• Vennum Law

A Brief History of Non-Competes

It makes sense that, as our civilizations have become more complex, so too have our laws.

Equity has no power to compel a man who changes employers to wipe clean the slate of his memory.” Peerless Pattern Co. v. Pictorial Review Co., 132 N.Y.S. 37, 39 (App. Div. 1911).

In many ways the history of labor is the history of humankind. For instance, we define our (earliest) historical eras by the materials our ancestors worked with: the stone age is called “the stone age” because we used stone tools, the bronze age is called the bronze age because we worked with bronze tools, the iron age because…you get the idea. A similar case can be made for the interaction of labor and the law. For instance, approximately half of the 3,750 year old Code of Hammurabi deals with contracts and labor law. The Code prescribed things like a minimum wage, work standards, and even required merchants to give customers receipts. However, the entirety of Hammurabi’s code was inscribed on the underside of a 7.5 feet tall statue of an index finger. Today, the United States Department of Labor administers and enforces more than 180 federal laws, and Title 29 alone (the part of the federal code that lays out the principal rules regarding labor) is almost one thousand pages long. So it makes sense that, as our civilizations have become more complex, so too have our laws.

Enter the modern day non-compete (also referred to as a “noncompete,” a “covenant not to compete,” or a “restrictive covenant”). A non-compete is a clause in an employment contract requiring the employee to agree not to , or start, a similar profession or trade that competes with the other party (usually the employer). In other words, it’s a contract employers use to prevent former employees from competing unfairly against them.

Like all contracts, all non-competes require consideration to be valid. In other words, the party trying to restrict the market for the other party’s labor must have given the restricted party something of value in exchange. Notably, offering someone a job provides sufficient consideration to restrict the new employee to a noncompete, but merely allowing an existing employee to keep his or her job does not.

In fact, if you are a former employee facing legal action over an alleged violation of an non-compete, you will want to hire an experienced or employment attorney in your area because, barring that, your next best option may be to invent a time machine and travel back over six hundred years to 15th century England because your former employer, should they be foolish enough to actually appear in court (and be able to hire a lawyer who speaks French because this is so far back in time that the first English court case dealing with non-competes was actually conducted in French), will most likely be thrown in jail and forced to pay a fine to the crown for attempting to monopolize the labor of one of their subjects (See John Dyer’s Case, Y.B. 2 Hen.5, fo. 5, pl. 26 (C.P. 1414). That’s right: at least when it comes to restrictive covenants like non-competes, an employee had more right to freely exercise his profession and reap the fruits of his labor in medieval England than he would in many states today (including North Carolina).

It is worth pointing out, you also had more right to die of dysentary six hundred years ago in England than you do in many states today, so maybe, like indoor plumbing and public sanitation, the proliferation of non-competes in modern times may not be all bad. Your opinion on noncompetes will probably depend on your point of view: Are you the CEO, a rank-and-file employee, or something in-between, such as a shareholder or partner? Historically, the higher up an employee’s rank, the more likely she would be held to a noncompete. This makes sense especially in the context of the sale of a business: If I’m going to invest in buying Joe’s Pizza Parlor, a popular and profitable local restaurant, I don’t want to find out a week later that Joe has opened Joe’s Pizza Palace just a few blocks away. If Joe didn’t sign a noncompete, however, he could do just that.

In theory, and all else being equal, a contract for exclusive use of someone’s labor is neither bad nor good if the consideration and the obligation to perform (or not perform as the case may be when dealing with non-competes) are agreeable to both parties. It is simply an exchange of one thing for another and (ideally) both parties are happy. But theory is not reality. It turns out that, in reality, “all else” is very much not equal. Despite that, this theory that people have a right to contract for labor was a powerful one that simmered in the cauldron of the common law for about three hundred years after the time of Dyer’s Case in 1414.

“Restrain Me Not”

However, in 1711 the pressure cooker of philosophical and economic forces exploded, resulting in the pivotal case of Mitchel v Reynolds. Previously, noncompetes were considered restraints on trade and therefore void and unenforceable, however Mitchel transformed the empty boilerplate where non-competes went from generally being void as restraints on trade, to valid parts of business contracts so long as they were, in the language of the time, reasonable,” necessary and ancillary to a legitimate transaction”.

Of course, like most things in law, things weren’t that simple, and they didn’t stop changing there. Although some states, most notably California, refuse to enforce noncompetes, most states have more of a complicated relationship with covenants not to compete. States fall into four basic categories based on how they treat noncompetes. The states that most resemble the courtroom of Dyer’s time, with noncompetes viewed harshly (meaning employees have the most rights to freely exercise their labor) are Oklahoma, North Dakota, and of course California, where most noncompetes, especially the ones that burden rank-and-file employees as opposed to owners or executives, are void and unenforceable as a matter of law. For example, if an employer attempted to enforce the noncompete below in a California court, she would likely be out of luck, as the court may refuse to enforce the entire provision.

NON-COMPETITION. Employee agrees that during her employment and for a period of three (3) or two (2) or one (1) year(s) following the termination of her employment for any reason, Employee shall not, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected with the ownership, management, operation, or control of any business similar to the Employer’s in any geographic location, in North America, within the United States, in the Southeast region of the United States, in North and South Carolina, in North Carolina, in Mecklenburg County, within a radius of five (5) miles from Employer’s principal office.

The next most restrictive states are called “Red Pencil” states. Red pencil states, such as Nebraska, Virginia, and Wisconsin, will enforce some noncompetes, but will void the entire non-compete if any part of it doesn’t pass muster. For example, if the maximum enforceable noncompete in a red pencil state were for two (2) years, a court could refuse to enforce the entirety of the following noncompete:

NON-COMPETITION. Employee agrees that during her employment and for a period of three (3) years following the termination of her employment for any reason, Employee shall not own, manage, operate, control, be employed by, or hold shares in any business similar to the Employer’s in any geographic location.

Less restrictive still than red pencil states are “Blue Pencil” states. Blue pencil states, such as North Carolina and Arizona, will enforce the valid provisions of otherwise unenforceable noncompetes, but only if the contract contains both enforceable and unenforceable terms, such that the court can excise (“blue-pencil”) the unenforceable terms, and the remaining language will still create a valid and enforceable contract. A noncompete with tiered restrictions, therefore, is ripe for blue-penciling, like the following example:

NON-COMPETITION. Employee agrees that during her employment and for a period of three (3); or two (2); or one (1) year(s) following the termination of her employment for any reason, Employee shall not, own, manage, operate, or control any business similar to the Employer’s in any geographic location; in North America; within the United States; in the Southeast region of the United States; in North and South Carolina; within the State of North Carolina; in Mecklenburg County.

At the opposite end of the spectrum from the courts in Dyer’s day are the so called “equitable reform” or “reformation” states. Courts in reformation states such as Hawaii, Nevada, and Minnesota, will not only enforce noncompete clauses, but can and will (and in some states are even required to) revise an unenforceable non-compete to make it enforceable and ideally consistent with the aim of the original contract. The following noncompete has been revised, with certain original terms crossed out, and new language inserted in green:

NON-COMPETITION. Employee agrees that during her employment and for a period of three (3)one (1) year following the termination of her employment for any reason,cause as defined in the agreement,Employee shall not own, manage, or work for in a role similar to her role for Employer, a business that competes with Employer.

Although the “Workforce Mobility Act,” a bill introduced in the United States Senate last year, proposed a nationwide prohibition on noncompetes, such uniform agreement among the states seems unlikely, given the widely varying approaches taken by the states.

“One of the central contradictions of capitalism is that what makes it work — competition — is also what capitalists want to get rid of the most.”

– Matt O’Brien, Washington Post

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