The law and policy of non-compete clauses in the United States and their implications

Abstract

In the modern information economy, companies grow based on knowledge. In decades past, a person would generally join a company and stay there throughout her professional life. Now, however, employees are much more mobile, and knowledge can flow between companies much more freely than before. The intersection of employee mobility and the increasing importance of knowledge assets means that noncompetition agreements between employers and employees are very important to many employers who desire to protect their investments. However, the law of noncompete agreements in the United States is extremely varied, and enforcement across state lines may be difficult. Some states, like California, take an openly hostile approach to noncompetes, viewing them as anticompetitive. The reason for these differences between various state approaches to noncompetes is not entirely clear, but it is related to factors like the political economies of various states and the varying interest groups that influence the economic policies in the different states. This contribution examines the variety of approaches to noncompete law in the United States and describes the different facets examined in the case law or addressed in state statutes. Some states, for example, limit the application of noncompetes, such as by excluding or including specific professions. We also evaluate the proposed language of the Restatement (Third) of Employment Law concerning noncompetes, and the potential application of the Uniform Trade Secrets Act as a complement or alternative to noncompete litigation. Noncompetition agreements generally cover all manner of confidential information, whereas trade secret protection applies only to information that the holder takes steps to keep secret and which derives its value from not being widely known. While much of the discussion of noncompetes centers on the needs of the employer to protect its unique knowledge and prevent competitors from obtaining an unfair advantage, it is also important to consider the trade-offs between employers and employees. An employee who has the freedom to take their skills and move to a higher paying company or to use their skills to form a new venture and compete with a former employer may benefit more from a regime that prohibits noncompete agreements than from a regime that strictly enforces them. On the other hand, an employer may also be comfortable with a regime that does not enforce noncompete agreements if there is a abundant supply of local talent to choose from, and if they can resort to other mechanisms such as stock option plans to retain their best employees. Thus, the balance between benefits to the employer and the employee must be considered, including that balance’s potential effect on innovation. The current flexible, multi-factor test that is used in most jurisdictions in the U.S. to evaluate noncompetition agreements aims to balance these competing needs since noncompetition agreements that are excessively oppressive of the employee’s autonomy are not likely to be enforced.