"I Forgot to Sign"

July 15, 2009

This past week, we found ourselves in the middle of a tricky negotiation concerning a ‘non-compete’ clause in an offer of employment. Both the client and candidate had valid though polar opposite positions on the necessity of the clause, its language, term and restrictions. In the end one party made concessions in return for changes to another part of the agreement. It was a lot of work for an eventuality that may well never materialize. However several recent well publicized employment battles serve as reminders that ‘non-competes’ are not a trivial matter.

Two weeks ago a US district judge ruled on IBM’s bid to prevent a senior executive from joining Dell as SVP Strategy. The employee in question was a 27 year IBM lifer who had risen to a very senior corporate development/strategy role in the company. In 2005 the executive was asked by IBM to sign a non-compete agreement. He resisted. The company advised him that his equity awards would cease if he did not sign. He acquiesced and signed, though in the wrong place, and submitted the document back to the corporation. Months later IBM noted the signature error and sent the executive another agreement to sign, presumably marking the appropriate places to sign with even brighter yellow stickies and larger ‘X’s marking where he should sign. The executive ‘never got around to signing’ the second document and the matter fell between the bureaucratic cracks until he announced his defection to Dell.

IBM argued that as their VP of Corporate Development the executive in question had critical knowledge pertaining to various IBM acquisitions and divestitures not to mention potential transactions being contemplated. He also had knowledge of the models the corporation used to evaluate businesses and the returns it expected to generate from its M&A related activities. Furthermore, though the executive ‘forgot’ to sign the non-compete IBM argued that there was a deal in principle, as evidenced by the continuance of the equity awards.

The judge ruled in favor of the executive thus rewarding his forgetfulness and making it clear that IBM had the responsibility to properly execute the agreement. No signature, no deal. IBM has launched several subsequent lawsuits accusing the executive of stealing secrets and using IBM resources to set up other businesses. It promises to be a legal mess.

IBM did win (in a manner of speaking) another non-compete judgment last year when a court ruled in favor of stopping another of its executives (this one a semiconductor guru) from joining Apple. In this instance the IBM executive argued that he was joining Apple in a role unrelated to the expertise and knowledge IBM was attempting to protect. IBM argued that the new job (EVP Hardware Development or something to that effect) was hardly distant from his area of semiconductor expertise and at best was a placeholder position/title until his one year non-compete expired. It also argued that the executive’s world-class expertise was critical to several strategic initiatives already announced by Apple.

The judge in this instance ruled in favor of IBM and ordered the executive to immediately quit Apple. But the story does not end there as IBM was then forced to deal with to a ‘return to sender’ executive who’d rather be at a competitor. With counter-suits flying in every direction IBM was forced to come to an agreement which allowed the executive to return to Apple. In a statement announcing the agreement an IBM spokesperson said, "The executive will be required to certify over the next 12 months that he has complied with his legal obligations not to use or disclose IBM's confidential or proprietary information". The press release was unclear as to exactly how such compliance would be validated.

In yet another case a senior Boston-based EMC executive accepted a role to head up a directly competitive division of HP based in California. Upon resigning the executive immediately filed suit against EMC in the state of California, asking for a judgment to void the non-compete clause in his employment agreement. EMC then filed suit in Massachusetts for violation of the key employee agreement and to enforce the non-compete in the agreement. The case, which has many moving parts, is complicated by the fact that California and Massachusetts have very different laws regarding non-compete clauses in employment contracts. It is unclear how this was resolved.

Designed to deter and protect yet difficult to enforce, non-competes are messy, moving minefields and a lawyer’s dream. They are also in almost every employment agreement we see.