The Antitrust Challenge to Covenants Not to Compete in Employment Contracts

For many years, Jimmy John’s franchises included a covenant not to compete (or “noncompete”) in the employment contracts signed by their workers, including entry-level sandwich makers. The noncompete barred employees from working for any sandwich shop within three miles of any Jimmy John’s franchise for two years. Because thousands of Jimmy John’s outlets are scattered across the United States, with most of them concentrated in cities, the noncompete barred sandwich-shop work over huge swathes of the country, including major urban areas. The disclosure of the noncompete arrangement caused a public outcry and litigation. The noncompetes were very likely illegal because they did not protect trade secrets or customer goodwill, but may well have deterred low-income workers from seeking higher-paying jobs from Jimmy John’s competitors. Jimmy John’s eventually settled litigation brought by state attorneys general and withdrew the noncompetes.

Noncompetes are clauses in employment contracts that forbid workers to work for competitors of their former employer, for a certain period of time and over a defined geographic area. Despite its traditional orientation toward laissez faire, the common law has always regarded noncompetes as restraints of trade, and hence presumptively unenforceable. Noncompetes are subject to a reasonableness test: a noncompete is enforceable only if the restrictions it imposes on the worker are no more burdensome than necessary to protect the employer’s legitimate business interest—usually, in protection of trade secrets or customer goodwill. In practice, however, noncompetes are frequently enforced, or simply not challenged, and may deter workers from quitting even when they are unenforceable. New research reveals that they appear in millions of employment contracts, and may deter workers from quitting and seeking alternative employment. While noncompetes were traditionally understood to be justified only for specialized and well-compensated employees, it turns out they are frequently imposed on low-skill employees like the Jimmy John’s sandwich makers.

In recent years, controversies over noncompetes and the new academic research that documents their prevalence have put the noncompete on the public agenda. Congress and state legislatures have considered or passed new laws restricting noncompetes, and presidential candidates have touted proposals for reform. The Federal Trade Commission has held hearings on whether it should regulate noncompetes under Section 5; the Department of Justice has intervened in cases involving no-poaching clauses in franchise agreements which function similarly to noncompetes. State attorneys general in Illinois, Washington, and New York have challenged noncompete agreements under state consumer protection laws, and won several settlements.

In this article, I argue that legal regulation of noncompetes should be strengthened because of their adverse effect on competition. The common law approach is inadequate because employers do not face substantial sanctions if a court invalidates a noncompete, and—more significantly—the common law does not provide the right approach for evaluating noncompetes. Because noncompetes pose a threat to competition, the analytic lens of antitrust law should be used. Antitrust law focuses on the market effects of noncompetes and provides for a significant deterrent in the form of treble damages when employers abuse them. However, antitrust enforcement has rarely been successful because of difficulties of proof. Accordingly, I argue for a stronger antitrust regime that incorporates presumptions derived from the empirical literature on noncompetes and related labor market behavior. The law should treat noncompetes as presumptively illegal, allowing employers to rebut the presumption if they can prove that the noncompetes they use will benefit rather than harm their workers.

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