In fashion, non-compete clauses in employment contracts have never been so “in.” Unfortunately, they have become unfairly burdensome to employees, hobbling talents and crimping the industry. And since legal channels offer limited recourse, at least for the moment, something’s gotta give.
The fact is that many employees are bound by non-compete clauses without justification. Traditionally, companies used non-competes to prevent rivals from poaching high-level executives who have unique skills and/or access to valuable information such as trade secrets and customer lists. Increasingly, in the fashion industry as elsewhere, restrictions have been imposed on the rank-and–file who pose little to no competitive threat. That’s a topic in itself.
But here, let’s focus on top talent in fashion. The definition of “competitor” has been extended beyond reason. Previously, competition was delineated on a product or brand basis. Now, even affiliates are off-limits. For example, an employee at a Kering-owned fashion house could hypothetically be barred from moving to any of subsidiary of luxury rival LVMH Moët Hennessy Louis Vuitton, including its vast spirits division, which comprises such brands as Veuve Clicquot Champagne and Hennessy cognac. A non-compete clause today can exclude so many companies that a worker is unable to find a job in the sector. And if he or she finds work outside the industry, compensation is likely to be lower, belying the true value of his specialized skills and experience, and hobbling his or her career path.
The duration of non-competes have also increased substantially. Six months on the bench was previously the norm. The average duration has inched up and restrictions are now commonly imposed for nine to 12 months or more, sometimes on top of three to six months’ written notice. Job offers are scarce for an individual who can’t start work for a year. Fashion is fleeting and the “deciders” are fickle. Off the market means out of sight and out of mind. Even a hot designer’s career path can be derailed.
Excessive non-competes are harmful to the industry as a whole. Talent is squandered. Workers can find themselves locked in dead-end jobs, whatever the level, and cannot advance to increase their skills. Workers with unique skills sitting on the bench represents a waste of precious resources.
Companies — and ultimately consumers — lose out when the best person for the job is not readily available. With so many companies deemed off-limits during a restricted period, workers, including the most talented, may be forced to leave the industry just to make a living.
Ultimately, that makes the industry less competitive. Overly broad non-competes foster further consolidation in an industry already dominated by a few large companies and the big groups. Those with the greatest bargaining power are using overly broad non-competes to hoard talent — “retention” by locking in workers who might otherwise move to more attractive positions elsewhere. The most restrictive employers have the greatest competitive advantage — stifling competition, entrepreneurism and ultimately creativity. As a tool originally conceived to protect a company’s legitimate interests in the marketplace, non-competes in fashion are as anti-market as it gets.
Top talent face risks and daunting odds in the legal system should they attempt to override non-competes.
Companies enforce non-competes through litigation or threat of litigation against their former employees. Mounting a defense is expensive, especially in a foreign jurisdiction, and the individual is invariably overmatched. Particularly aggressive companies will spend whatever it takes to enforce their terms, not only to restrain the individual but also to intimidate other employees and ward off rivals who might lure away their talent. Sometimes the potential new employer will cover the legal fees, but at a cost: often similarly onerous restrictions.
The outcome is uncertain at best. Many companies have offices all over the world and the employee can’t always count on which country’s or state’s law will be applicable. California does not enforce non-competes. New York and the other fashion capitals do, to varying degrees. Whatever the jurisdiction, rulings tend to be highly fact-specific and industry precedent is scarce.
There is hope — to a limited extent, and New York is a case in point.
New York courts enforce non-competes if deemed “reasonable,” defined as not more restrictive than necessary, not unduly harsh to the employee, appropriate in duration and geography and not contrary to public policy. Most states have similar standards, though New York courts have long disfavored non-competes and applied these criteria more rigorously than many others.
Recently the state’s attorney general, Eric Schneiderman, in his own words, declared “war” on over-broad non-competes and has penalized offending companies accordingly. One non-compete agreement was deemed so egregious that the employer was required to void it, in its entirely, in contracts for all then-current employees and former employees still under restriction.
It would seem that non-competes in fashion, at their most onerous, would be unenforceable in New York. Not necessarily so.
Precedent cases were rulings in favor of lower and mid-level employees posing no competitive threat. The Attorney General’s priority is ensuring fair labor standards for the rank and file; Liberating glamorous fashion designers and elite executives – not so much.
In addition, non-compete terms that would be unreasonable in other industries may not be deemed so in fashion. For example, worldwide restrictions may be appropriate in the face of global competition. In fashion, time is measured in six-month intervals and sitting out more than one season may be necessary to safeguard confidential work-in-progress. Top talent may not be off the market long, as many companies are willing to hire and wait; Senior executives are highly compensated and arguably should be able to support themselves for the duration. The most onerous restriction, a too-long list of competitors, is likely to be struck or narrowed, but other restrictions may very well hold up.
Though New York may offer better prospects than elsewhere, the cost, uncertainty and paucity of alternatives make most employees submit to non-compete restrictions, however draconian.
For the individual, the most immediate and effective defense against an onerous non-compete is competent legal counsel, if available and affordable. Non-compete agreements are often deceptively simple. Broad and vague terms obscure a wide range of potential consequences. Companies bully prospective employees into accepting unreasonable restrictions – described as “standard terms” and therefore non-negotiable. Prospective employees often hesitate to negotiate, not knowing norms and fearful of losing the opportunity.
If you are an employee, understand the terms and implications so you can make informed choices.
If you are an employer, take care, as the landscape is changing. Indications are that U.S. employers are about to lose the upper hand.
A growing number of states have adopted laws to curb the widespread misuse of non-competes. Last October, Schneiderman proposed the nation’s most comprehensive bill, including a limit on permissible duration and first-of-its-kind provision giving aggrieved employees the right to sue for money damages. Falling on the wrong side of a judgment could be a very costly mistake.
Laws on the books will also provide more specific criteria as to “reasonableness.” Employers will lose their leverage to impose terms likely to be struck down, giving prospective employees the opportunity to meaningfully negotiate agreements in advance. Employees already subject to unreasonable non-competes can better calculate their odds before taking the plunge, be that leaving to join a “competitor” or shelling out the cash to defend him- or herself after the fact.
Most employers will claim that their non-competes are “reasonable”. But one person’s reasonable is another person’s unfair labor practice. If that other person is Schneiderman, you may have a problem.
Do your restrictions cross the line? Perhaps it’s a good moment to revisit your contracts and reevaluate the cost-benefit.
Betsy Pearce, of Pearce LLP, is an attorney specializing in the global fashion and luxury goods sector. The firm was founded in 2003 and describes itself as “a transactional law firm serving clients in these and other creative-driven industries.”
For More Business News From WWD, See: