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Amazon Testing the Limits of Non-Compete Clauses

By Christopher Coble, Esq. on June 20, 2017 | Last updated on March 21, 2019

As a general rule, non-compete agreements and clauses in employment contracts are difficult to enforce. First they must be narrowly tailored enough to be valid, and many courts are loathe to tell people where they can and cannot work. That is especially true in California in general and Silicon Valley in particular, where, as GeekWire notes, "non-compete agreements have long been considered unenforceable."

Not so farther north in Washington State, where Amazon was able to obtain a temporary restraining order against a former executive in its Web Services division, barring him from working from a company the retail monolith contends is a competitor. But that company, and the exec currently in legal limbo, claim Amazon has stretched the definition of competitor too far, to even include a customer company.

Non-Compete, No Work

Amazon Web Services (AWS) offers cloud computing services. Smartsheet offers cloud-based productivity solutions, for the most part in "management and automation of front office knowledge workers." In fact, Smartsheet has been a long-time customer of AWS's cloud services. On paper, they don't appear to be direct competitors, and both companies even have close ties to the same venture capital firm, Madrona Venture Group.

But when Gene Farrell went from Vice President of AWS's Enterprise Applications and EC2 Windows team to Smartsheet's Senior Vice President of Product, Amazon decided to try and block the move via a non-compete agreement Farrell signed with the company. While Smartsheet's attorneys reviewed the agreement and decided there were no issues, King County Superior Court Commissioner Carlos Velategui sided with Amazon's request for a temporary injunction against Farrell's new job until another hearing later this week.

Substantially the Same?

While non-compete agreements are legal in Washington State, Farrell's attorneys claim they are aimed at employees leaving a company and taking customers with them, which is not the case here. Instead, there may be a secret product at play. As GeekWire noted, filings from the case have been heavily redacted and parts hearings have been closed to everyone but the attorneys in the case. There is speculation that it's something that Amazon doesn't do yet that will be at the center of Farrell's case. The central issue will be whether Smartsheet's products are "substantially the same" as whatever Amazon may have in the pipeline.

GeekWire also reports that this isn't the first time that Amazon has attempted to enforce a non-compete agreements when a key executives leave, though that enforcement has not always been consistent. The company sued former AWS execs in 2012 and in 2014, after they took jobs at Google, also working on cloud platform services. (The latter suit was unsuccessful as a federal court declined to enforce much of the non-compete agreement.) Yet, according to Smartsheet, Amazon declined to enforce a non-compete against an "employee who left to be CEO of a competitor company after that employee had approved and priced Amazon's directly competing product."

Whether the company's far-reaching enforcement efforts will take hold in Farrell's case remain to be seen, but provide a sobering reminder that your non-compete clause or agreement might not be enforceable, even if you've had legal counsel vet it first. (Although that can never hurt.)

Editor's note, June 21, 2017: Amazon's lawsuit against Gene Farrell has been dropped after a settlement was reached with Smartsheet.

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