Academic journal article The University of Memphis Law Review

Covenants Not to Compete: The Real Question for Enforcement

Academic journal article The University of Memphis Law Review

Covenants Not to Compete: The Real Question for Enforcement

Article excerpt

I. Introduction

In 1776, in An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith wrote that the real price of everything is the toil and trouble of acquiring it.1 Likewise, John Locke proposed that one acquires an ownership of property in those things with which he joins his own labor.2 Our nation's founding documents and our national conscience reflect the moral values expressed by smith and Locke. Two centuries of market economy built on these doctrines of property and profit create the controversies inherent in drafting and enforcing covenants not to compete.3

A covenant not to compete is a contract. The sanctity of contract in law parallels the almost religious belief in the ownership of property. This, in turn, is the foundation of market economy and competitive capitalism. On one hand, our society recognizes the benefits of the competitive marketplace. In theory, it nurtures higher quality production and products, labor and service, and all at the best prices to the consumer. on the other hand, our society values equally the predictability and security available for parties free to contract and the companion right of the individual to own property. We expect the legal infrastructure to protect not only the right to contract but also the ownership of property.

Contract is not the only source of these conflicting protections. Common law employment loyalty and intellectual property laws recognize such rights.4 However, covenants not to compete represent a front line between them. In a highly mobile society, employers know that the best-qualified applicants often come from their competitors. As of March 2011, the Bureau of Labor Statistics reported that professional and business services, areas where the most covenant agreements exist, hired the most employees of any industry.5 In December 2015, this sector still had among the highest number of open jobs available and among the highest growth rate.6

Some conclusions have been drawn based on a longitudinal survey of the number of jobs held, labor market activity, and earnings growth among the youngest baby boomers. These results show that, on average, the least educated men changed jobs more often than the most educated men across the survey age group, while the opposite was true among women.7

Men without a high school diploma held 13.3 jobs from ages of 18 to 44, while men with a bachelor's degree or more education held 11.0 jobs. Women with at least a bachelor's degree held 11.7 jobs from ages 18 to 44, compared to an average of 9.7 jobs for women without a high school diploma.8

The younger baby boomers considered by the study were born between 1957 and 1964.9

Therefore, the largest single work force age group approaching retirement has set the standard and the pattern for a highly mobile employment life. The competitive market for labor requires employers, especially in business and professional services, to hire from their competition. Employers need to attract and retain qualified candidates. At the same time, they must find a way to prevent a drain on protectable business information and other assets when the same employees decide to move on.

The purpose of this Article is two-fold. First, it will evaluate and illustrate the standard balancing tests in the law between enforcement of contract covenants not to compete in employment and the refusal to do so as an unreasonable restraint of trade. Second, it will offer a new focus for clarifying enforceability to assist businesses and the courts going forward. Definitional cases from several state courts are cited. A few cases are briefed to illustrate the tensions in the balancing formulas. I suggest that the standard approach illustrated by the Tennessee cases represent the majority of jurisdictions. The prob lem is that this approach invites litigation and leaves open more questions than answers. Nineteen states have regulatory statutes governing enforceability in this context. …

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