Tech Industry

Noncompete clauses can keep tech in check

IBM's lawsuit against former executive Mark Papermaster, who is trying to join Apple, underscores how companies can enforce restrictions on their employees.

Apple may have a real fight on its hands if it believes Mark Papermaster is the right man to nurture the iPhone.

In an age where employees move between companies as often as relief pitchers change teams, noncompete agreements seem an outdated concept. But lawyers say the noncompete agreement that Papermaster signed with IBM is serious business that demonstrates how companies are increasingly looking to enforce restrictions on their most important employees, and that could force Apple and IBM to share valuable information to make their argument stick.

Getting out of a noncompete
clause isn't easy--unless you live
in California.

IBM is suing Papermaster for violating the terms of a noncompete agreement, which he signed in 2006, when he accepted an offer to run Apple's iPhone group in October. He claims that since he'll be working on a product that does not compete with anything IBM offers, that agreement should not apply. But it may not matter: the agreement he signed contains broad provisions regarding where and how Papermaster could seek employment for a year following his departure from the company, and it's very enforceable in New York, where IBM is based.

The two parties are scheduled to have a status conference later Tuesday, and we could learn as early as then just how determined IBM is to send a message to the rest of the tech industry and its own employees. One sign IBM is taking this case very seriously: It's using longtime legal partner Cravath Swaine & Moore, who represented IBM in the SCO trial, to fight the Papermaster battle.

"These cases are prosecuted as a deterrent to others," said John Siegal, a partner with Baker Hostetler in New York. "In case people are going to be following a high-level executive, (a company) is going to impose limitations to get the rest of the staff to think twice or three times (about leaving)."

Don't fence me in
Covenants not to compete (generally known as noncompete agreements) are perfectly valid everywhere but California, where they have been outlawed. They are generally regulated, however, to make sure they are "reasonably limited to time and space," said Robert Scott, a professor at Columbia Law School and director of the Center on Contract and Economic Organization. That means employers can't keep you on the sidelines for 10 years or allow you to work only on the moon.

The central question surrounding Papermaster's noncompete--and really any noncompete--is whether his activities at Apple would harm IBM. "The court has to find that the noncompete is necessary to protect the interests of the employer," Scott said.

Papermaster signed the noncompete (click here for a PDF copy) in 2006 when after a 15-year career at Big Blue, he joined an "elite" team of IBM managers called the Integration and Values Team (I&VT). He claims the information discussed at the three meetings he attended was "high-level" and didn't involve IBM trade secrets. According to IBM's complaint, however, that group is a collection of 300 senior managers at IBM who are responsible for "addressing the most difficult and important issues facing IBM, such as developing corporate strategy and driving innovation and growth, and I&VT members work with the most sensitive strategic information the company possesses."

But according to an interview that IBM human resources executive Randy McDonald gave just before the company filed suit against Papermaster, I&VT seems more focused on solving the "thorniest" problems that IBM's customers are having integrating technology into their businesses, rather than developing any specific technology. "I&VT is about talking business first," McDonald said during the interview.

Nonetheless, IBM will point out that the agreement covers "any entity that engages in, or owns and controls a significant interest in any entity that engages in, competition with the business units or divisions of the company in which you worked at any time during the two (2) year period prior to the termination of your employment."

So, then do Apple and IBM compete because they both make servers, even though no rational observer of the server market would consider Apple a true competitor to IBM, Hewlett-Packard, Dell, and even beleaguered Sun Microsystems? Do they compete because they both design chips, even though IBM's go into servers and game consoles and Apple's will one day go into iPhones?

It all depends on what the judge considers to be the most relevant issues at hand. "What always happens in these cases is that every company in the world thinks that everything it does is a trade secret," Siegal said. "Under the scrutiny of a judge, that gets winnowed down to real specifics, such as whether the guy was engaged in activities and had knowledge of things that would give Apple an advantage in unfair competition."

And that's where this case could get juicy.

Laying down the cards
"It may also be that this litigation serves some ancillary purpose, that in discovery, one or both of these companies is seeking to find out more about the plans and activities of the other," Siegal said.

IBM and Apple may not want to
share their road maps for the next
year in a courtroom.

IBM will likely have to explain to the judge exactly how Papermaster's specific knowledge harms Big Blue's short-term interests by laying out just where those interests lie. Apple could have to do the same thing to prove that it doesn't plan to use that knowledge to start a new business or improve an existing one, even though it had Papermaster sign an agreement that he would not disclose any confidential IBM information to Apple upon joining the company. "Sometimes in these cases, competitors find out a lot about each other," Siegal said.

As a result, these cases rarely proceed to trial, since the preliminary stages tend to drag on and often the "secrets" at issue aren't worth the prolonged involvement by upper management. Papermaster's hope is that the judge agrees with his claim that nothing in his proposed role at Apple overlaps his role with IBM.

"The court (could then) put restrictions on his conduct for Apple that falls short of an outright prohibition on his working for Apple," Siegal said, satisfying the letter of the noncompete by prohibiting him, for example, from running the XServe group or the P.A. Semi chip team for a year but allowing him to run the iPhone group.

Noncompete clauses don't appear to be going anywhere, despite California's decision to ban them earlier this year. If anything, companies are getting bolder about their use of restrictions like noncompete clauses, Siegal said, which could start to affect more and more of those executives looking to move on from deteriorating situations. And if you refuse to take that next great job because the company requires a noncompete, the employer will likely find somebody who won't hesitate.

"While most states' laws say they are disfavored as a matter of law and policy, the fact is they are very often enforced," Siegal said. "I'm not certain there is a (growing) trend toward enforcement, but there is a trend toward using these agreements and seeking to enforce them."