On Friday, the Department of Justice filed a lawsuit against eBay accusing the company of entering a non-compete pact with software maker Intuit. Under the terms of the alleged secret deal, both companies agreed to refrain from recruiting or hiring each other’s employees. According to the DOJ, both companies aggressively policed their respective workforces to ensure that the deal was upheld. The non-compete pact was in place from approximately 2006 through at least 2009.
The eBay case should serve as a powerful reminder of the fact that non-compete agreements are the exception to the general rule. In recent years, non-compete practices have been booming, particularly on the plaintiff-side. Non-compete agreements have become commonplace in industries where they were previously seldom used. Somewhere along the way, many companies and even practitioners have embraced the notion of restrictive covenants as standard practice, rather than as tools to be used selectively.
Admittedly, the eBay case presents a slightly different situation than the typical non-compete dispute. In the typical scenario, the non-compete is inked between employer and employee. In the eBay case, the alleged agreement was made between two companies competing for the same talent. This amounts to a horizontal agreement in restraint of trade, clearly in violation of Section 1 of the Sherman Act. Some suggest that although the eBay case may raise antitrust concerns, the typical employee non-compete agreement does not. Let’s examine that:
In Florida, as in most other states, non-compete agreements and restrictive covenants are governed by statute. In Florida, that statute is 542.335. Non-compete statutes represent an exception to traditional antitrust principles. Whether or not any restraint of trade is legal or enforceable depends on whether or not that restraint is necessary to protect a legitimate business interest. An agreement between two competitors not to compete obviously does not further a legitimate business interest—– rather, it is a naked restraint of trade and is illegal. But an employee non-compete can, likewise, lack any connection to a legitimate business interest and therefore be unenforceable. A good example is non-compete agreements in the broadcast industry. A prominent radio personality works for ABC Radio. He jumps ship and goes to work for XYZ radio. In such a scenario, there is – in my view – no legitimate business interest. There are no trade secrets. There is no confidential information. There is no interference with any customer relationships. There is no extraordinary training or investment in the employee. Instead, you have a situation where a company is using a non-compete agreement simply to prevent competition. The same could be said of many non-compete scenarios involving other types of employees like doctors or sales people.
And this is where everything, once again, goes back fundamental doctrines like sham litigation and Noerr Pennington immunity. Noerr Pennington essentially holds that petitioning activity (e.g. filing a lawsuit) cannot be used as the predicate for an antitrust action. There is, however, an exception for sham litigation. Sham litigation involves a lawsuit so objectively basis that “no reasonable litigant could realistically expect success on the merits.” See Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 56 (1993). Although many attempts to enforce non-compete agreements are justifiable or at least plausible, others are – in fact – baseless. Under the right set of circumstances (i.e. market, market share, etc.), a misguided attempt to enforce an unenforceable non-compete agreement could give rise to antitrust liability. The same could be said for a baseless claim of trade secret misappropriation.
The takeaway: There are limits to how non-compete agreements should be used and enforced. Particularly when entered by competitors, such agreements can have antitrust consequences.
Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida. He focuses his practice on cases involving employment disputes, antitrust and business torts. He represents clients in Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Jupiter, Fort Myers, Tampa, and Orlando.