The Antitrust Challenge To Covenants Not To Compete In Employment Contracts

Employee covenants not to compete, which bar workers who leave their jobs from working for a competing employer for a period of time, should be subject to heightened antitrust enforcement. Some commentators and judges defend noncompetes as a method for protecting employers’ investments in trade secrets and workers’ human capital. But noncompetes may also create entry barriers and reduce labor market competition. The threat to competition has been highlighted by new research, which suggests that employers overuse noncompetes and that noncompetes reduce labor market competition. A likely explanation is the inadequacy of the existing legal regime. The common law offers minimal sanctions for abusive noncompetes, and is poorly suited for understanding the effects of noncompetes on markets. Antitrust law nominally applies to noncompetes but courts have eviscerated it by imposing an excessive burden of proof on plaintiffs who challenge noncompetes. In light of antitrust theory, evidence, and the failure of existing legal approaches, courts should strengthen the antitrust regime. An appropriate doctrinal framework for evaluating noncompetes under antitrust law would shift the burden of proof to employers. Employers would be permitted to rebut challenges to their noncompetes only by showing that the noncompetes raise wages for their own workers and workers in the broader labor market.

Eric A. Posner