closius & Schaffer, supra note 13, a 536; see Uniform Trade Secret Act §1(4), comment, 14 U.L.A. 439 (1990).
[31] Courts have relied heavily on Restatement (First) Of Torts §757, comment b (1939), which sets forth six factors for evaluating the value and secrecy of an alleged trade secret: (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others in the business; (3) the extent of measures taken by the employer to guard the secrecy of the information; (4) the value of the information to competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
[32] Minet Ins. Brokers, Inc. v. Rooney, supra note 20.
[33] See, e.g., Arnold’s Ice Cream Co. v. Carlson, 330 F. Supp. 1185, 1187 (E.D.N.Y. 1971) (employee has responsibility not to solicit customers while an employee); see also Restatement (Second) Of Agency §393, comment e (1957) (agent may not solicit customers for rival business before end of employment or properly do similar acts in direct competition with employer’s business); Robinson v. Jardine Ins. Brokers Int’l, Ltd., 856 F. Supp. 554 (N.D. Cal. 1994) (under some circumstances employer may contractually prohibit employee from soliciting its customers for limited period of time after employment).
[34] E.g.,
Hilb, Rogal and
[35] See generally Peterson, supra note 3; Pooley, supra note 4.
[36] Closius & Schaffer, supra note 13, at 548.
[37] E.g.,
Junker v Plummer, 320
[38] See Closius & Schaffer, supra note 13, at 547-49.
[39]
[40] Whitmore, supra note 20, at 502-08.
[41] Gordon, supra note 25, at 223-34.
[42] Boston Globe, Nov. 26, 2000, at G1, G6 (75.6% of human resource managers in the United States say that skilled workers are “scarce,” and some employers attempt to stem “job-hopping” by offering stock options).
[43]
[44] See Hanna Bui-Eve, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors’ Employees, 48 Hastings L.J. 981, 986-92, 1000-002 (1997).
[45] The California Business &
Professional Code defines unfair competition as an “unlawful, unfair or
fraudulent business practice,” Cal. Bus. & Prof. Code §17200. The Civil Code defines a “trade secret” as
“information, including a formula, pattern, compilation, program, device,
method, technique, or process that (1) [d]erives
independent economic value, actual or potential, from not being generally known
to the public or to other persons who can obtain economic value from its
disclosure or use; and (2) [i]s the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
[46] The average job tenure in the early
1990’s was two years. Annalee Saxenian,
Regional Advantage: Culture and Competition in
[47] Ronald J. Gilson, The Legal
Infrastructure of High Technology Industrial Districts:
[48] M. Dertouzos
et al., Made In
[49] Gilson, supra note 47, at 575.
[50] See
N.Y.T.,
[51] Colgate v. Bacheler, supra note 8. If many courts were to embrace the inevitable disclosure doctrine and thereby impose sweeping injunctions in the absence of covenants not to compete, then the benefits of eliminating non-compete agreements would be seriously undermined. Proponants of the inevitable disclosure doctrine argue for broad injunctions in the absence of non-compete agreement. See, e.g., Bui-Eve, supra note 44; Gilson, supra note 47; Koh, supra note 27.
It should also be noted that California’s high-tech
industry, which has benefited from the absence of non-compete agreements, is
not immune from the ups and downs of the marketplace. Some start-ups have gone out of business;
others have been subject to mergers and acquisitions. As a result, attorneys advise dot-com clients
not only about trade secret law, but also about how to prevent wrongful
termination lawsuits. See Michael Joe, Dot-com Layoffs Keep
Firms Busy, Nat’l L. J.,