Eli5: how exactly can companies enforce non-compete contracts? How is it their business what company you go to, and how would they even know?
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Many areas of work that might require a non-compete are much smaller pools than you might imagine.
And while different areas of this small pool can hold different swimmers, inevitably paths cross.
They can enforce them by taking the matter to court.
The reason it is their business (to some extent) is because by employing you, they are letting you in on valuable, competition-sensitive information that other companies might like to get their hands on. This could range from really secret things like the recipe for the soda that your company makes, to more mundane stuff like contact details for clients or suppliers, or information on the rates that those clients pay or what you pay your suppliers. These are all things that a competing company could use to their advantage. Or things that an employee could use in order to start their own business. So companies have a right to protect themselves against such risks, by including clauses in their employees’ contracts that bar them from sharing or using certain information that they became privy to as a result of their employment.
For instance, suppose I run a paper company that acts as a middleman, selling paper from big suppliers to local businesses. A big part of my company’s value is the network of clients and suppliers that I’ve built up over the years. I mean, it’s not like selling paper is rocket science. Anyone can start a paper company, but they’d have a hard time making headway without having clients to sell to, or without good deals with suppliers that allow for better margins or more competitive prices. So as the owner of a successful paper company, I really want to protect this information, or else one of my employees could just take it and start their own company. Or, one of my competitors could hire my employee and get them to share this information.
How would they know? That depends. In the above example, it’s probably not hard to find out that my employee went to work for my competitor, or that they started their own paper business. Certainly I would notice if my clients suddenly started leaving me for the competition, and it wouldn’t be hard to link that to this employee. In particular, if their contract said they couldn’t found their own paper company in the same state within 5 years of termination, and they did so anyway, that’s a pretty open-and-shut case.
Generally in areas where non-compete contracts are used there aren’t that many jobs available. So they would know eventually. And when they know, they can sue you for breach of contract.
Depending on your jurisdiction, often they can’t.
That said, anyone can sue you for any reason, and it still might be a painful and expensive experience if they decide to pursue action, even if you win.
If you are concerned, consult a lawyer.
When they find out that a customer isn’t buying from them anymore and they call up and find out that the customer is now with your new firm it’s not difficult to put 2 and 2 together.
Same way as any contract is enforced – by taking the matter to court. If the judge finds that the contract was breached and the law allows for these types of contracts and court action to enforce them, the judge may award damages and order stopping whatever activity was breaching the contract.
Damages are money/cash, and usually based on the judge’s estimate of how much loss was caused by the breach, but can also include punitive damages (punishment) if the law allows for it.
Noncompetes are often “unenforceable”.
Businesses enforce contracts by lawyering up and suing you. Many contracts are more like legal wishlists, and what *actually* binds you depends on the laws and precedents in your jurisdiction.
Companies care because a common thing that happens is:
* employee works with them for years
* gets fired or leaves with privileged information (customer lists, roadmaps, git repos)
* founds (or joins) a new company doing the same thing
* shares that information about their old company with the new employer
* now the new employer has an enormous advantage. The employee is often hired into a leading role
Corporate espionage and staff poaching are *very* lucrative, and noncompete contracts do help cracking down on egregious examples of it. They’re usually unenforceable in more modest situations where there’s not a quantifiable “damage” caused, i.e. someone who works for a competitor but refrains from using privileged information.
They find out when they conduct corporate espionage (or just ordinary investigation) and see that you’ve breached the contract or that their competitor suddenly does a 180 in strategy.
I’m a locksmith and went on an interview with a very large lock manufacturer who also does installations. They mentioned that I “of course would need to sign a non-compete clause.”
I asked for a copy of it.
I told them I would not be able to sign it because the way it was worded, I would not be able to work as a locksmith in NYC, Long Island, and parts of NJ for 5 years.
They told me that no one had ever refused that before. Before the interview was up, I was told they checked with the VP and he said I wouldn’t have to sign it.
I turned the position down because the medical benefits sucked compared to what I already had.
Not sure about the legal issues but in my business, everybody knows everybody. There are no secrets as to who works where.
In most countries, non-competes are difficult to enforce if not outright impossible. Typically a company needs to be able to prove there is a specific and reasonable reason for preventing you from working for a competitor, which in most cases would be better charged under other laws anyway like information theft. Its inclusion in contracts is usually intended more as a scare tactic or to cover their bases than to actually prevent you working for a competitor. But you would need to get real legal advice for any specific case (cause you never know).
The main exception in the west is France where they are fully enforceable, however they are required to provide compensation (often 20-40% annual salary) if they choose to enforce the non-compete.
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