‘Gentlemen’s Agreements’ Mean Caution in Non-Competes

"Gentlmen’s agreements" in business, when competitors promise not to, say, poach each other’s talent, aren’t anything new. When two companies strike such a deal, few eyebrows seem to rise. But if three, five, or ten firms are involved it can throw the natural supply and demand of the job market out of balance. And that can get people’s attention.

So, the Justice Department recently launched an inquiry into the recruiting practices of some large Silicon Valley companies to see if they’ve violated antitrust laws by steering clear of hiring senior staff away from business partners. Apple, Genentech, Google, Intel, Microsoft, and Yahoo! have all been asked to provide relevant documentation.

It’s happened before in other industries, most notably in 2001, when petroleum engineers and geologists went after Exxon, among others, for hiring collusion. Interestingly, the appellate decision upholding their victory was written by current Supreme Court nominee Sonia Sotomayor.

Why the fuss? Road blocks among preferred employers can, in effect, result in a virtual salary cap. When employees know that if they leave Company A they won’t be able to interview at Companies B, C, D, E and F, not only are they more likely to stay put, but Company A knows it needn’t bother showering them with big raises to keep them at their desks.

At the same time, grumble bloggers monitoring the story, many of the companies under the Justice Department’s microscope are constantly lobbying for an increase in the number of H-1B visas.

Other online comments complain that American innovation is being imperiled by bottom-line bean counters. "It’s as if the MBA-types consider it obscene for those with scientific or engineering backgrounds to be making even a fraction of what they themselves make," writes on blogger. "And some people wonder why not enough American students are studying science, math, or engineering."

It’s important to note this controversy is brewing in the place where tech salaries are actually the highest in the nation. The 2008-2009 Dice Salary Survey (pdf) found the average Silicon Valley IT salary was $93,257, up 3.6 percent over the previous year, and more than $10,000 higher than that of second place Washington, D.C. Clearly, Silicon Valley is still a tech mecca for skilled IT workers, even if its notoriously high cost of living eats into those relatively sweet salaries.

The story serves as a reminder that newly hired employees – as well as contractors getting ready to sign deals – should always look carefully at any non-compete clauses built into their contracts, making sure they are time-limited, perhaps geography-limited, and fair. In early 2009, 20-year IBM veteran Mark Papermaster was able to go to work for Apple only after a three-month battle between the two companies. He’d signed an IBM non-compete clause that he and Apple felt was too broad, and a New York court eventually ruled in his favor. In California, it turns out, non-compete clauses aren’t valid, making it all the more intriguing that the Justice Department’s anti-competition investigation is launching in that jurisdiction.

— Don Willmott

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