Herb Hovenkamp, James G. Dinan University Professor, recently published “Noncompete Agreements And Antitrust’s Rule of Reason” at Competition Policy International.
Widely known as the “Dean of American Antitrust Law,” Hovenkamp is a Fellow of the American Academy of Arts and Sciences, and in 2008 won the Justice Department’s John Sherman Award for his lifetime contributions to antitrust law.
The Federal Trade Commission (FTC) has proposed a rule that would ban nearly all employee noncompetition agreements as unfair methods of competition. These agreements prevent an employee from taking a new job in a competing business for a certain period after his or her employment ends. The duration and geographic scope of the agreements varies.
Today, purely vertical noncompete agreements are analyzed under antitrust’s rule of reason and most are lawful under federal law. Several states have enacted stronger laws. The FTC’s proposed rule would apply the FTC Act, a statute that reaches further than the Sherman Antitrust Act but cannot be enforced by private parties.
This essay does not consider the FTC’s power to make and enforce a rule like the one proposed, but rather it addresses the wisdom of the proposed rule itself. Should employee noncompete agreements be invariably unlawful or should the law reach only a subset? If the latter, how should the law distinguish between different agreements?
The effects of employee noncompete agreements vary with the type of job. Recent attention has turned to noncompete agreements covering lower-wage employees in industries such as fast food. These are unjustified and anticompetitive, and there is growing support for prohibiting them. In these situations, employers have not invested a great deal in specific employees. Most of their employment is “at will,” which means that either employer or employee can ordinarily terminate employment on reasonable notice. A noncompete agreement in such situations is nothing more than an anticompetitive restraint on employee mobility, limiting an employee’s right to seek a better job by moving or threatening to move elsewhere.
Other employees are different… .