By Tara Hoke
Based on an actual case from the construction industry and inspired by recent developments in U.S. employment law, this case explores the widespread but controversial use of noncompete agreements in the engineering workspace.
Situation
A successful engineering company is working to expand its business into new localities and areas of service. Its preferred model for doing so is to purchase a small but well-established company in its target location and operate it as an affiliate structure under the firm’s overall corporate umbrella. As a result of these endeavors, the company now owns more than 15 subsidiaries in five states across the Great Lakes region.
The company’s latest acquisition is a small engineering and surveying firm in western Ohio. Owned and managed by four partners, along with a dozen other full-time staff, the firm has a solid customer base but has often struggled to recruit talent and expand its portfolio due to competition with larger firms. The proposed acquisition provides the owners with their share of an attractive multimillion-dollar purchase price and an offer of continued employment in the new affiliate entity.
In exchange for those benefits, however, each of the firm’s former owners is required to sign an expansive noncompete agreement. This agreement requires the owners’ commitment not to compete against the acquiring company for a period of 36 months in Ohio and Indiana, as well as anywhere outside those states “within a hundred-mile radius of any other location in which a member of the company group has sold products or provided services.”
As an extra layer of assurance, the agreement also includes a clause agreeing that the extent and duration of the noncompete clause are “necessary for the protection of the company group” and waiving the former owners’ right to challenge the reasonableness of the noncompete restriction.
Though the acquisition largely proves to be beneficial for the firm, one of the former partners soon chafes under the leadership of the company group. Less than a year after the closing date of the transaction, the former partner leaves the firm and accepts a position in another company several hundred miles away from his old firm in another mid-Atlantic state.
While the new job has no overlap whatsoever with the customer base or geographic territory of the engineer’s previous firm, and in fact does not offer precisely the same type of engineering services, his new employer does occasionally compete for business with one of the other affiliated entities under his former company’s ownership. When the leaders of the company group learn that their affiliate has lost a bid to the engineer’s new employer, they file suit against their former employee, seeking an injunction against the former partner from offering his services to a market competitor.
Question
What are the ethical implications of employee noncompete agreements?
Discussion
The use of noncompete agreements is perhaps the most intensely debated practice in today’s professional workspace. From the perspective of employers who rely on them, noncompete agreements ensure that employees will use the opportunities afforded them by their employer solely for that employer’s benefit and not abuse their knowledge or connections for personal benefit. In that light, noncompete agreements can be said to represent merely a formal articulation of an engineer’s ethical obligations under sections 4a and 3d of ASCE’s Code of Ethics, namely, to “act as faithful agents” and “reject practices of unfair competition.”
On the other hand, it is undeniable that noncompete agreements can place significant personal and financial burdens on employees. Employees bound by noncompete agreements may be confronted with the difficult choice between continuing work in places that no longer suit their needs; limiting their job searches to employers outside their current industries or geographic locations; or risking being targets of expensive litigation.
In addition, while the case described here involves a negotiated agreement between independent parties, all too often there exists a wide disparity in bargaining power between the current or prospective employee asked to accept an unfavorable noncompete agreement and the employer who demands it.
Although there is no express ethical duty in today’s code requiring employers to be faithful to employees, the code has for many years identified an obligation of fairness from engineering employers. Canon 7d of the previous ASCE Code of Ethics encouraged “mutually satisfying relationships between employers and employees with respect to terms of employment,” and Section 5 of today’s code includes provisions urging employers to supervise respectfully, foster a healthy workspace, and encourage their employees’ professional development. When measured against these provisions, an employer who compels an employee by use of a noncompete agreement to limit personal growth or suffer an unhealthy or unwelcome environment could be said to violate the ethical duty of fair treatment.
In fact, it could be argued that an inequitable or overreaching noncompete agreement is itself a violation of Section 3d’s stricture to “reject practices of unfair competition” in that it seeks to preclude any type of competition by a former employee, even competition that is undertaken in good faith and in full compliance with his or her ethical obligations.
In the actual case this scenario is based on, the court held that parties to a noncompete agreement could not contractually waive the court’s authority to consider whether a noncompete clause was reasonable. While noting that the acquiring company group had a legitimate economic interest in protecting “the goodwill and competitive space” of the firm it purchased, it felt the group went too far in seeking to extend that protection into other entities purchased in other transactions. Finding no evidence that the former employee had misused proprietary information or committed any other breach of duty to the company group, the court declined to enforce the noncompete agreement.
While the focus of this column is on the ethics of employee noncompete agreements, it is interesting to note how the same considerations described here have driven efforts in the legal arena to prohibit, or at least severely curtail, the use of these agreements. In the United States and abroad, courts have long expressed disfavor for employee noncompete agreements, finding them enforceable only when narrowly tailored to protect a company’s legitimate business interests while minimizing the impact on the employee’s future work prospects. More recently, California, Maryland, and other states have enacted laws that restrict the use of noncompete agreements in certain fields or at certain levels of compensation.
Earlier this year, the Federal Trade Commission announced what may prove to be the most significant regulatory action on noncompete agreements in U.S. history. Stating that noncompete agreements “keep wages low, suppress new ideas, and rob the American economy of dynamism,” the FTC has issued a final rule banning the use of employee noncompete agreements nationwide. Should this rule go into effect as planned in September 2024, the new law will void existing noncompete agreements against all but certain narrowly defined senior executives and will prohibit new noncompete agreements for employees at all levels.
Though the U.S. Chamber of Commerce and other business interests have already commenced legal action to contest this proposed law, the rule is further evidence of a strong cultural shift against employee noncompete agreements. Employers who wish to avoid future complications in the legal arena, or who are mindful of their ethical obligations to support and enhance their employees’ personal and professional development, may wish to reconsider whether a broad or punitive noncompete agreement is truly necessary to achieve their ends.
Tara Hoke is ASCE’s general counsel and a contributing editor to Civil Engineering.
This article first appeared in the July/August 2024 issue of Civil Engineering.
