Although such issues have not often been raised in the federal courts, employee agreements not to compete are proper subjects for scrutiny under section 1 of the Sherman Act. – United States Court of Appeals, Second Circuit (1977)
When I started my own law firm several years ago, I decided to focus on defending non-compete cases and ending non-compete abuse. One of my first observations: Basically everybody had gotten it wrong. Corporate America and big firm corporate lawyers all treated non-compete agreements like ordinary contracts. And, unfortunately, many judges did the same thing. Even in those jurisdictions that were hostile to employee non-compete agreements, it was rare to see anyone talking about antitrust. And that made no sense at all. So, I started talking about antitrust. Because antitrust law dictates analysis of employee non-compete agreements.
Non-compete agreements are restraints of trade. Restraints of trade are illegal unless they are reasonable and serve a legitimate business purpose. The “legitimate business interest” test used in many jurisdictions is based on the classic antitrust “rule of reason” framework. Restraining trade to eliminate ordinary competition is not a legitimate business purpose. Any restraint that does not serve a legitimate purpose is illegal. And the basis for that illegality is antitrust law.
Antitrust: Defense vs. Offense
There is a critical distinction between using antitrust law (e.g. illegality) as a defense to non-compete enforcement and bringing a plaintiff-side antitrust claim based on the same non-compete agreement. There are a number of obstacles to bridging that gap. Some of those obstacles are legitimate. Other of those obstacles are completely fallacious. In certain circumstances, employee non-compete agreements can and should be viewed as plausible violations of Section 1 of the Sherman Act and give rise to affirmative claims.
The First Hurdle: Antitrust vs. Contract
A threshold obstacle to bringing such a challenge is getting the court to change lenses. I have said it 100 times: There are two lenses here. One is antitrust and the other is contract. Antitrust comes first. Any non-compete agreement must first be evaluated through the antitrust lens. If it is unreasonable and not necessary to protect a legitimate business interest, it is illegal, unenforceable as written, and plausibly raises antitrust concerns.
But if you say the word antitrust in a non-compete case, lots of people will look at you like you are a crazy person. On countless occasions, I have heard the following logic from both opposing counsel and certain judges: Antitrust? This is a breach of contract case.
In certain jurisdictions, there is incredible judicial bias in favor of non-compete agreements and non-compete enforcement. This is wholly improper. In my opinion, that stems from three main causes:
- Normalization. Non-compete agreements have become appallingly normalized and particularly in certain jurisdictions. In some parts of the country (e.g. Florida), it is so normal for courts to enforce non-compete agreements that many judges do so almost reflexively. So after years – if not decades – of routinely enforcing non-compete agreements, most of these judges are inclined to reject any argument grounded in antitrust as utterly absurd. But if illegality (e.g. antitrust law) was not a defense to non-compete enforcement, then I wouldn’t have a Florida state court appellate decision confirming that it is. See Salazar 230 So.3d 619 (2017).
- Wrong Defense Strategy. At the same time, lawyers defending employee non-compete cases rarely go directly at antitrust law. Most of them argue on the margins. Time. Geographic scope. Industry scope or line of business. Some of the better ones attack legitimate business interest. But many simply cede this, especially in jurisdictions where courts basically assume the existence of a legitimate business interest.
- Judicial Bias. This is an ugly one but, in my opinion, it is a very real issue. There have been entire law review articles written about judicial bias in the context of non-compete cases. Some judges take the approach of, “By golly, you signed a contract and I am going to hold you to that contract as a matter of moral obligation.” Likewise, some judges come out of corporate law firms where their clients routinely used and enforced non-compete agreements. In my opinion, these types of judges have an inherent pro-non-compete bias.
Given all of the foregoing, it is an uphill battle convincing certain courts (e.g. Florida) not to enforce employee non-compete agreements based on antitrust law (i.e. illegality). Now imagine trying to convince those same courts to recognize a Section 1 claim based on an employee non-compete agreement. Rough sledding, indeed. But have hope. First and foremost, any such claim would be filed in federal court. Florida has a very strong federal bench. So even in Florida, the plaintiff has a shot. But let’s be real: The plaintiff has an even better shot in New York or California. It makes sense to file any such claim in the most favorable forum.
Years ago, I remember standing in a bankruptcy court in South Carolina when opposing counsel stood up and, red faced and exasperated, exclaimed,
Your honor! Mr. Pollard writes a blog where he advocates forum shoppin!.
The judge immediately shut him down and told him that my blog posts had no bearing on the matters at issue. My point here: There is nothing unfair or improper about filing a case in the most advantageous forum that has a genuine connection to the dispute. And that is particularly important here. Because some judges – in certain jurisdictions – will not entertain this type of case on the merits. They will issue a one-sentence order granting a motion to dismiss. If the plaintiff gets past these “extra” obstacles (that have no real basis in law), then they have a shot.
Per Se Illegality vs. Rule of Reason
The biggest obstacle (on the actual law) is per se illegality vs. rule of reason. As every antitrust lawyer knows, getting per se treatment is often dispositive. Under the per se framework, the plaintiff has no obligation to demonstrate actual anticompetitive effects. There is no requirement for proof of relevant market, market share, impact on competition, etc. To state the obvious: Certain employee non-compete agreements should be deemed per se violations of Section 1 of the Sherman Act. See, e.g., Newburger, 563 F.2d 1057 (2d Cir. 1977).
A restraint is per se illegal if there is no redeeming, pro-competitive benefit. Nobody can articulate a remotely plausible justification of the “pro-competitive” benefits of low-wage non-compete agreements. Let’s take a private security guard company that pays $11 an hour, has massive attrition, and requires all of its security guards to sign non-compete agreements. Let’s take a lamp shade factory that pays $10 an hour and requires all of its factory workers to sign non-compete agreements. Let’s take a cleaning company that pays $9 an hour requires all of its janitors to sign a non-compete agreement. Where is the pro competitive justification? There is none. These people are performing labor. There are no trade secrets at issue and there is certainly no inevitable disclosure. These laborers are not business development or sales people. They are not out courting clients. They are cleaning the bathrooms, patrolling the housing projects, and sitting on the factory line. Any concerns over customer relationships (which are absurd to begin with) can be addressed using a limited non-solicitation agreement. There is no pro-competitive justification for a non-compete agreement.
Such restraints have a clear and nefarious goal: Eliminate competition and suppress wages. Deeming such restraints per se antitrust violations does not take a massive leap in logic or analysis. It simply requires one federal judge to reach the obvious conclusion that non-compete agreements among janitors, factory workers, and other low-wage workers are point blank illegal. Even if courts are not willing to make such a holding at the motion to dismiss or summary judgment stage, they should do the next best thing: Defer on the ruling until after trial. Yes, numerous courts have deferred ruling on the issue until trial.
Vertical vs. Horizontal
Eventually, at least one federal judge will deem a low-wage employee non-compete agreement per se illegal under antitrust law. Law is slow to catch up with the real world. And courts take a while to embrace market realities. But we are headed that direction. In the past few years, antitrust scholars have started to focus on labor market collusion. Federal regulators are now discussing labor market antitrust issues. As part of this movement, courts will have to reevaluate their classification of employee non-compete agreements (e.g. vertical or horizontal).
A key factor in many courts (incorrectly) assuming that the rule of reason must apply is the historic view of employee non-compete agreements as innocuous vertical restraints. But that view is utterly non-sensical. The embrace of that position is an unfortunate product of corporate welfare, judicial activism, and reliance on law that is wholly inapplicable. The standard (incorrect) argument goes like this:
The employee works for the company. So the employee is located vertically within the company. An employee non-compete agreement is therefore a vertical restraint.
Sure, the restraint is vertical when the employee is employed by the company. But once the employee leaves the company, the restraint is no longer vertical. By its very terms and definition, the restraint is horizontal. Such restraints say – point blank – that when the employee leaves the company, he will not go work for a competitor. At that point in time, the employee is no longer part of the company. The employee no longer resides anywhere within the company (e.g. vertically in the chain). The employee no longer has any connection whatsoever to the company. The employee is a free man who could join a competitor, but for the non-compete agreement. That post-separation employee non-compete agreement is unequivocally a horizontal restraint of trade.
The problem: Many courts are citing vertical restraint case law from the manufacturer/distributor/reseller context in evaluating employee non-compete agreements. Those cases are wholly inapplicable. In the manufacturer cases, there is a chain or structure of which the downstream actor is always a part.
If Leegin makes leather products, and I want to sell those products, then I am always part of that chain/structure until I stop selling Leegin. But once I stop selling Leegin, I’m free to do whatever I want. The vertical restraint cases deal with what I can do while distributing / reselling Leegin. The disconnect here is obvious. In the employee non-compete context, the employee has left the company. He is no longer part of the chain.
The next obstacle is antitrust standing. But there are numerous cases finding antitrust standing satisfied in the context of labor market restraints. See, e.g., In re High-Tech Employee Antitrust Litigation. That was the Apple/Google/Adobe etc. no poaching case. In that context, the restraints at issue suppressed wages and limited employee mobility. The court found antitrust and injury satisfied. Similarly, in the employee non-compete context, abusive and unreasonable non-compete agreements have the same market impact (e.g. suppressed wages and limited mobility). The harm is essentially the same.
More than forty years ago, the United States Court of Appeals for the Second Circuit stated the obvious: Employee non-compete agreements can be scrutinized as potential violations of Section 1 of the Sherman Act. Unfortunately, since that time and particularly in the past twenty years, non-compete abuse has become rampant and unchecked in certain jurisdictions. In places like Florida and Texas, non-compete agreements are business as usual in every line of work. Likewise, in those states, non-compete enforcement is a major profit center for powerful, politically-connected, and judicially-connected lawyers and law firms. The result of all this: Non-compete agreements have become appallingly normal. And that makes no sense. Courts routinely cite black-letter case law holding that “restraints of trade are strongly disfavored”. But these same courts turn around and routinely enforce non-compete agreements against poor, working class, and middle class people. The emperor has no clothes. If restraints of trade are – indeed – strongly disfavored, then non-compete agreements would not be so common. And corporate law firms would not be able to sustain entire practice groups dedicated to non-compete enforcement.
The reality is that millions of Americans in low-paying jobs are subject to illegal non-compete agreements. And under antitrust law, that gives rise to plausible, viable Section 1 claims. The actual law supports such claims. The problem is a political and cultural one (e.g. the non-compete culture). In certain jurisdictions, courts reflexively validate non-compete agreements because that is their culture. That is what they know and what they have always done.
Fortunately, over the past several years, the issue of non-compete abuse has become national news. Several states have passed reform severely limiting the use of non-compete agreements. And the federal government has taken up the issue of non-compete abuse, antitrust, and labor market collusion. So the time is ripe to move from antitrust as a defense to non-compete enforcement to suing companies that abuse non-compete agreements under Section 1 of the Sherman Act.
Naturally, some folks will file Rule 11 motions against me and argue I should be sanctioned. And some folks will file bar complaints against me for my advocacy (and my scholarship). Both of those strategies are wholly improper and an abuse of the system. But that is the price I pay for attempting to fix this non-compete crisis and help poor, working class, and middle class folks earn a living. And although derided by some as an unmitigated crazy person, my strategy for fixing all of this is quite reasonable: Apply existing antitrust law.
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. He has appeared in or on the New York Times, Wall Street Journal, Bloomberg, PBS News Hour, The Guardian, Fund Fire, and more. His office can be reached at 954-332-2380.