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MODULE 24: No Compete Agreements and Arbitration Clauses
Core Module Issues:
• Are no compete agreements acceptable? If so, when?
• Are arbitration clauses acceptable? If so, when?
Module Teaching Notes
This module examines two issues that are related in that each is a sometimes unpopular inclusion in
employment contracts. Emphasize that many of your students will sign contracts during their careers that
will contain one or both types of clauses. Each is common, and courts generally uphold each type, except
for long term and very broad no competes. Don’t be fooled by a handful of courts in California – neither is
likely to go away anytime soon.
The background information in the textbook summarizes each in some detail, so you may want to just “hit
the highlights” for a few minutes before diving into the scenario this time.
Describe arbitration first. It is a binding out of court settlement. The parties sign a contract agreeing that
they will not sue in court, and that an arbitrator will settle any differences. (If you like showing video clips,
you might use one from any of the endless People’s Court-type shows, all of which are courts of arbitration.
The participants sign a contract before the taping and agree that Judge Judy (or whomever) will have final
legal authority to settle their dispute.
Arbitration is faster and less expensive than court, but some people are upset when they learn that they
can’t “have their day in court” if things go wrong at work.
No competes prohibit workers from taking a similar job with a competitor for awhile after leaving their current
position. Companies argue that they are necessary to protect intellectual property, but employees feel
wronged when they cannot immediately pursue a better opportunity.
The scenario presents three characters that want to take a new job, but can’t do so (at least not right away)
because of a no-compete agreement. They are:
Rachael – a senior level engineer who has knowledge of a great amount of intellectual property which would
be of great value to competitors.
Tony – a human resources manager who wants to switch companies for family reasons
Mark – a sales person who is laid off.
It is worth noting to students that even in the case of layoffs, no competes are usually enforceable. Many
companies will waive the restrictions if workers are laid off (fearing bad press, etc), but they can enforce the
agreements if they wish.
And so, Mark can be forced to sit out just like Rachael and Tony, of the company wants to make him do so.
Discussion Points for Scenario Questions
1. Should the company go to court and enforce the no-compete clause against Rachael Smith
(the senior electrical engineer)? Why or why not?
A. YES – WHY? SHOULDN’T SHE BE FREE TO SELL HER SKILLS TO THE
HIGHEST BIDDER, JUST LIKE EVERYONE ELSE?
B. NO – ISN’T THE COMPANY RIGHT TO WANT TO PROTECT ITS
INTELLECTUAL PROPERTY?
2. Should the company go to court and enforce the no-compete agreement against Tony Jones
(the HR manager) or against Mark Rodgers (the laid-off sales rep)? Why or why not? Is the fact
that Mark Rodgers was laid off and did not leave voluntarily relevant?
A. TONY – DOES IT MATTER WHY HE WANTS TO LEAVE?
B. MARK – IS THE FACT THAT HE HAS BEEN LAID OFF RELEVANT?
3. Would you personally be less likely to take a job if the company’s employment contracts
included a no-compete clause?
A. YES – WOULD YOU ONLY REFUSE TO SIGN IF YOU HAD ANOTHER
OFFER FROM A COMPANY THAT DID NOT HAVE NO COMPETE
CLAUSES?
4. Should Alpha release the worker who is currently claiming discrimination from her
arbitration agreement and allow her to sue the company in court? Should it release other workers
from their possible future claims? Should it take the arbitration clause out of the sought-after
recruit’s contract?
A. ENFORCE ALL ARBITRATION CLAUSES – WOULD YOU BE UPSET IF
YOU HAD A CONFLICT WITH A COMPANY AND COULDN’T GO TO COURT?
5. Are arbitration clauses fair? Would you be upset if you signed one and then were unable to
sue your employer in court? Should arbitration clauses in employment clauses be legal, or should
they be legally unenforceable?
A. SHOULD BE LEGAL – DO YOU EXPECT TO SIGN ONE OR MORE OF
THESE DURING YOUR CAREER?
B. SHOULD BE ILLEGAL? ISN’T EVERYONE BETTER OFF IF DISPUTES
ARE RESOLVED QUICKLY AND CHEAPLY?
