A recent article in the Wall Street Journal states what some of us have known for the past few years: Litigation over non-compete agreements is on the rise. But rather than that assertion being purely anecdotal, the story backs up that conclusion with statistical data. Apparently, over the past decade, there has been a 61% increase in published U.S. court decisions involving non-compete agreements. That increase would probably be even greater if you looked at all decisions, including unpublished decisions, which have become increasingly popular over the past several years.
As the article notes, and as I have said dozens of times on this blog, non-compete agreements have gone from being a tool used in certain limited, specific situations to being treated as a required piece of every employment agreement. In eras past, non-compete agreements were generally reserved for certain employees— either top level employees or employees who had access to the company’s secrets. Few people would question the appropriateness of having a well-compensated CEO who knows all of the company secrets and plans sign a non-compete agreement. That is perfectly reasonable. Likewise, most people would find it acceptable to use a non-compete agreement for a top level scientist who has been deeply involved in developing plans for a new, genetically superior banana. Sure, that is all very reasonable. The problem, however, is that non-compete agreements are no longer viewed as tools that are only appropriate in certain limited situations. Instead, non-compete agreements have become ubiquitous. Now, non-compete agreements are in every industry (except law, ironically enough) and at every level. There’s a good chance that your doctor has a non-compete agreement. If you have a maid, the maid might have one. The chef has one. The mechanic has one. The guy who sells search engine optimization services— he has one. The content writer has one. The list could go on ad nauseam.
The Internet Changed Everything
The explosion of non-compete litigation over the past decade is, in large part, a product of non-compete agreements being more prevalent. This broader use of non-compete agreements is fairly easy to explain. I believe that the internet has played a significant role. Not to paint with a broad brush, but it seems that lawyers often tend to be risk averse people, set in their ways and slow to embrace change. Even in the year 2013, I know some lawyers – particularly older ones – who aren’t fond of technology. Think about the legal world circa 2000. Law firms had volumes and volumes of law books. Law firms had libraries. Fast forward a few years, to a point in time when Google had become a household name. The point is that the internet has completely changed how law is practiced. If you have a technology company, and you want to see how other technology companies are drafting their employment agreements, you go to Google and run a search. You can easily see what’s out there. In my view, this is exactly what happened with non-compete agreements. Lawyers started realizing, “Other companies are using these non-compete agreements. I want to give my client every possible advantage, so maybe I should advise them to use a non-compete agreement as well.”
I understand that. As lawyers, we have an obligation to advocate for our clients and help them get the upper hand. That said, on a personal, philosophical and intellectual level, I have concerns about the widespread use of non-compete agreements in today’s world.
Restraints of Trade, Antitrust & Non-Competes
First, non-compete agreements often allow a company to restrain trade, commerce and competition in a manner that technically is unlawful. Some people reject that assertion out of hand. There is the rather trite and pedantic argument about a contract being a contract, people should be held to their bargains, etc. Yes, of course. And if Joe Blow has a contract to deliver 16 kilos of cocaine and knock off two of Tony’s men, are courts going to enforce the contract? Of course not. If six companies that make plasma tv’s have a contract to fix prices, and engage in concerted efforts to punish companies that stray from the fold, are courts going to enforce that contract? Of course not. I regard this particular argument (the “you signed a contract” argument) as completely asinine. Non-compete agreements are, of course, an exception to the general rule of free and fair competition. State non-compete statutes basically have codified a certain “rule of reason” analysis. The reasonableness of a non-compete Agreement is measured against various factors laid out in these state statutes. Generally, if reasonable and necessary to protect a legitimate business interest, the agreement will be enforced. You know: Sherman Act. Restraints of trade. That whole business. In spite of the clear legal underpinnings in this general realm of law, you would be amazed at how many business people and lawyers simply fall back on the “you signed a contract” line of argument. Does that fact matter? Absolutely. But only to the extent the contract is reasonable and necessary.
“If it’s unenforceable, then the employee can just fight it.”
So non-compete agreements are only enforceable in certain instances. Because of this, some people who support the aggressive use of such agreements argue that an employee (or anyone else subject to a non-compete agreement) always has the option of fighting it in court. In other words, if the employee thinks the agreement is bogus, he can fight it. This, of course, ignores reality. In today’s world, everyone has a non-compete agreement. Yes, in some instances, the employee is a CEO or some other highly compensated individual who has the ability and the resources to fight. But in most instances, (1) the employee cannot afford to get entangled in non-compete litigation and (2) the possible risks of litigation (litigation costs, time drain, risk of losing on the merits, etc.) simply outweigh any benefit. Because of this, many companies often get more mileage out of non-compete agreements then is legally appropriate. Often, on the merits, the agreement should be unenforceable, or only should be able to restrain competition in a limited manner. But if the employee lacks the means to fight, which is often the case, then the agreement is never tested on the merits. Instead, regardless of whether or not the agreement actually is enforceable, competition is restrained wholesale. This is a problem.
Where Things Are Headed
I try to keep up with recent developments in non-compete litigation. I make a concerted effort to read as many new non-compete decisions as possible each week. I read decisions from state and federal courts, all across the country. Every once in a while, I’ll even read law review articles about non-compete agreements and non-compete statutes. I’m not the Wall Street Journal. I’m not a research firm. I do not have any hard data to help me identify trends in this space. But if I had to say which way the wind is blowing, I’d say this: First, there is tremendous variation in non-compete law across jurisdictions. Different states have different standards. That said, on the whole, I believe courts throughout the country are doing a better job of scrutinizing non-compete agreements than they did even five or ten years ago. For a while, the “you signed a contract” rationale seemed like it always was lurking in court decisions on non-compete cases. For a while, it seemed that courts almost went out of their way to hold people to whatever bargain they made. But today, given the proliferation of non-compete agreements and the increase in non-compete litigation, it seems like courts are more inclined to take a hard look at these agreements and carefully consider whether or not they are reasonable and necessary. And in my view, that is a good thing.
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. His office can be reached at 954-332-2380.