I’ve been saying it for years: Non-compete agreements are restraints of trade and are subject to antitrust scrutiny. The United States Court of Appeals for the Ninth Circuit agrees.
Before the court can consider whether or not there has been a breach of an agreement not to compete, it first must evaluate the propriety of the restrictions. In other words, are the restrictions necessary to protect a legitimate business interest? If the restrictions are not necessary to protect a legitimate business interest, then the contract is – at a minimum – unenforceable as written.
This is black letter law. But you wouldn’t know that from listening to lawyers who specialize in prosecuting non-compete cases. I have seen this literally hundreds of times: Some mediocre big firm lawyer who basically takes this position: The guy signed a contract! He has to uphold his bargain! But that’s not how it works.
You can’t have a contract to fix prices. You can’t have a contract that divides up the market where you agree to stay out of each other’s territory. And you can’t have a contract not to compete if it’s a naked restraint of trade. That would be illegal. You know, the whole Sherman Act thing. But most people do not know this! So on March 17th, the 9th Circuit brought non-compete law back to what it really is: Antitrust law.
The relevant facts are really simple: The case came out of Arizona federal court. In the trial court, the Plaintiff Seychelles Organics and Defendants John Rose et. al. resolved the litigation via settlement. Their settlement agreement contained a 25-year, world-wide non-compete provision. Fast forward. Upon information and belief that the Defendants had violated the non-compete, Plaintiff moved to hold the Defendants in contempt. The trial court rebuffed those efforts and ultimately struck the non-compete as being unenforceable. The Plaintiff appealed. The 9th Circuit affirmed. The relevant holding, which I will paste below in full because of its importance:
“The district court did not err in holding that the section of the Settlement Agreement containing the non–compete clause was invalid and legally unenforceable.1 Seychelles argues that the non–compete clause was a reasonable restraint on trade ancillary to the sale of the goodwill of a business. However, the provision barring Rose from competing worldwide for 25 years in the markets for certain hormonal supplements was unrelated to the sale of Rose’s businesses. Instead, it was part of the settlement of Seychelles’ legal claims. The covenant not to compete thus does not further any “legitimate interest beyond [Seychelles’] desire to protect itself from competition.” Valley Med. Specialists v. Farber, 982 P.2d 1277, 1281 (Ariz. 1999). Accordingly, the restraint is naked rather than ancillary. See Restatement (Second) of Contracts § 187 cmt. b (Am. Law Inst. 1981) (“A promise made subsequent to the transaction or relationship is not ancillary to it.”). Naked restraints like the one here are per se invalid under Arizona contract law. Valley Med. Specialists, 982 P.2d at 1281; see also Restatement (Second) of Contracts § 187 (“A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade.”).
Even if the rule of reason applied, the covenant would be invalid because it is unreasonably broad in scope. A 25-year, worldwide non–compete agreement is not “reasonably limited as to time and territory,” see Gann v. Morris, 596 P.2d 43, 44 (Ariz. Ct. App. 1979), and no case cited by Seychelles is to the contrary.”
Let’s unpack that a little: First, the Court assailed the relevant non-compete as a “naked restraint of trade.” In antitrust lingo, that’s what we call a “per se illegal” restraint. Second, the Court invoked the “rule of reason”, which is the classic antitrust framework for evaluating restraints that aren’t naked restraints, or, per se illegal.
The upshot of all this is pretty straight forward (but surprisingly a startling suggestion to many practitioners and some judges): Non-compete agreements are restraints of trade and must first be evaluated as such. The fact that a non-compete agreement does not give rise to an affirmative antitrust claim (for lack of things like market power or antitrust standing) does not mean that antitrust law does not provide for a defense. It most certainly does.
The case is SEYCHELLES ORGANICS, INC., a Delaware corporation, Plaintiff-Appellant, v. JOHN R. ROSE; ANUMED INTERNATIONAL, LLC; MARIA ESPARZA, Defendants-Appellees., No. 15-15814, 2017 WL 1020355 (9th Cir. Mar. 16, 2017).
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida who focuses his practice on complex non-compete, trade secret, trademark and antitrust litigation. His office can be reached at 954-332-2380.