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Freedom Isn't Free: Upfront Approaches to Non-Competes When It's Time to Go

By Andrew Cripe

The prospect of non-compete litigation can be a source of extreme anxiety for employers and employees alike.  The costs of pursuing or defending non-compete litigation can prove enormously costly in terms of legal fees and expenses and the unpredictable results of such efforts can be mutually unappealing: employers may see valued business relationships jeopardized or lost; employees can be left unable to earn a living in their chosen field. Against this backdrop, physicians in Washington recently made the news as they presented testimony to state lawmakers about an increasingly common approach to securing a release of their non-compete obligations: paying hefty fines.

Physicians reported paying or potentially facing amounts ranging from $50,000 to $427,150 for leaving their employers to secure new employment in the same geographic area.  Opponents question these practices in an era of physician shortages and rapidly evolving patient care models.  Defenders reject the suggestion that such payments are fines at all, explaining that they are the product of negotiated settlements aimed at reimbursing employers for the expenses associated with departing employees and business. Regardless of whether such payments are "fines" or "settlement payments," the practice highlights an honest, if seldom articulated, reality: business considerations, not technical legal arguments, tend to drive the resolution of most non-compete disputes.  In Washington, the parties seem to have simply cut to the chase: skipping the legal back and forth and settling on fixed payments up front to avoid the stress, expense and uncertainty of litigation.

Physicians and healthcare providers in Washington aren't the only ones who have figured out that cutting to the chase may be preferable to protracted and costly litigation.  In the retail securities world, a standing protocol agreement between competing brokerage firms spells out specific steps which, if followed, will enable individual brokers to move freely from one firm to another without regard to any post-employment non–compete restrictions.  These steps include precautions designed to ensure that customer choice is respected, confidential information is not used without appropriate authorization and employers and employees are given a fair chance to compete for business.  The rationale behind this approach is well-explained on the Protocol website:

Every year, hundreds of Registered Representatives leave their firms to create new firms or move to other companies. Until 2004, these transitions were often accompanied by lawsuits in which the former employers sought to enforce contractual non-solicitation and non-compete provisions limiting contact with the customers that were served by the departing individual. These suits could be costly and sometimes resulted in injunctions that prevented the brokers from contacting their customers on behalf of their new employer. The Protocol for Broker Recruiting virtually ended this litigation among firms that chose to enter into the agreement.

Non-compete litigation may prove financially rewarding for lawyers, but employers and employees can often benefit from skipping that exercise entirely.  Upfront approaches, such as those in Washington and the brokerage world, are two possible models.  Other approaches are also possible, depending upon the unique business considerations underlying non-compete agreements in a particular industry or market.  For example, an employer could tailor and unilaterally impose restrictions on a new employee’s job duties when that employee is subject to a non-compete agreement.  Such unilateral restrictions could essentially stake out a “middle ground” between no competition and unrestrained competition.  The key to any such approach is to undermine the economic or business factors that would otherwise trigger litigation.  Ultimately, such an upfront approach may leave each side with less than they want, but should be calculated to put them in a better position than they should reasonably expect in litigation.

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Note: for more information on the Protocol for Broker Recruiting in the securities industry, please click here for a white paper produced by Polsinelli's Financial and Securities Litigation practice.