Last night my husband was telling me about the “purge” at Apple, where the company had fired several key employees that had close ties to Steve Jobs. This story is fascinating in all sorts of ways, because it raises questions about new CEO Tim Cook’s leadership, perhaps his efforts to move the company away from just being about Steve Jobs, and how Apple deals with its mistakes. Interestingly, rather than completely getting rid of Scott Forstall, the executive that refused to sign a letter of apology to customers regarding the map application that failed on the new iPhone, he is being kept on for a year as a “consultant.” Why would the CEO keep around someone that he dislikes enough to fire?
The answer comes from the law. In California, non-competition agreements are not enforced. We will discuss these contracts next week, but basically they are agreements between an employee and employer whereby the employee promises not to work for a competitor for some set time after leaving. Although these have all the required elements of a binding contract, for policy reasons many courts have decided not to enforce them, or to enforce them only in limited circumstances. In California, the courts refuse to enforce these contracts, so employers and employees know that once the employee leaves (whether fired or quitting), the employee can start to compete with the former employer right away. Many analysts have cited Massachusetts’s strict enforcement of these contracts as a reason why our high tech industry hasn’t grown as fast as California’s high tech industry; freedom to hop around from company to company stirs innovation and growth. Here we see the flip side: Apple has to pay to keep Forstall on as a consultant to prevent him from running out the door and competing.
What do you think? Are non competition agreements good for business, or bad?
31 Comments
Stephanie Castro posted on November 3, 2012 at 12:47 pm
It’s really difficult to come to a decision about whether or not non-competition agreements are good for business. After considering several pros and cons I think non-competition agreements are good for business. While sharing key strategies or information from Company A may be extremely beneficial to Company B, it also makes the person sharing it look bad. By not having non-competition agreements, employers may be manipulated by their employees. It also may cause employees to be less loyal to their employers since they can easily work for another company and share vital information. It almost seems to be the case at Apple, with Scott Forstall being kept around for fear of having vital knowledge escaping to a competitor.
Jenny Perales posted on November 5, 2012 at 4:17 pm
First off, why is Forstall agreeing to stay on as a consultant? Wouldn’t he know their strategy and realize that he was being taken advantage of? In terms of non-competition agreements, I think they are bad for employees and the industry. While they seem advantageous to a company, other options may be just as fruitful without negatively impacting a career and an industry. An employee’s career progress can be hindered as a result of non-competition agreements because they are unable to reach their full potential at a new company. As you mentioned, the industry can also suffer because talented individuals are unable to be innovative at a new job. At the company level, it could be advantageous to keep an employee to avoid strengthening the competition; however, the payoff that employee is receiving could be better used to find new talent.
Stephen Wong posted on November 6, 2012 at 1:10 pm
Non-competition agreements is good for the business but not for the market. Businesses like Apple obviously benefit from it since it prevents the “former” employee from leaking information or ideas. However, our economy and market is stirred by competition and innovation, without it society wouldn’t be making any big strides. Therefore, I think it would be very important to encourage competition and get rid of non-competition agreements.
Personally, I have been disappointed with Apple and have seen a lack of innovation from them since the Steve Jobs era. Seriously, an iPad mini, Retina Display on computers, a bigger screen on the iPhone 5? If you ask me, those products/features aren’t very innovative considering its competitors seem to have developed many of those ideas before them. Honestly, I don’t know what Tim Cook and Apple have up there sleeves, but if you ask me Jobs did most of the work to create the brand loyalty from consumers, the main driver of why people still flock to Apple, in my opinion.
Hilary Bokoff posted on November 8, 2012 at 12:04 pm
I think these kind of agreements are beneficial to the individual company; any important contacts or secrets are kept some what private. But it really hurts the market as a whole because these “bright minds” aren’t moving around and creating new ideas with other companies. I also think it’s a little stupid on Apple’s part. What do they have that is so important? What do these employees know that needs to be kept from other companies? If the new CEO really doesn’t like this guy, why even keep him in the company?
Dorothy Cheam posted on November 8, 2012 at 1:01 pm
I think non-competition agreements are beneficial to most companies as it avoids the employee from spilling any trade secrets, customer lists or important company information to another company. While in terms of such a fast-moving industry like the IT industry, I think the fact the non-competition agreements exist in most states do prevent the personal and technical growth of most employees as they are unable to work on an existing technology obtained from a previous company to benefit another company. And as more laws are tailored to protect businesses, it does in a way prohibit innovation and this may cause the consumer market to deteriorate. Therefore, I believe the rules on non-competition agreements should be relaxed to an agreeable limit to promote active competition and innovation in employees and companies. This way, the consumer market would grow as a whole and benefit the greater good.
Brandon Siegenfeld posted on November 9, 2012 at 9:09 pm
It really depends on the entrepreneurial environment of the area, which is why it is important to allow for states to rule accordingly.
California has many high tech software and computer related startups. This industry has very short product life cycles and moves rapidly. So a non-competition agreement would only block innovation, since it would be difficult for the employee to utilize trade secrets since the info becomes obsolete very fast.
Boston on the other hand has a more diverse entrepreneurial community from software startups to biotech companies with product life cycles that could take up to 20 years to become obsolete. In a biotech scenario it would be a disaster if employees could compete with their employer and share information that could completly destroy their employer’s advantage and investment in research for their product.
So both locations are catering to different entrepreneurial communities, one that is fast paced and highly innovative, and another that is slower paced and more secure.
Valeria Brito posted on November 11, 2012 at 4:54 pm
I believe non-competition agreements benefit individual companies but harm the competitive environment of industries.
The fact that an Apple consultant or engineer could not go to Microsoft or any other competitor, highly benefits Apple, since expertise and probably company’s secrets and techniques would transfer to another firm.
In contrast, it harms the competitive environment of industries, because it would not allow companies to hire the best available talent out there, which at the end of the day it is what has ignited the US economy. The economy benefits from a competitive environment, it allows industries and firms to grow, by allowing non-competitive agreements, the economy is being harm indirectly.
Oliver Koester posted on November 13, 2012 at 3:20 pm
I think two key factors contribute to deciding the impact of non-competition agreements, or lack thereof. Firstly, the nature of the business; whether information or experience from a competitor can give an immediate edge. Secondly, whether the individual leaving company “A” is enough of a “threat” to business when he shares his experiences with company “B”.
To me I feel California’s approach allows the company whose employee is leaving to make that call -if the employee is deemed a threat they keep him on in a consultancy role, if not he is free to go. This approach certainly adds to cost for a company like Apple, but it may be recouped elsewhere because talent is drawn to companies working in this type of environment. An environment where top employees know that if they choose to leave, they can.
I would like to know how non-competitive agreements play into non-disclosure and intellectual property laws and how that effects these types of decisions. and how bound by this an individual is when he leaves a company.
Jinhua Li posted on November 14, 2012 at 12:48 am
I think non competition agreement is a good way to secure the company’s trade secrets and information. However, it needs to be balanced. On the one hand, it protects the company. On the other hand, it also restricts employees. Therefore, it is too loose in California that non competition agreement is unenforceable, and too strict in MA. Thus, for the development of every industry, the states should set proper restrictions on non competition agreement to protect the benefits of both the employers and the employees.
Mohammed Ali Al Nowais posted on November 18, 2012 at 10:06 pm
If the reluctance on the part of courts is due in part ot a philosophy that the employer has an advantage in all contract negotiations (inequalilty of bargaining power), it seems to me that instead of blamket rules (e.g. California does not tend to enforce these non-comps, but Mass does), courts should look harder at particular industries. If in high tech employees can secure new jobs with relative ease, the ‘bargaining power’ question seems less important – and the early rules we discussed concerning the importance of contracts and certainty in legal relations would seem more important.
Tinna Zhang posted on November 26, 2012 at 1:33 am
Here, I want to talk about the leadership. The definition of leadership is a process by which a person influences others to accomplish an objective and directs the organization in a way that makes it more cohesive and coherent. There is a leadership pyramid. The principle at the top of this pyramid is the first principle(build vision), followed by nurture collaboration, promote performance, cultivate learning, and, at the base of the pyramid, ensure results. I have another understanding of this pyramid. I think the top of the pyramid should be leader itself. For instance, when a popular singer is rocking on the stage, he shouts: put your hands up! Everyone would put their hands up without be forced. Why? Because they admire the singer. So, it is the same here. If Tim Cook is a really “charming” person, all people will spontaneously follow him. So, I think Mr. Cook need check himself instead of fire those key employees.
Eugene Mundowa posted on December 16, 2012 at 4:38 am
I think that non-competition agreements are good for business when it comes to fostering a competitive edge. A non-competition agreement can provide major security to a company that thrives on a differentiator. In other words, if a company has a certain business strategy, method, or secret that is driving the business to success that is only known by trusted employees, it’s an understandable precaution to implement such an agreement. It might seem ridiculous to give someone salary in order to avoid losing a competitive edge, but it must mean that edge is valued at more than the salary of Scott. Only when that value became outweighed would it become an issue.
In terms of innovation and growth, I don’t think that these agreements have as much of an effect as people are claiming. It is probably true that less regulation in California makes it more of a desirable place to delve into entrepreneurial tech space, but innovation and growth should not be based on stealing others ideas. If anything sharing ideas can at best put one on an equal playing field, not ahead.
Y. Daniels posted on January 13, 2014 at 1:07 pm
I can only comment on non-competes in relation to my personal experience. A company I once worked for in a ‘non-compete friendly’ state had me sign a non-compete in the middle of my employment, prohibiting me from working in the same industry anywhere in the United States. The only limiting clause was that it was to last 2 years.
If used correctly, however, I can see how a non-compete can save your employees from being targeted by competitors, for example.
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There is a clear connection between wage stagnation and having enormous barriers to entry in an economic sector. The patent and IP laws were meant to protect innovators, but what it has ended up doing is impeding innovation overall. I have written about the one important solution to economic inequality from the starting point of non-compete agreements:
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https://docs.google.com/document/d/194BVsnHk33wGaMPu3WSK4qMl7R1VonPsEhKvcrGqMEo/edit?usp=sharing
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Daniella posted on February 24, 2024 at 12:58 am
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