In a recent post at Innovation Economy, Scott Kirsner describes a discussion he had with an attorney who has been involved with negotiating severance deals for several employees. The attorney has sought to avoid future noncompete complications for his clients by essentially trading severance pay for noncompete relief. The attorney told Kirsner that “employees can often get released from the non-competes by giving up about 25% of their severance payment.” This may be a desirable outcome for departing executives, but employers that regularly engage in this practice are playing with fire.
There is no doubt that waiving or scaling back non-competition or non-solicitation restrictions for departing employees may be an effective tool to reduce the cost of severance. However, doing so may have an unintended result: in a future case in which the company is seeking to enforce a restrictive covenant, its earlier waivers may come back to haunt it. A practice of releasing employees from noncompetes will expose the company to what I refer to as the “selective enforcement” problem. That is, the attorney for the defendant (i.e. breaching) employee will argue that the company has not sought to enforce the provision at issue against similarly-situated employees who have departed for competitors. Thus, the argument goes, the employer is not really seeking to protect its legitimate interests – confidential information, trade secrets and/or good will – but rather is trying to stop ordinary competition (which is not a permissible basis for enforcing a noncompete). When I am involved on the defense side of these cases, I often will try to develop evidence of selective enforcement. In my experience, judges will be quite interested to learn that a company that is seeking to enforce a noncompete against, say, the director of product development, actually allowed another senior employee (say, the head of engineering) out of his or her noncompete. Such waiver practices suggest that the company is picking and choosing whom it wants to restrain from competition. Doing so undercuts the company’s argument that it is consistent and vigilant about protecting its legitimate interests. Thus, a company that lets people out of restrictive covenants in exchange for cost savings ultimately may find itself penny-wise, but pound-foolish.