Source code license "cooling-off" clauses as possible (and unenforceable) non-compete covenants

Companies licensing out source code, particularly operating system or middleware platform code, are fond lately of inserting into the relevant licensing agreements a "cooling off" period during which employees of the licensee who accessed such code would be prohibited from being involved in projects concerning source code of competitive software. An example of such a clause follows:

Licensee shall ensure that any Licensee employee who has accessed the Licensed Software Source Code shall not be permitted to work on any project involving the development, evaluation, modification or use of software that is substantially similar in function and purpose to, or which is competitive with, the Licensed Software, during such employee's access to the Licensed Software Source Code and for a period from the date of such employee's last day of access, to one (1) year later.

Depending on how this type of clause is worded, it could in essence require that the licensee impose a non-compete obligation on those employees who are required to access the licensor's source code as part of their job duties.  Non-compete covenants are either highly regulated, or of questionable enforceability, in many jurisdictions.  For example, in California such covenants are generally unenforceable absent limited exceptions.  Cal. Bus. & Prof. Code § 16600; see Edwards v. Arthur Anderson LLP (Cal. S.Ct. 2008).  In Germany, such clauses are strictly regulated and are enforceable post-termination only if the employer provides separate compensation to the employee.  Handelsgesetzbuch (Commercial Code) § 74(2).  In short, compliance with such clauses could prove impossible or expensive.

Companies confronted with such clauses should take care to determine whether they can in fact comply with such obligations given the laws and regulations applicable to the employees of such companies.  One possible solution would be to limit the nature of the obligation to one of restricting the employer's right to direct the work employees perform, as opposed to restricting the employees themselves, and to limit the durational effect of the clause to the period when the employees in question are in fact employed.  For example:

Licensee shall ensure that any Licensee employee who has accessed the Licensed Software Source Code shall not be permitted assigned by the Licensee to work on any project involving the development, evaluation, modification or use of software that is substantially similar in function and purpose to, or which is competitive with, the Licensed Software, during such employee's access to the Licensed Software Source Code and for a period from the date of such employee's last day of access, to the earlier of one (1) year later or termination of such employee's employment with Licensee.

The above is merely a suggestion in principle for the type of changes that could be made generally; counsel should always be retained for the purpose of modifying or proposing licensing terms.

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