Staggering High Number of Noncompete Lawsuits Affect Recruiting, Hiring

Author: Melissa A. Silver, XpertHR Legal Editor

August 26, 2013

In light of recent statistics released by the Wall Street Journal (WSJ), employers should be aware of the impact noncompete litigation has on the marketplace. The WSJ reported that there has been a 61% increase since 2002 on the number of court decisions involving noncompete agreements. However, this number was based only on published decisions and did not take into account cases settled out of court or unreported decisions.

Noncompete agreements (or covenants not to compete, a type of restrictive covenant) function as an excellent tool to prevent employees from working for a competitor using the specialized knowledge, skills, or confidential information gained while working for the employer for a period of time. However, companies recruiting and hiring key talent may experience an adverse effect from noncompetes in that these agreements may limit the available talent pool. If a recruited individual is subject to a noncompete with his or her current or former employer, the hiring company would have to wait out the terms of the agreement or risk exposure to a lawsuit. As a result, companies may prefer not to hire an individual who has signed a noncompete agreement in order to avoid the cost of either litigation or paying the employee until the terms of the noncompete end. Notably, the same companies that may have been adversely affected by a noncompete agreement's terms in hiring often require new hires to sign noncompetes in order to protect their own valuable information. As such, the cycle continues.

Although employers enforcing noncompetes may be accomplishing their goal of discouraging employees from starting up a rival company, the practice may have the unintended effect of stifling innovation (especially in the high tech industry). In fact, according to Matthew Marx, a professor of entrepreneurship at the Massachusetts Institute of Technology, who is quoted in the WSJ article, stated that these lawsuits have had a "chilling effect" on employees. For instance, he found that in Michigan, "workers were less likely to change jobs and, if they did, were less likely to start their own businesses or jump to a startup or small firm."

As a result, the WSJ found that startups and spinoffs are more likely in states that do not enforce noncompete agreements.