In today’s non-compete lesson, we address New York’s “unique services” non-compete exception. New York courts generally disfavor non-compete agreements, only enforcing them in limited circumstances (such as the protection of trade secrets). One massive exception: New York’s “unique services” rule. Essentially, this doctrine holds than an employer can enforce a non-compete agreement where the employee is uniquely talented and provides unique services to the employee. Once again: This is sheer madness. New York’s enforcement of non-compete agreements based on an employee’s unique talents is legally unprincipled and contravenes antitrust law. The fact that an individual is uniquely talented does not create a legitimate business interest or justify non-compete enforcement. New York needs to abrogate this doctrine immediately. Allow me to explain:
Non-Compete Agreements as Restraints of Trade
Non-compete agreements are restraints of trade. Unreasonable restraints of trade are illegal. I have encountered many big firm partners from Carlton Fields, Holland & Knight, Ford Harrison, etc. who have built entire careers on enforcing non-compete agreements. When you say the phrase “restraint of trade”, these lawyers look at you like you are an unmitigated crazy person. If you direct these people to the Sherman Act and antitrust law, they respond, “What does this have to do with antitrust? It’s a non-compete case. It’s a breach of contract.” The answer is, well, everything. This has everything to do with antitrust law. Let’s start with the text of the Sherman Act, Section 1:
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal
15 U.S.C. § 1 et. seq. Now over the years, courts have refined their interpretation of the Sherman Act. But contracts in restraint of trade remain subject to antitrust scrutiny. Certain types of non-compete agreements are naked restraints of trade and automatically, or, per se, illegal. Other types of non-compete agreements are subject to a rule of reason analysis, and can be declared illegal if there is no legitimate, pro-competitive justification for the restraint. The upshot of all this: Because of the Sherman Act and antitrust law, illegality is always a potential defense to any non-compete agreement.
There are differences in bringing antitrust as an affirmative claim vs. raising antitrust as a defense. Notably, raising antitrust as a defense (i.e. the restraint is unreasonable and illegal) does not require things like antitrust standing, antitrust injury, evidence of market power, etc. These requirements have been built up as conditions and obstacles to pursuing affirmative antitrust claims. They do not exist on the defense side of the coin. See, e.g., Seychelles Organics, Inc. v. Rose, 682 F. App’x 605, 606 (9th Cir. 2017) (declaring a non-compete provision illegal both as a naked restraint and under the rule of reason).
At bottom: Any non-compete agreement should be declared an illegal restraint of trade if it harms competition and does not have a pro-competitive justification. Likewise, a non-compete agreement may be declared illegal if it is not the least restrictive means of achieving any extant pro-competitive justification. See, e.g., Hovenkamp, Herbert; The Rule of Reason; 70 Florida Law Review 2018 at 104.
Non-Compete Agreements & Legitimate Business Interests
Any claimed legitimate business interest must fit within this framework. New York, in particular, generally recognizes the following protectable or legitimate business interests: (1) trade secrets (2) goodwill or (3) an employee’s unique services. Although (1) and (2) arguably make sense, (3) is absurd.
Let’s use an example: A company called JetCo spends billions of dollars to design a new jet that could revolutionize air travel. JetCo pays a team of engineers millions of dollars to engineer this new jet. The head engineers have non-compete agreements. After three years on the project, the two lead engineers abruptly leave the company and go work for a rival called FlightCo. Is there a legitimate business interest that would justify enforcement of a non-compete restriction when viewed through a classical antitrust and rule of reason lens? Possibly.
The logic is as follows: JetCo made a tremendous investment of money and resources in this project and these engineers. JetCo is not seeking to restrain trade but, rather, to protect its investment. If the lead engineers are allowed to leave and go work for FlightCo, that could chill investment in future projects like this by companies like JetCo. Because such companies will never have any meaningful way to protect their businesses, technology or investment. This is the strongest type of legitimate business argument. In this sort of situation, a court could reasonably conclude that the restraint at issue is not illegal. But even here, that conclusion is not a given. There are counter arguments.
First, it is highly doubtful that a company inclined to invest $1 billion or more in developing a new type of jet would forgo such a project simply because it could not bind key engineers to non-compete agreements. More likely, JetCo would still invest in its revolutionary jet project. JetCo would still pursue the project in the hopes of making a technological breakthrough, changing the world, and making billions of dollars in profit from the new technology. Even without non-compete agreements in place, JetCo could use confidentiality and non-disclosure provisions. JetCo could also rely on existing trade secret law to protect its interests. It is a near certainty that JetCo would still pursue the project. So the argument for enforcement based on chilling investment or innovation is basically bullshit. But it’s still the most plausible variant of bullshit that you will find in this space.
New York & Unique Services Non-Compete Agreements
Now, against this backdrop, we return to the original premise of this article. Suppose that the are certain limited instances wherein the pro-enforcement argument above is credible: Situations where a non-compete agreement is supported by a justification that is pro-competitive or at least neutral (like the JetCo example). Now consider New York’s “unique services” rule. It makes no sense.
New York law generally is quite harsh on non-compete agreements. But one glaring exception: Unique services. Under New York common law, a non-compete agreement may be enforced where the employee’s services are unique. New York courts have invoked this rule to enforce non-compete agreements involving, e.g.,, acrobats, musicians, writers, etc.
The sad irony here is that even revered courts such as the United States Court of Appeals for the Second Circuit have treated New York’s unique services rule as if it is completely logical and proper. But it is not. This refusal to question absurd non-compete doctrines is a product of the American corporate power structure. Yes, courts can take the easy way out, cite long-standing New York precedent and consider the matter closed. But, in my view, that is intellectually dishonest and logically incoherent. Courts do not want to unpack this issue because the analysis compels a contrary result: Declaring the “unique services” rule dead.
New York’s Unique Services Rule Violates Antitrust Law
Courts have repeatedly stated that New York’s unique services rule derives from English law. That raises some interesting issues. Non-compete agreements are restraints of trade. Restraints of trade are always governed by and subject to federal antitrust law. Supremacy clause. Sherman Act. English common law does not defeat federal law (e.g. Sherman Act).
Let’s take an example: Under New York law, a publishing company could enforce a non-compete agreement against a brilliant writer. The logic is that the writer’s talents are unique and irreplaceable and that his departure will cause some special harm to the company. Let’s pretend JK Rowling of Harry Potter fame has a contract with Scholastic and a New York non-compete agreement. Her contract is done. But there’s a 2-year non-compete provision. JK Rowling gets a massive 3-book offer from Penguin Books. Scholastic sues and invokes the non-compete agreement. Believe it or not, Scholastic would have a viable non-compete claim under New York’s “unique services” rule. But that makes no sense from an antitrust/restraint of trade perspective. Remember the two lenses: First lens of analysis is antitrust. Second lens is contract.
There is no principled legal basis for allowing a company to restrict, e.g., extraordinarily talented writers, artists, musicians, etc. There is no justification grounded in any conceivably legitimate business interest. There is no claim of trade secrets in need of protection, customer goodwill, etc. JK Rowling switching publishers does not threaten any sort of unfair competition. The unique services doctrine isn’t even in the same wheelhouse. The rule is basically this: If a person is super talented, a company can lock up their talent and restrain their future trade because it would be bad for the company if they went elsewhere. That certainly fails a rule of reason antitrust analysis, rendering the restraint illegal (and thereby creating a rock solid affirmative defense of illegality).
I’ll go a step further: “Unique services” non-compete agreements may be so lacking in any legitimate or pro-competitive basis as to constitute per se violations of federal antitrust law.
The upshot of all this:
- New York’s unique services non-compete regime has an antitrust problem. A big one. A person subject to a New York non-compete agreement based solely on unique services may not only have an antitrust defense, but also potentially an affirmative claim for antitrust. You package this as a lawsuit for (1) a declaratory judgment that the non-compete is unenforceable/illegal and (2) an affirmative claim for antitrust. Even if the actual antitrust claim gets kicked, you still have the declaratory judgment action.
- When courts say “We get this law from England going back hundreds of years so we just do the same thing today”, that’s a problem. American courts should not be justifying legal doctrine based on old English law. That is especially disconcerting when faithfully adhering to that English legal tradition runs afoul of existing federal authority (i.e. the Sherman Act).
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. He has extensive experience litigating non-compete cases. He has appeared in or on the New York Times, Bloomberg, PBS News Hour, Law360, FundFire, Inc. Magazine and more. His office can be reached at 954-332-2380.