Hidden Handcuffs - Watch Out for Buried and Disguised Non-Compete Agreements

CASE HISTORY: "Objection!" I bellowed, "My client is not an attorney, and so his understanding of the law is irrelevant to the issues before this arbitration panel." "Objection overruled," the arbitration panel chairman immediately shot back. "What is in writing, and therefore binding on your client is, indeed, relevant. Now, Ms. Downey, proceed with your questioning." I sat down.

We were engaged in a heated battle of wits and wills before an arbitration panel of the Chicago Board of Trade (the "CBOT") in Chicago, and getting to the central issue of the case. My client, Louis Tepper, was a senior executive who had "jumped ship" from RBK Trading to a competing trading firm six months earlier. RBK, his former employer of eight years, claimed that he had "entered into" a non-competition agreement with them, that he had violated that non-competition agreement when he "jumped ship" to a competitor and by the terms of that non-competition agreement he had to both resign from his present job, and repay his last year's bonus to RBK.

Had Louis signed such an agreement? Well, yes and no. Had he "entered into" one? Well, yes, and no. On his second day of employment with RBK, eight years earlier, he had been handed a yellow booklet and a piece of paper. The yellow booklet said on its front cover "RBK Standard Employee Handbook" and the piece of paper said on it, "I acknowledge receipt of the RBK Standard Employee Handbook, I have carefully read this booklet, and I agree to abide by its terms." Louis had signed the piece of paper, given it to his HR representative, and then thrown the yellow booklet into the back of his desk drawer.

The problem was that, on page 117 of the yellow booklet, it stated "If I leave the company's employment, I promise that I will not work for a competitor of RBK Trading for 12 months. If I violate this agreement, I may be stopped from doing so by a Court order, and I will repay my last year's bonus." Louis was totally unaware of this, but learned of it only eight years later, by way of a nasty and threatening letter from RBK's attorneys, two weeks after he had started working for RBK's competitor.

My opposing counsel, Ms. Downey, continued, "So, Mr. Tepper, did you receive a copy of the Employee Handbook? "Yes," he responded. "And, Mr. Tepper, is this your signature on this document entitled "Acknowledgment of Receipt." "Yes," Louis responded.

Ms. Downey then paused, and asked, ever so slowly, "Now, Mr. Tepper, I ask you to turn to page 117 of the Employee Handbook... did you agree that, if you left your employer, you would not work for a competitor for one year?" Louis responded, ever so slowly, "I guess so," and slumped into his chair.

"No further questions," Ms. Downey said, with a smirk on her face the size of Rhode Island. "In fact, we rest our case." Somehow, her smirk grew even larger. Louis slumped into his chair even deeper. His new job was in jeopardy, and it looked like he was going to return to RBK his last year's bonus of $250,000.

Lucky for Louis, I read carefully, and so had a bit of an "ace up my sleeve." I stood up, and said, "I have a few questions for Mr. Tepper, please." Ms. Downey appeared unconcerned. "Mr. Tepper, would you please turn to page 205 of the RBK Employee Handbook, and address your attention to the fourth paragraph, second and third sentences. I ask you to read that sentence aloud, to the arbitration panel." Ms. Downey looked at the page herself, and her smirk lost a bit of its luster.

"Sure," he replied. "Nothing in this Employee Handbook shall be interpreted to create a contract of employment for any specified period of time, or any other binding obligation on the Employer or the Employee. Only an agreement signed by both an authorized officer of RBK Trading and the employee will be binding."

The smirk on Ms. Downey's face was now gone. I knew her objection would follow: "Objection. Mr. Tepper's understanding of the law is irrelevant," Ms. Downey declared. When I reminded the Arbitration Panel of the ruling the Chairman had just made when I raised that very same objection, we were in "glorious checkmate." "Objection overruled." The Panel's decision was this: though a non-compete was entered into, by the very words of the Employee Handbook, it was not binding. Lucky for Louis, we won his case. But he was lucky, in fact, very lucky, much luckier than most.

LESSON TO LEARN: Non-competition agreements can devastate your career and your finances. No matter what anyone tells you about such agreements being "unenforceable," a letter to your present employer threatening a lawsuit against them is usually enough to get you fired. That's the real way most non-competition agreements are enforced. But be forewarned: they are enforced in court, as well, each and every day.

With increasing frequency, our clients are learning - to their surprise and dismay - that somehow, in some way, without being aware of it - they have "entered into" a non-competition agreement restricting their future employment. Why the surprise? Because with increasing frequency, non-competition agreements are hidden from sight, or disguised as something else, or buried deep inside a larger document.

Almost no one reads their company Employee Handbook from cover to cover. Hardly a single soul reads his or her employer's complete Stock Option Plan. And who among us would realize that "non-interference with company relations" is a gussied-up way of saying "non-compete agreement?" For some reason, employers' human resources professionals and attorneys have found it necessary to put non-competition agreements where very few people would think of looking for them.

Some non-competition agreements are found in unusual places, such as a posting on the company website. Others are given unlikely titles, such as "Confidentiality Agreement." And still others are worded in a way so that no one knows what they mean, such as "non-interference with company relations."

But you're now on notice: you need to read, carefully consider, and be a bit paranoid about, any and all workplace documents, agreements, benefit plans and the like, especially any that require your signature. The lesson is simple: you've got to keep yourself on alert for hidden, disguised and buried non-competition agreements the way you would be alert for burglars in the night (except in this context there are no automatic alarms to protect you.) Since violations of non-competition agreements can cost you a lot of money, aggravation and even your next job, you've got to be vigilant, and a bit paranoid, with everything you sign at work.

WHAT YOU CAN DO: These are among the unlikely places, and under the unsuspecting titles, we've found hidden, disguised and buried non-competition agreements. Be a bit wary of each, and read each carefully, with the pitfalls of non-compete's in mind:

1. Employee Codes of Conduct / Employee Handbooks: Codes of Conduct and Employee Handbooks historically served to remind employees of the forbidden sins they cannot commit at work, such as use of company facilities for personal reasons, viewing pornographic websites, and possession of alcohol, drugs or firearms on company grounds. Among those forbidden sins we now see is future employment with a direct competitor "in circumstances that may suggest use of confidential information." (A "hidden" non-compete.)

2. Incentive Compensation / Bonus / Stock Option Agreements: Recently, more and more employers are handing out annual bonuses only after a "bonus agreement" is signed. Full of legalese and obtuse language, these "bonus agreements" contain provisions that make "participation" or "eligibility" to collect this year's bonus conditioned on either (a) agreeing not to go to a competitor for 12 months after leaving, or alternatively, (b) requiring repayment of the entire bonus if you do so. The same goes for stock option and restricted stock agreements. (A "buried" non-compete.)

3. So-called "Non-Interference" or "Non-Solicitation" Provisions: Imagine the following: "I agree that I will not take any steps to interfere, directly or indirectly, with the Company's relations with its customers or prospective customers." Sounds rather innocuous, and easy to obey. Imagine, however, that you are a salesman, and after your departure you remain in the same industry: is your making cold calls to prospective customers, offering your new employer's services, an "interference," especially if you are successful in one of those cold calls? (A "disguised" non-compete.)

4. Inventions and Copyrights Agreements: Employers justifiably claim ownership of the inventions and written works that employees create on the job. Until recently, these agreements provided that employees acknowledge their employers' ownership rights, and agree to sign any papers necessary to confirm employer ownership. With greater and greater frequency, we are finding non-competition provisions buried deeply in these. (A "hidden" non-compete.)

5. Severance Agreements: It is not at all unusual for severance agreements to contain non-competition provisions. Sometimes they are labeled clearly, with no intent to deceive or confuse. However, many severance agreements provide that "All past agreements and understandings between Employee and Employer are hereby superceded, except for any by which Employee may have entered into 'restrictive covenants.'" Or they might say, "Any non-competition provision is 'incorporated by reference' into this agreement." Do either tell you if you have to stay away from competitors? No. Might they constitute a non-competition agreement? Yes. And does that place you at risk? You betcha. (A "buried" non-compete.)

6. Confidentiality and Non-Disclosure Provisions: It's always fair to ask an employee to keep confidential the trade secrets that he or she learned on the job. It's never fair, though, to claim that everything in the world that the employee knows about his or her industry is one of those confidential "trade secrets." By asking an employee to acknowledge that the name of every customer and potential customer of the company is a "trade secret," even though some of those same people were for years known to, or even friends with, the employee prior to the employment, is a form of trickery, and simply wrong. But it is not that uncommon today. (A form of "disguised" non-compete.)

7. Original Offer Letters: Many, many clients fail to bring to their meetings with us their original offer letters provided when they started their jobs, long, long ago. Why? Because they believe, "Oh, that only lasted one year, and then expired." Sadly, any non-compete signed 25 years ago may be just as potent a career poison today as it was then. (A "buried" non-compete.)

If you look for hidden, disguised or buried non-competition agreements, there's a good chance you will find one. If you find a hidden, disguised or buried non-competition agreement, you will then be able to try to avoid signing it. If you've already signed a non-compete, you can try to get it limited or even waived. Most importantly, if you're aware you've signed (or otherwise "entered into") a potentially damaging agreement, you can do your best to "navigate" and negotiate your career around it.

Beware of hidden, buried and disguised non-competition agreements, for they are potential risks that can be - and should be - avoided. Just as "practice makes perfect," so too does "prudence make protection."

A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.