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BFV Perspectives, Noncompete & Trade Secrets, | Oct 29, 2013

Making Non-Competes Unenforceable

State law varies widely in its treatment of covenants not to compete in the employment context.  At one end of the spectrum, states such as California do not enforce covenants not to compete at all.  Others go out of their way to enforce these agreements by blue-penciling or removing any contractual terms that are over broad, thereby ensuring that even an overbroad non-compete can be enforced.

In Making Non-Competes Unenforceable, Professor Viva Moffat notes the myriad administrative headaches that arise from the diversity of American law in this area, concluding that uniformity would promote certainty, fairness, and the free flow of commerce.  54 Ariz. L. Rev. 939 (2012).  Professor Moffat examines what type of uniform approach would be best, ultimately concluding that the best outcome for businesses and for employees is a rule, as California adopts, that non-competes are unenforceable.  In so doing, she adds to a long running debate about whether non-competes actually improve the business climate for a given jurisdiction.

Professor Moffat begins by noting the wide state-to-state variation in how the law regards non-competes.  Id. at 943.  The enforceability of non-competes is more than a simple yes or no proposition.  Among those that enforce non-competes, some states enforce “reasonable” non-competes and others apply varying levels of scrutiny depending on the contractual relationship that is involved.  Even within one state, then, the legal standard applicable to a given employment agreement can be difficult to determine.  For a business owner who has employees in multiple states, this imposes an immense burden.  They must draft agreements that will pass muster in different states and stay abreast of changes in the law of these states, which may require them to revise their covenants.  Further, litigation involving non-competes can become complex as the divergence of state law can encourage forum-shopping.  Even if non-competes do protect the interests of employers, then, state law is so balkanized that any of these advantages are undercut.

According to Professor Moffat, uniformity across the states, then, would be productive.  It would facilitate the flow of commercial transactions across state lines and substantially reduce the administrative headaches placed upon businesses that have employees in multiple states.  The next question Professor Moffat asks, however, is what kind of uniformity is best.  Stated another way, would the national economy be best served by a uniform rule that non-competes are entirely unenforceable, or by a rule that applies a consistent reasonableness test, or by some other substantive rule?  Those who argue in favor of the enforceability of non-competes assert that employers will be more likely to spend time and resources developing and training their employees if they are free from the threat that those employees will then use their newfound knowledge to compete against the employer.  Opponents contend that non-competes stifle economic development and innovation.  They point to the example of California, where the thriving Silicon Valley economy emerged in a state where non-competes were unenforceable.

Though scholars and legislators have endeavored for decades to find a way to measure whether the enforceability of non-competes has a positive or negative impact on an economy’s performance, given how complicated economic performance is, and how many variables are involved, the results of such studies have hardly been conclusive.

Professor Moffat ends up advocating that the states should uniformly adopt a rule that non-competes are unenforceable.  Though she acknowledges that non-competes may help employers protect their investment in their employees, she notes the countervailing benefit:  where non-competes are unenforceable, employers are freer to hire whom they choose without fear of being sued.  This arguably allows businesses to grow more aggressively.

Given how complex a given state’s economy is and how many factors are involved in its overall health, it is hardly a certainty that any state that embraced the unenforceability of non-competes would suddenly see a new Silicon Valley blossom within its borders.  Here, we see the source of the state-to-state variations of non-competes:  when each state’s legislators are focused on what can be done to boost their own state’s economy, they have little incentive to consider the benefits of harmonizing law across state lines.  Though the jury remains out on whether non-competes have actually helped employers, Professor Moffat points out that the increasing practical difficulties imposed by the wide variations among states ensure that the matter should continue to be examined not only by scholars, lawyers, and business owners, but also, perhaps through the legislative process as well.

BFV Perspectives, Noncompete & Trade Secrets, | Oct 29, 2013