17.01.14

Know Your Enemy

It is only natural to protect things vital to your well-being.  Self-preservation has long been understood as the first and most dominant of all human instincts.  It was the great Roman orator Cicero in his philosophical classic De Finibus in 45 B.C. who asserted that “by nature our first impulse is to preserve ourselves”. Extrapolating this concept, especially in potentially hostile environments, having central intelligence on those who can harm you is a pivotal tool.  Further, implementing a strategy to limit or prevent these potential enemies from harming you is all part and parcel of effective self-preservation.  Sun Tzu correctly espoused this concept in his famous book The Art of War as he professed “if you know the enemy and know yourself, you need not fear the result of a hundred battles”.  With business these days being more tumultuous than some ‘run of the mill’ civil wars, using the legal device of a non-compete agreement (“NCA”) with particular employment contracts could prove to be your life-support in the field of corporate medicine.

A non-compete agreement is a contract limiting a party from competing with a business after termination of, or resignation from employment or completion of a business sale.  Generally speaking, enterprises pursue these agreements in two circumstances: when hiring new employees, or when purchasing an existing business.  

The first recorded non-compete case was brought in England in 1414.  A dyer of clothes tried to enjoin a former assistant of his from setting up a similar business in the same town.  During this time, the free transferability of property and goodwill became an important social goal, as a result, non-compete agreements were looked down upon by the courts as the general sense was that they bred complacency and stifled the general principle of free-market benefits.  To make matters even worse, there was a drastic shortage of available labour at the time due to the Bubonic Plague which ravaged a sizeable portion of the population.  It was poor timing on the part of the NCA which did not see prominence or credibility in the courts until the economic boom provided by the Industrial Revolution in the middle of the 18th century.

The commercial underpinning of NCAs is an employer’s self interest.  Typically, businesses spend vast amounts of resources on training their employees in the hope that this investment will reap rewards in the long term.  They also have a vested interest in protecting their customer base, trade secrets, and other information which facilitates a smooth operation.  The modern company will naturally take all precautions necessary to avoid investing in an employee, only to see that employee take the skills acquired (on the company’s dime), or the business’s customers, to a competitor.  Furthermore, when a company purchases a player in its industry in an effort to expand through acquiring market share, you can imagine that they would be quite disappointed to discover that the vendor has opened up another such business of the same size three weeks after the completion of the sale.

Practically, NCAs are very pointed, specifying several conditions.  Usually the agreement will define a length of time in months, a type of activity in which the employee promises to refrain from working after leaving the position, and a geographic radius in miles.  NCA’s are most often seen in industries which depend on an established group of customers.  For example, NCAs are basically standard in the contracts of television and radio personalities.  

In 2010 there was a highly publicized feud between NBC and Conan O’Brien when NBC decided to move the time slot of The Tonight Show with Conan O’Brien to a later time to accommodate a more favourable viewing time for fellow late-night talk show host Jay Leno.  O’Brien threatened to leave the station and start his own show if the change was permanently implemented citing the decision as destroying the venerable franchise of The Tonight Show which had aired at the same time for over 60 years.

During the negotiations, NBC Universal’s President Jeff Zucker threatened to enforce a non-existent non-compete clause which would have sidelined O’Brien from hosting any show on any major network for a year.  Unfortunately for NBC, the threat was unfounded as non-compete clauses are generally outlawed in the State of California.

In Jamaica, the courts tend to only uphold NCA’s where there is an exceptional proprietary interest of the employer to be protected.  The restrictions must be reasonable and must extend no further than is reasonably necessary to protect that proprietary interest.  Recent cases suggest that the courts are minded to uphold NCA’s which speak to trade secrets and trade connections.  However, the courts recently upheld a NCA which sought to place a 3 year ban on solicitation of the former employer’s customers.

Employees should also be aware that a NCA can give them leverage in the negotiation room as well.  If you are being asked to sign a NCA, a common strategy used by employees is to ask for a higher base salary citing the obvious risk associated with one’s livelihood should the employment be terminated or a resignation tendered.

Businesses should consider who their ‘star’ employees are and how much they know.  They should also consider how best to insulate themselves from possible industrial espionage.  A non-compete agreement could be the golden gun which all spies fear.  It is ideal to have loyal employees who have an innate belief and pride in you and your business.  It is equally as ideal to have a loyal employer who believes in your integrity.  However, A.A. Fair of Perry Mason fame said it best in his murder mystery novel Top of the Heap when he wrote “loyalty is a fine thing...but self-preservation is the first law of nature”.