Business Musings: An Important Notice on The Non-Compete Clause (Contracts/Dealbreakers)

I wrote about the non-compete clause in mid-May. It’s a pernicious horrid little clause that has shown up all over contracts involving creative works—not just in traditional publishing deals here in the U.S., but works in translation, game rights, movie deals, and more.

In that post, I said that I wasn’t sure if the clause would hold up in court, but that was a bit of fudge. I knew that some states had already litigated the non-compete clause and found it wanting.

I am very aware of the fact that I am not a lawyer. I don’t have the years and years of training and life experience that makes some things clear to lawyers and not to the rest of us. I don’t write certain blog posts because I’m not a lawyer. I know that I would quickly get in over my head.

I get a lot of letters from lawyers, and they do advise me on the things I get right, and the things I get wrong.

I’ve had the pleasure of emailing back and forth with Teri Kanefield for over a year now. She writes books for young readers as well as adults. She also practices law in California. Here’s what her website says about her law practice:

Teri’s law practice is limited to representing indigents on appeal from adverse rulings. She believes that when the rights of society’s most vulnerable members are denied, everybody’s rights are imperiled. She also believes that the purpose of literature is to expand our sympathies.

She emailed me after reading the non-compete blog and mentioned that non-compete clauses are mostly illegal under California law, with rare exceptions.

She also suspected that they were illegal and thus unenforceable under New York law.

She had reasons for that. I asked her to send me a few citations, so that I could essentially try to recreate her argument, although I admit, as a non-lawyer, I felt uncomfortable doing that.

Then she suggested doing a guest blog for me on this topic, and I jumped on it. She’s written it in the form of a letter. It’s fantastic.

I want all of you—indie, hybrid, traditional, with non-competes and without— to read this letter, which follows.

I will give you each some non-legal advice on what to do after you’ve read her letter at the end of this blog post.

So, without further ado, here’s Teri:

Hi, Kris,

First, all the usual disclaimers: I am a lawyer, but this is out of my area of expertise, and I am not authorized to practice in New York.

So, while nothing here is legal advice, maybe we can start a discussion that will help writers deal with these non-compete clauses.

After our email chat, I visited the law library and did a little research on New York non-compete agreements. Here is what I found.

Why I suspect that non-compete clauses in publishing contracts are disfavored under New York law

As far as I can see, New York has no statutes governing non-compete clauses. The law is entirely case law (meaning that judges make the law according to established principles and follow the precedent set down from other judges).

Case law seem to be entirely in the area of employment law, with employers requiring employees to sign non-compete agreements, which means (as far as I can see) nobody has ever challenged the legality of a non-compete clause in a publishing contract.

That means we have to argue by analogy, even though it’s important to remember that the writer is not employed by the publishing house. The writer is paid royalties, not a salary, so the analogy doesn’t really work–but employment cases seem to provide the only guidance out there as to what a court is likely to do with publishing contract non-competes.

Leading cases in New York on non-competes are Reed, Roberts Assoc. v. Strauman, 40 N.Y.2d 303, 307-08 (N.Y. 1976) and BDO Seidman v. Hirshberg, 712 NE 2d 1220 (N.Y. Ct. App. 1999)

Both cases hold that non-competes will only be subject to specific enforcement to the extent that they are:

  1.        necessary to protect the employer’s legitimate business interests,

         2 .      reasonable in time and area, 

         3 .      not harmful to the general public and 

         4 .      not unreasonably burdensome to the employee.

Obviously, it is important to define “legitimate business interest.”

Here is what I found on “legitimate business interest” in New York:

Employer legitimate interests include protecting a customer base, trade secrets and an employer’s investment in training or educating employees. Business or financial information, such as market reports or market strategies, do not trigger the trade-secrets legitimate interest. Customer lists are generally not considered to be confidential information unless such lists are discoverable only by extraordinary efforts and not through public sources. As a general rule, a restraint against ordinary competition remains against public policy.

Merely preventing ordinary competition is not a legitimate business interest.

Today, a mobile workforce in a digital economy creates opportunities for employees to compete unfairly against their former employers, so courts will prevent employees from using inside information to compete unfairly against a former employer.

In other words, as in other areas of business law, fair competition is allowed. Unfair competition is not.

In addition, non-competes cannot be used to prevent a person from earning a living:

Courts in New York are less likely to enforce non-compete clauses if the restriction would leave the employee without compensation from the former employer and without the right to earn compensation in his or her field. When evaluating the enforceability of a non-compete clause, New York courts may take into consideration whether or not the employer will make any payments to the employee for the period of “garden leave,” when the employee is no longer employed by the former employer but is restricted from working for a competitor. See, e.g., Cornell v. T.V. Dev. Corp., 17 N.Y.2d 69, 75, 268 N.Y.S.2d 29, 34 (1996); DeCapua v. Dine-A- Mate, Inc., 292 A.D.2d 489, 744 N.Y.S. 2d 417 (2d Dep’t 2002).

A recent (2013) New York case held that a non-compete may be enforceable if the departing employee agrees not to compete in exchange for financial compensation. Lenel Sys. Intl. v. Smith, 106 A.D. 3d 1536 (2013). In this case, an employee accepted stock options in exchange for a promise not to work for a competitor for two years.

Now let’s have a look at one of the non-competes you posted on your blog:

The Author agrees that during the terms of this Agreement he will not, without the written permission of the Publisher, publish or authorize to be published any work under this name or any other, including blog posts, short stories, nonfiction articles, novels, or the like.

Analysis:

The above non-compete does not protect any “legitimate business interests.” All it does is reduce the number of books in the marketplace that are competing with books published by that particular publishing house. It therefore violates the first element.

The clause is not reasonable in time and place because it possibly extends to the end of the author’s life, so it violates the second element.

It is harmful to the general public to have an industry stifle writers and limit what they are allowed to publish, so it violates the third.

It is unreasonably burdensome to the writer to be told she cannot publish, and hence cannot earn a living in his or her field, so it violates the fourth.

Every element fails, when only one would be enough for it to be unenforceable.

Given that courts take care to make sure that a person is not prevented from earning a living, it seems clear to me that New York courts would strongly disfavor that particular clause if following the example in employment noncompete agreements.

Options

It’s worth noting that option clauses also restrict what and when an author can publish. Take, for example, this option from a contract I was offered once:

The Author agrees to give the Publisher the exclusive first opportunity to consider the Author’s next full-length work with the understanding that such submission may take place no earlier than the initial publication of the Work.

I have had publishers take as long as three years to publish a book, which means an author signing that option can be prevented from publishing anything else for an extended period of time.

Freedom to Contract

People have a basic freedom to enter contracts without government restriction, with exceptions where necessary for the public good. Exceptions include minimum wage, competition, and price fixing.

This raises the question: Do publishers have a right to say, “We want to contract only with writers who don’t self-publish and who are not trying to earn a living through writing and are thus content to publish one book every few years.”

Hypothetical: The best yard service in town says, “You can hire us to maintain your yard, but only if you sign here promising never to hire another yard service as long as you live, unless we give permission.” The person signs the contract, grateful to have the best yard service in town, and truly believing that she’ll never want to hire another service. The yard service a great job, and for a while, she’s very happy. But then something changes . . . the quality of the service goes down. A better service moves to town. Is the contract enforceable? Can she really be stuck for the rest of her life, regardless of what the yard service does?

Argument in favor: She is a grownup and knowingly signed a contract, from which she received a benefit. She’s stuck.

Argument against? That I leave to others.

So there you have my thinking about non-competes, intended as a jumping off point for discussion.

P.S. Yes, you have permission to publish this letter on your blog.

Thank you, Teri. This is spectacular information, and very helpful to all of us.

I have advice for writers at different levels. Please scroll down and find out if any of this applies to you.

For Those of You Who Have Non-Competes in Existing Contracts

Here’s a list of things to do right now:

1) Find a copy of your contract. Look at the section marked something like “Applicable Law and Modifications.”

In that section, it should say something like this:

This Agreement shall be construed and interpreted according to the laws of the State of New York. (Or Illinois, or California, or something. The horrid contract from last week  was governed by Washington State.)

Each contract will have a line like this in it, determining venue. Because, in the United States, each state has different laws regarding non-competes. I don’t know what the laws are in all 50 states. The state where your contract is litigated might have stricter laws about non-competes than New York does. That’s for you to find out using point #2, below.

For those of you with contracts from foreign publishers/entities, those contracts will also include a line like this. Sometimes the contract refers to the country of origin (Say, Great Britain). But every once in a while, the contract will refer to the State of New York. (I have Chinese contracts like that.)

2) Find a lawyer to help you with your contract. Yes, even though the contract is negotiated, and even though you’ve signed it. You’re probably being diligent and operating under the non-compete as if goons will show up at your door if you publish so much as a short story without your publisher’s permission.

This is hurting you, and your career.

A lawyer will tell you how to deal with your particular non-compete. There are a variety of ways the lawyer can help you. Perhaps a lawyer will suggestion modifying the existing contract with addendums. Or perhaps the lawyer can simply inform the publisher that the non-compete provision is illegal, so their client (you) won’t follow it. Or they might suggest some other kind of action.

Get advice.

Do not let someone else control what you can and cannot write.

I will have a blog post on hiring an attorney later, but here are two things you need to know.

First, most attorneys do the first consult for free. It’s a get-to-know-you and your case moment. (If you don’t fit with the attorney or you’re outside their expertise, they will send you to someone else.) Before you set up an appointment, ask if the first meeting is free. Make sure you ask about rates and fees. Since most attorneys bill hourly (for the time they spend on your case), have them estimate how much time it will take to handle your contract before you formally hire them to take your case. Second, most contract work costs less than $500 from a reputable attorney, especially when you’re using an existing contract.

Laura Resnick has helpfully provided a list of literary lawyers. Start with them.

3) Show the attorney this blog post. If the attorney does not understand it, then find a new attorney. This post should be a starting point for a good attorney.

If the contract is governed by the laws of New York, then Teri’s work above will help immensely.

If the contract is governed by the laws of another state, Teri’s work above will provide a blueprint for the lawyer to find relevant case law and/or statutes. It also provides a way to think about this issue, in regards to writers.

4) Agents can’t and won’t help you. Agents don’t have access to the relevant case law for one thing. For another, they understand it about as well as you do. And for a third thing, most of them don’t mind the non-competes. Those clauses keep their clients from producing more work than the agent can handle, and they (usually) give the agent a guaranteed next sale. So do not have your agent deal with this.

The neat thing about attorneys is that if you don’t like the one you hired, you can fire them and hire a different attorney. That little feature of the relationship is just one reason they’re better than agents. An agent usually stays on a project even after you’ve fired them. (Sigh)

For Those of You Negotiating Contract Right Now

1) Hire a lawyer, not an agent. (See the same point, above.)

2) Show the lawyer this blog post. Then make sure your new contract does not have a noncompete clause anywhere.

3) Do not sign a new contract with a noncompete clause in it without getting legal advice first, and maybe not even then. Be prepared to walk away if the publisher refuses to budge.

For Those of You Involved in Writers Organizations

Please send this blog post to the contracts arm of your writers organization. If your organization has a scammer alert committee, send this to them as well.

Organizations have deep pockets and can set up a legal action on the part of members of the organization. I can guarantee you that a lot of writers in your organization have signed non-compete clauses. For all I know, a group of writers may be able to bring a class action.

For Those of You with Law Degrees and Legal Expertise

Please use the comment section below to weigh in. If you have suggestions on how to get rid of this pernicious clause, which is destroying more careers than I care to think about, please let us know.

Again, many thanks to Teri for doing all this work. It’s now up to each and every one of you to defend your writing by refusing to sign these clauses, or by getting rid of the clauses in existing contracts.

I am putting the information out there.

I sincerely hope you do something with it.

If you’re finding anything of use in these posts, please consider donating to keep me blogging about these topics. You can leave a tip here: paypal.me/kristinekathrynrusch.

And one other matter:

Throughout these contracts and dealbreakers posts, I talk about negotiating your own contracts. I know many of you don’t like to negotiate. I wrote blog posts about this that I made into a book: How To Negotiate Anything. The posts are still free, but if you want a copy of the book, then hurry to Storybundle  right now. The book’s part of a bundle with nine other great writing business books, chockful of information you need to keep learning business and craft.

“Business Musings: An Important Notice on the Non-Compete Clause,” copyright © 2016 by Kristine Kathryn Rusch. Image at the top of the blog copyright © 2016 by Canstock Photo/ Vjom.