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California employers would be able to hire employees away from competitors in other states if a recently filed lawsuit is decided in favor of the plaintiff—a California tech company that seeks to do away with noncompete agreements and other restrictive hiring covenants nationwide.
Veeva Systems Inc., a cloud computing company in Pleasanton, sued three out-of-state competitors in California Superior Court in Alameda County for the restrictive covenants they've used to block it from recruiting their workers, arguing that the noncompete agreements are anti-competitive and illegal under California law.
Veeva claimed that Medidata Solutions Inc., Quintiles IMS Inc. and Sparta Systems Inc.—based in New York, Connecticut and New Jersey respectively—have "overbroad" agreements that make recruiting their employees "difficult and expensive," while at the same time those companies are able to poach Veeva's workers, who are not bound by noncompetes, which are banned by state law. All three defendants do business in California, according to the lawsuit.
Medidata and Quintiles had previously filed trade secret lawsuits against Veeva, alleging that it stole market research information.
A spokesperson for Medidata said "the theft of trade secrets" is "the real issue" behind Veeva's suit. "Medidata will not tolerate the misappropriation of its intellectual property and has a responsibility to its customers, employees and investors to protect its substantial investments," the company said.
Michael Bord, director of communications for Sparta Systems, said his company is in the early stages of investigating Veeva's claim. "Sparta is extremely proud of our hiring and business practices. We take the allegations made by Veeva seriously and we are further investigating at this time," he said.
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California is one of just a handful of states where noncompetition agreements can't be enforced as a matter of state policy. "Under the law in most states, companies essentially have the power to dictate where employees can work and keep them locked in jobs," said Peter Gassner, Veeva's founder and CEO. "People who live outside of California are not free to come work for a California company because they're [bound] by these agreements. We are taking action because people should have the fundamental right to use their skills and experience to advance their careers as they choose without the threat of being sued."
Noncompete agreements—which are common among technology employers—typically bar workers from taking jobs with competing firms for a set period of time after leaving their current job. Employers use noncompete agreements for a variety of reasons, including protection of trade secrets and to help prevent turnover, while critics of the restrictions argue that they limit worker mobility and depress wage growth.
"The negative effects on wages, mobility and job satisfaction can be substantial," said J.J. Prescott, a professor of law at the University of Michigan, Ann Arbor.
About 30 million workers, or 18 percent of the labor force, are covered under noncompete agreements, according to a 2016 report from the U.S. Treasury Department.
"Many companies include these clauses in their standard terms of employment, realizing that most employees won't read or understand the fine print," Gassner said. "Employees often unknowingly sign contracts that could eventually be used against them as they pursue new job opportunities."
Veeva's suit asks the court to affirm its right to solicit its competitors' workers, to retain workers accused of breaching restrictive covenants in other states, and to block the defendants from using noncompete agreements.
Orly Lobel, a law professor at the University of San Diego, said that case law in this area—when an out-of-state employee who signed an enforceable noncompete agreement wishes to work for a California company—is unsettled.
She said California courts are likely to void noncompete agreements signed in other states, however, if the worker is hired by a California company but works remotely outside of California, the restrictive covenant may still be enforceable.
President Barack Obama's administration expressed concern about the use of noncompetes, especially for low-wage workers. A 2016 White House report stated that "noncompetes could result in unemployment if workers must leave a job and are unable to find a new job that meets the requirements of their noncompete contract."
Certain states introduced or passed legislation restricting the enforceability of noncompete agreements for workers under a certain income level, according to the White House report.
"I'm thrilled to see broad action being taken to curb these unfair agreements," Lobel said. Confidentiality and nondisparagement clauses, which protect against disclosing trade secrets and criticizing an employer, respectively, can be as big a constraint as noncompetes, she added.
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