Monday, January 28, 2013

Tait Graves Asks: Do Non-Competes Appropriately Regulate Intellectual Property?

For those of you interested in the academic side of non-compete agreements, the article I have embedded with this post is a must-read.

Tait Graves is a partner at Wilson Sonsini and has written a ton of great stuff on trade secret law. In his latest, he poses a pretty reasonable question that - to him - hasn't received a satisfactory answer:

Does it make sense to use non-compete agreements to regulate intellectual property?

I have a few observations on this article:

(1) I agree with the general proposition that when enforced non-competes can protect too much information if the asserted protectable interest is, in fact, trade secrets. I think, almost by definition, that every employee has something to offer besides access to, or knowledge of, trade secrets. So a lock-up period necessarily means that a new employer is going to lose the benefit of some skill that fails to rise to the level of a trade secret.

(2) I don't agree that trade secret law is a better (or at least as good of a) protector of intellectual property law than the non-compete. The problem with using trade secret law instead of a non-compete is that it fails to put employees and prospective new employers on notice of what is actually prohibited. More problematically, for the trade-secret holder, discovery of a misappropriation can come too late and compromise the secret altogether. A non-compete allows for a more objective way to protect the trade secret at the outset.

(3) I absolutely agree that training is a poor justification for using a non-compete. The argument Tait rejects is the Law and Economics argument that firms won't provide training if they can't count on non-competes. Or, more appropriately, that firms will pay a lower wage if non-competes are not available. This doesn't square because firms have every interest to properly train their workers anyway, and whether a non-compete is part of the equation or not, companies will need to invest in the appropriate training to stay competitive. Simply put, it's hard to see how this asserted interest is really appropriate for upholding a non-compete.

What this article does not cover - and indeed does not try to cover - is the use of activity restraints, like non-solicitation agreements, to protect other business interests typically tied to restrictive covenants.

This is an excellent, theoretical read that asks some very important questions.

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