The argument for and against non-compete clauses

President Obama’s final term is coming to a close, and we find an article in Fortune about his October pitch to ban non-compete agreements, which the author says would “make the rich richer.”

The author primarily focuses on low-wage workers:

“Low-wage workers are precisely the group that will benefit from signing agreements not to compete, because they are the ones most in need of the training and life skills that a first job can provide.”

The author’s case assumes a direct tie from training and life skills to the existence of non-compete clauses in employment contracts.

According to this logic, a worker is hired, who is then trained in by his or her employer. After the training period is done, the worker quickly “jumps ship” to another employer for more pay. There’s no non-compete clause, so the employer is helpless to do anything about it. Therefore, that employer will simply choose not to train new employees.

The trouble with this logic, however, is that employers must train in all new employees for the job they were hired to do. Would employers suddenly forego training and opt instead not to hire? Would the lack of non-compete clauses in employment contracts be that competitively troublesome?

Perhaps.

But it is difficult to see how the absence of a non-compete clause alone would prevent employers from hiring unskilled workers, who must be trained in either way.

Dealing with a non-compete clause?

What the author of the Fortune article fails to mention is that employment contracts in general often serve the interests of employers, not employees. This assertion applies to non-compete clauses as it does to other aspects of employment contracts. All too often, a non-compete clause actually unfairly limits the employee’s ability to work. If you’re facing a dispute regarding a non-compete clause, call 202-463-6036 for legal help.

Non-compete Agreement Prevents CVS from Hiring Former Wal-Mart VP

Most are familiar with Wal-Mart’s success as a company, and its uncanny ability to drive smaller competing businesses into the ground. But people are not necessarily aware of the legal battles Wal-Mart engages in to protect its marketing strategy.

On December 15th, Wal-Mart won a court order preventing CVS Caremark Corp. from hiring the man who formerly served as Wal-Mart’s executive vice president. Wal-Mart claims that its former VP is bound by a non-compete agreement.

Wal-Mart hired its former executive VP in 2006 and formed a non-compete agreement with him in 2009 upon appointing him president of Northern U.S. division of Wal-Mart. The agreement prevents the former VP from working for competitors retailing more than $5 billion in revenue for two years after leaving Wal-Mart.

The agreement was reportedly made to prevent the former VP from disseminating confidential information concerning Wal-Mart’s pilot program involving small-format markets. The former VP had been the executive sponsor of Wal-Mart’s small-format plan, and had oversight of 1,312 stores in 19 states during his time with the company.

In a hearing concerning the contract dispute, CVS argued that Wal-Mart brought the former VP on because of his expertise in management rather than for his knowledge about Wal-Mart growth strategy, and that any knowledge he may have is outdated. But the judge ruled that the non-compete agreement was reasonable. Wal-Mart’s request was granted as a preliminary injunction, which will prevent CVS from making the hire until the issue is tried in early March.

In the area of pharmacy retail, Wal-Mart has established itself as a competitor with companies like CVS, Walgreens, and Supervalu. The company currently has over 4,000 pharmacies.

Wal-Mart announced its plans last October to open 30 to 40 small-format markets in 2012. Its small-format strategy will place it in direct competition with companies CVS.

Source: Bloomberg, “CVS Can’t Hire Ex-Wal-Mart Vice President, Judge Says,” Sophia Pearson; Phil Milford, 15 Dec 2010.