The Evolving Law of Employee Non-Competes: Recent Trends and an Alternative Policy Approach
Abstract
Abstract The Evolving Law of Employee Non-Competes: Recent Trends and an Alternative Policy Approach
Businesses increasingly rely on employee non-compete agreements to protect their assets and forestall competition by former employees, a trend that will likely continue given the ascendancy of the information economy and the fundamental changes taking place in the post-industrial employment relationship. The proper balance between and among the competing interests of employers, employees and society implicated by post-employment restraints will continue to be an important public policy issue. This paper analyzes recent developments in the law of employee non-compete agreements and proposes an alternative framework to judge the enforceability of post-employment restraints on competition.
Legal scholars have traced the history of the common law approach to employee non-compete agreements and the reasonableness standard that emerged from the early judicial prohibition of such restraints. What commentators have failed to fully appreciate are the subtle yet fundamental shifts in the judicial approach to employee non-compete agreements occurring in the modern era. Under the “modern” approach to employee non-compete agreements, described and documented in the paper, courts broadened the permissible scope of non-compete agreements and expanded the judicial power to enforce unreasonable covenants not to compete. Recently, however, the courts appear to be retreating from the modern approach, with courts adopting doctrines and rules that restrict the enforceability of employee non-compete agreements. Beginning in 1999, with supreme court opinions in New York and Arizona, many jurisdictions have imposed a form of heightened judicial scrutiny on post-employment restraints. A parallel development has occurred in the inevitable disclosure doctrine, under which a de facto non-compete is imposed to protect trade secrets. Recent court decisions have limited the broadest formulation of inevitable disclosure and returned to a stricter common law approach to the doctrine.
The emerging restrictive trend in the law reflects significant changes taking place in the economy and in the modern employment relationship where employee mobility is a defining element. Any legal framework governing employee non-compete agreements should be responsive to these new economic realities, that is, enforcing non-compete covenants that prevent unfair competition without unduly restricting employee freedom in the market. Under our proposed policy framework, employee non-compete agreements designed to prevent the exploitation of the former employer’s customer relationships would be enforceable under a modified common law reasonableness standard.
Trade secrets, however, another important employer interest, would no longer be deemed a protectible interest justifying a covenant not to compete. Employers could prevent competition by a former employee only under the inevitable disclosure doctrine. We contend that the doctrine provides a more balanced and fair resolution of the competing interests of employers and employees with regard to trade secrets and post-employment competition. By substituting a carefully framed injunction based on demonstrated necessity (inevitability) for the enforcement of a non-compete agreement based only on the potential for trade secret misappropriation, the proposed framework would support a climate of employee mobility while providing businesses an adequate level of protection for their trade secrets.