Wednesday, September 8, 2010

Non-compete agreeements

Felix Salmon is discussing the lawsuit over Mark Hurd accepting a job at Oracle. The crux of the argument seems to be concerns that Mr. Hurd might reveal confidential information as part of his new job. Fortunately, for him, the state of California takes a very dim view of non-compete agreements. From commenter Vania, in the comments to Mr. Salmon's post:

The covenant not to compete, as written, is simply unenforceable under California Business & Professions Code Section 16600:

“16600. Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Now I have a generally dim view of non-compete agreements, so I think that this law is good sense. While I don't have any issue with a CEO having more restrictive rules, given the level of compensation that they are given, I am dubious that these agreements are given only at the CEO level. I know that I was under one, once, in a very junior position at a firm.

The key issue is that I am unsure of how easily one can freely consent to such an agreement in the midst of a dismissal. The person has just had their life turned upside down and likely lost a crucial income stream. The company has had time to prepare the exit package and carefully optimize it for their interests. They have had lawyers look it over and had HR vet the relevant policies. I am unclear that these structural differences in information can be overcome nor do I really see the "sign this or get no severance" as being a real choice for people who have had no ability to assess their options.

At an even more fundamental level, I am unclear why these sorts of agreements don't violate our norms of a free market. How can there be a bigger barrier to free economic activity than a pledge for workers not to sell their skills? We are already worried about issued with implied compensation, does this not count as a hidden cost that is not declared up front?

At best one might argue for contract law and the ability of people/organizations to enter into agreements. But the santicity of contract law seems to be under attack when it favors the worker (consider tenure and defined benefit pension plans). Why do the same arguments about net social good not apply here?

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