Nonrival work pacts grow more popular But when contracts land in court, judges don't always support them

April 13, 1997|By BLOOMBERG NEWS

NEW YORK -- When eight Exco PLC interest-rate options traders in New Jersey joined a rival, the British firm sued, claiming the workers violated signed agreements not to work for competitors.

A state judge had a different view. He tossed out Exco's claims, saying the agreements were "too broad" because they barred the traders from working for a competitor for a year within 100 miles of New York -- one of the few places in the U.S. where interest-rate options traders can find jobs.

As more companies are learning, agreements to discourage employees from joining the competition often are scorned by judges who don't like contracts that make it hard for people to earn a living.

"Courts see it as the last vestige of indentured servitude," said David Carr, a labor lawyer with Johnson Smith Pence in Indianapolis.

So-called noncompete agreements typically require an employee not to work for a competitor in a certain geographic region or for a certain amount of time after leaving a company. Sometimes they carry a penalty for leaving, such as the cancellation of options to buy stock at reduced prices.

Once a feature found only in the employment contracts of top managers, the agreements increasingly apply to middle managers.

"Human capital is increasingly more important, and everybody knows it," said Alan Sklover, a New York lawyer specializing in labor issues.

Litigation common

And because the agreements are being applied to lower-level workers, more disputes wind up in court. Noncompete agreements are now among the most frequently litigated contracts in the United States, said Larry Cunningham, a professor at George Washington University Law School.

Agreements not to compete are vulnerable if they're seen as too broad, or designed to keep a worker out of a geographic region crucial to a certain industry, experts said.

"The court has a hard time accepting the fact that one company can prevent a person from earning his livelihood elsewhere," said E. Daniel Raz, principal and owner of Analytic Recruiting Inc. in New York.

Courts are less sympathetic, though if a worker signs a noncompete agreement in exchange for a signing bonus or other benefits, something top executives -- but not mid-level managers -- frequently receive.

Sometimes, though, courts side with company claims that even employees who didn't sign noncompete agreements should be barred from joining a rival who could profit from trade secrets.

Pepsi sues

For example, when William Redmond left soft-drink maker PepsiCo Inc. to join Quaker Oats Co. in 1994, Pepsi sued, asking that Redmond -- who never signed a noncompete agreement -- be barred from working for six months.

The court agreed, and ruled that Redmond, who was Pepsi's California general manager, would inevitably use trade secrets in his new job as North American vice president of operations for the sports drink Gatorade.

"PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game," wrote the 7th U.S. Circuit Court of Appeals, in upholding an earlier court ruling.

Some labor lawyers say that they are concerned that companies use the threat of litigation over noncompete agreements to intimidate workers.

Pub Date: 4/13/97

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