A More Creative Approach to Non-Compete Agreements
Charting the future of public relations
Holmes Report

A More Creative Approach to Non-Compete Agreements

“There’s a growing minority of public relations firms that are adapting new techniques aimed at greater enforceability,” says Michael Lasky of New York law firm Davis & Gilbert, who specializes in working with public relations firms.

Paul Holmes

In 1991, Charles Pucie left Hill & Knowlton to set up his own public affairs firm, Capitoline International. A year later, a trio of senior H&K healthcare executives, including Marcia Katz and Ken Rabin, followed him, founding InterScience as an affiliated company. H&K sought an injunction in an attempt to restrict the firms’ operations—it was denied—and claimed the executives had stolen proprietary materials that helped them establish their new companies. The resulting media coverage included extensive criticism of H&K’s “stifling culture,” which was blamed for the defections.
Four years later, three senior executives from the Atlanta office of Manning Selvage & Lee struck out on their own. MS&L management claimed the three had recruited employees and clients while they were still employed at the agency and filed suit. The three counter-sued, leveling a variety of charges that included assault—because security officers had forcibly restrained them as they sought to remove their possessions from MS&L’s office. The suits dragged on for two years, generating extensive media coverage in the Atlanta papers and claims that MS&L’s New York-based management did not understand the local Atlanta market.
Then, earlier this year, WPP Group subsidiary Cohn & Wolfe fired the general manager of its Atlanta office, Tony DeMartino, and three others after it learned they were planning to leave and launch a rival firm. Cohn & Wolfe sued and the new firm countered, claiming the non-compete agreements they had signed were too restrictive and charging that Cohn & Wolfe had failed to pay bonuses and was slow in paying expenses.
In all three cases, the agencies involved suffered a double blow, first losing key executives and then being forced to deal with media coverage that raised questions about management competence. It’s no wonder that in the wake of such cases, some public relations firms are taking a long hard look at restrictive covenants and finding new ways to protect themselves against senior employee defections.
“There’s a growing minority of public relations firms that are adapting new techniques aimed at greater enforceability,” says Michael Lasky of New York law firm Davis & Gilbert, who specializes in working with public relations firms. “They are moving away from the old model, which is largely punitive in its approach, and looking at ways of preventing the loss of revenue that is associated with the departure of people and clients.”
One big reason firms are examining their contracts is that while laws vary from state to state, traditional non-compete agreements are increasingly difficult to enforce. In most states, the general rule is that non-competes are enforced only to the extent “reasonably necessary to protect the legitimate business interests of the employer,” according to Michael Diamant, a labor attorney with Kahn Kleinman Yanowitz & Arnson in Cleveland. Agreements that keep intellectual property in the hands of employers are generally enforceable; those that place broad restrictions on an individuals right to pursue employment in his or her chosen profession are not.
In California, everything changed after a California Court of Appeals ruling in D’Sa vs. Playhut. The plaintiff was hired by toy manufacturer Playhut as art director, and asked to sign a confidentiality agreement that prevented him from passing company secrets to other companies. But the agreement also included a clause that barred employees from working for a competing toy company for a year after leaving. D'Sa refused to sign and was fired. He sued for wrongful termination and the Court of Appeals found the contract in violation of California public policy, which says no contract may restrain a person from earning a living.
But even when restrictive covenants are enforceable, there are questions about whether they are worth enforcing. When lawyers get involved, ill will almost inevitably follows. Legal action alienates those who have departed (obviously) but may also strain the relationship between the company and its remaining employees, its clients, and anyone else who reads the media coverage of the case.
Gil Bashe, president of healthcare communications firm Health!Quest, sees non-compete agreements as a reflection of an agency’s values. He has philosophical reasons for taking a more progressive approach to employment contracts.
“To some extent, these agreements establish the tone in which a company’s relationship with its employees will be conducted,” says Bashe. “They are a form of communication with your employees, and we wanted to establish right from the start of a relationship that we have good communication skills.”
Bashe has been on the receiving end of employment agreements several times in his career, and says most of those agreements have been punitive in nature. “They are designed for the most part to put the fear of god into the prospective employee,” he says. “As a result, if employees become unsatisfied they become jailhouse attorneys, they start working to get themselves out of the agreement, and the company becomes the enemy.”
What they don’t do, Bashe says, is communicate with their employers. “If you want to be able to hang on to your best people then you don’t want to set up a dynamic where they are not going to talk to you about what is in their heart,” he says. “The typical agreement doesn’t encourage dialogue, it encourages secrecy.”
But when employees leave, their departure impacts not only the employees involved, but also those who remain and, of course, clients, whose interests are often forgotten as agencies fight to hold on to their business.
“What happens next is that the employees who remain side with whoever they have the closest relationship with. They tend to gravitate to the leader of their group rather than with management, because they have an emotional attachment.” At the very least, employees are distracted by the controversy. In the worst-case scenario, the tension may encourage more employees to follow the defectors.
It may also have an impact on clients, who may also have a closer relationship with the departing individuals than they do with agency management. Clients are likely to believe that they have a right to choose who provides them with public relations counsel, and agencies should probably avoid any action that increases client sympathy for departing executives. Says Bashe, “Clients are like everyone else. They are likely to see a dispute between the agency and its employee as a David and Goliath battle, and their sympathy is likely to be with the employee.”
Rather than taking a litigious approach, companies should approach their clients and ask for a reasonable opportunity to prove that they can continue to handle their business, says Bashe. “I think it’s reasonable to ask for a period of time to put a new account team together,” he says. “Most clients will understand that a senior level departure creates disruption. They should be willing to give the agency time to rebuild.”
If there are philosophical reasons for taking a different approach to non-compete agreements, the practical reasons are likely to have broader appeal. Stanton Crenshaw Communications is another firm that is taking a more progressive approach to restrictive covenants, because “we are trying to avoid having to spend a lot of time and energy after someone leaves,” according to principal Dorothy Crenshaw.
That’s why Lasky recommends that agencies eschew the typical punitive approach and look at other ways of protecting the employer’s interests.
“If you can’t prevent the revenue from being lost, you can at least provide a mechanism for some of that revenue to be recovered or replaced,” says Lasky, who says that the traditional non-compete agreements are prohibitions. “It’s like the 10 commandments, half of which consist of ‘thou shalt nots,’” he says. “That gives companies rights, but not remedies. They figure they are not in the business of pursuing law suits, which nobody wins.”
The best non-compete agreements, he says, are “self-executing,” triggering specific remedies if employees do take business with them when they leave.
“In a service business, companies spend a good amount of time and energy developing client relationships, and in the unlikely event you do leave and you don’t honor the non-compete agreement, you agree that you will provide fair and reasonable compensation to repair our loss. Usually, that will be a reasonable percentage of the revenues you derive from a client over a specified period of time.”
The compensation an agency receives for any lost business will often be considerably more than the agency would have spent on legal action—and with a far lower cost in terms of management time and energy. But the best thing about that kind of agreement is that it’s enforceable—even in California, Lasky says.
“You’re not doing anything to prevent an employee from earning a living,” he says. “You’re not putting restrictions on where they can work.”  
Other companies, Lasky says, are asking employees to agree to longer notice. It is no longer unusually for senior employees to be asked to give six months notice. “In a service business, time is always an important factor,” Lasky says. “An agency needs time to put a team in place to try to hang on to the client’s business. If you ask your employees to give you two weeks notice, you’re not going to have time to react.”
These new agreements protect the interests of everyone involved—which should be a high priority for every agency president. Says Crenshaw, “We are not making widgets here. This is a business that is based on talent and you have to do everything you can to protect yourself against losing that talent. At the same time, we are not in the litigation business. Anything that provides solutions that avoid long, drawn out lawsuits has to be a good thing.”
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