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NEW YORK — May Co. and Limited Brands are scheduled to duke it out in court on Monday.
The two retail heavyweights are fighting over non-compete contract provisions, which companies feel protect their trade secrets and people assets, but executives believe are notorious for stifling career moves.
The case will be tried in St. Louis County Court, in a suburb of St. Louis called Clayton, according to a May Co. spokeswoman. May is based in St. Louis.
The case will determine the future of former Foley’s chairman Mark Weikel and could have far-reaching implications for how non-competes are written into contracts and interpreted. Weikel is seeking to work at Victoria’s Secret Stores.
The Limited has filed suit against May, contending that Foley’s is not a competitor to Victoria’s Secret and therefore hiring Weikel does not constitute a violation of non-compete restrictions written into Weikel’s contract at Foley’s, which runs through April 2005. Weikel was removed from his job at Foley’s, though May has been paying him. Reportedly, there is a restraining order preventing Weikel from joining Victoria’s Secret where he has been offered a senior-level job.
It’s the first time that Limited and May have been in a legal battle involving executive recruitment. Limited officials couldn’t be reached for comment this week.
It’s possible that the dispute gets settled before it’s time to go to court. Usually these kind of cases do, with the suing company being able to extract money or other concessions from the company being sued. As a result, the executive is usually released from his or her contract. The wrinkle this time is that the recruiting company, Limited, is suing the one where the executive works, May.
“If this goes against May, it will probably change a lot of things and will be meaningful to the industry overall,” said one retailer.
Non-compete provisions, which are widely used by retailers, protect employers by prohibiting executives from joining competitors. Typically, restrictions extend for six months to two years after a contract expires and apply to top executives. However, many retailers, and those involved in recruiting for retailers, believe non-competes can be vague in defining the competition and therefore so restrictive that they “enslave” executives to their current employers and minimize career options. They also contend non-competes drain the available talent pool and are a major reason why it takes so long to complete high-level executive searches. The retail talent pool is already small and the Limited-May court battle underscores companies’ determination to hang on to talented managers.
Search executives say the practice of non-competes has been getting more pervasive, though in California, they are not enforceable. The state decided it does not want to mess with anybody’s right to work where they want.
“It’s an emotional and sensitive issue that I don’t feel has been put out in open discussion. Everybody knows about non-competes and nobody wants to talk about them,’’ said Kirk Palmer, of the executive search firm bearing his name. “In order to join a company, you have to sign a non-compete. There’s enormous pressure.”
According to Hal Reiter, chief executive of Herbert Mines Associates executive search, “Most of the time, non-compete provisions are very specific. They will say you cannot go to work for company A, company B and company C, for a specific period of time.” But sometimes the provisions are not specific, Reiter added, and that’s when they become difficult to enforce, leaving the courts to determine the competition.
“The reason any company enforces a non-compete is to demonstrate to all of their employees they will use every method they have at their disposal to prohibit an executive from violating an agreement that they executed,” Reiter said. “What good is it, if they don’t try to enforce it?”
Generally, non-compete clauses involve executives at the chief executive level down to general merchandise managers, though Palmer said the practice has been widening to the vice president and divisional merchandise manager levels. “There is a place for non-competes, at the ceo level. When you get down to the gmm level and below, it’s ridiculous.”
Currently, Saks Fifth Avenue is searching for a chief merchant. But non-compete clauses, according to industry sources, mean Saks can’t tap such logical places as Bloomingdale’s or Neiman Marcus. It’s also likely that Saks couldn’t tap May Co.
May, historically, has been aggressive in enforcing its non-competes, but it has a reputation for paying those who stay on very well. May sued Bon Ton when Heywood Wilansky, a former president and chief executive of Foley’s, was offered the same job at Bon Ton in 1995. The case was settled out of court. May also sued J.C. Penney when Linda Quick, a senior marketing executive, wanted to switch jobs. A trial date was set, but Penney’s decided it wasn’t worth the wait and hired someone else.
Federated also has been aggressive about enforcing its non-compete agreements. In one high-profile case in 1993, Federated sued Macy’s when Roger Farah left Federated to join Macy’s as president. Federated’s non-compete provision was upheld by the court, which sidelined Farah from working at Macy’s for several months and made Macy’s pay Farah’s salary while he was benched. Macy’s paid dearly again when Federated took over Macy’s and Macy’s had to pay Farah millions due to a “change of ownership” stipulation in his contract. Federated also once sued Herbert Mines Associates for recruiting Matthew Serra to work for Foot Locker. That case was settled, though Federated made its point.
“The folks who have employed non-competes have achieved their objectives of keeping candidates out of the marketplace,” said Palmer, who, in light of the upcoming Limited-May case, will mail to the industry an essay giving his perspective on the issue. “The time has come for all companies to reexamine and get realistic about defining three major components related to non-competes,” he writes. “We all know Federated competes with May. Restrict non-compete provisions to companies that are obvious competitors.”
Palmer also stresses that after someone has been out of a job for six months, “it’s difficult to believe that anyone can possess such secrets to create substantial and irreparable harm. After this time period, an executive should have the right to go back to work.”
In the first place, non-competes “should be restricted to those who truly have bona fide and highly proprietary information,” which is generally not more than the most senior members of management. “There are too many examples where a company has been downright vindictive to executives, forcing them not to work for years to make their point to the rest of the industry,” Palmer writes. “It’s wrong.”