A discussion in a BusinessWeek article this week on the telecom giant Sprint’s search for a new CEO raises an interesting question: have U.S. businesses gone too far in binding their most senior executives to non-compete and other restrictive agreements? In discussing the Sprint board’s search to replace its current CEO in the wake of poor company performance, the article reports that Sprint has “cast its line overseas not only to broaden the pool of strong candidates but to avoid the snare of noncompete contracts often held by executives who have worked at other U.S. telecoms.” The article notes that landing its current CEO from competitor BellSouth was problematic because of a non-compete clause in his contract.
As has been discussed in this blog and elsewhere, in many states, including Massachusetts, a C-level executive often presents the best case for enforcement of a noncompete. Judges tend to regard such individuals as both sufficiently compensated and sophisticated to knowingly restrict their post-employment career opportunities. What’s more, courts typically find that companies have a better argument that their confidential information and good will are placed in jeopardy when their most senior people move to competitors. So, from a practical legal standpoint, the movement of a very senior telecom executive within the telecom industry is going to raise, as BusinessWeek put it in the case of Sprint, “red flags.” Perhaps it is not surprising that such an entity would look to other markets — such as Europe, where noncompetes are less common and less enforceable — to find qualified individuals to fill a very senior role in the U.S.
The fact that a significant U.S. company would need to look overseas to find a qualified candidate unfettered by a noncompete might strike some as an indication that noncompetes are a problem. Of course, in many quarters there will be little sympathy for a current or recently-unemployed CEO whose career options are temporarily limited by a noncompete: such individuals typically leave their jobs with generous packages rendering their time on the sidelines financially palatable. But, the phenomenon described in the BusinessWeek article does point to the larger question of whether such restraints unduly hamper the ability of businesses to compete. Certainly companies possess compelling arguments that senior executives are precisely the people who are properly subject to post-employment restraints, as they know a great deal about the strategic plans of the companies they have led.
This blog cannot answer the fundamental question posed here. There can be no doubt, however, that these trends point to the fact that noncompetition agreements are playing a central role in fundamental business decisions being made by companies large and small.