Monopolists & Non-Compete Agreements

Let’s beat the same drum but only this time, take it a step further:

Widespread Ignorance About Non-Competes & Antitrust

Certain practitioners and judges have absolutely no understanding of the antitrust principles upon which non-compete law is based.  True story:  I was in a hearing in front a federal judge who I will not name.  I made an argument about restraints of trade.  His response:  You might have something with this antitrust but I don’t know.  I have the transcript.   I’m happy to share it.  Do I have something with that whole antitrust thing?  Absolutely.  After all, Florida non-compete law is codified at Florida Statutes 542.335 as part of the Florida Antitrust Act (542.15 et seq.).

In fact, most states have a statutory non-compete law (a few like Pennsylvania don’t).  In many states, the relevant non-compete law is part of the state’s antitrust act.  So clearly, the law of non-compete agreements is grounded in antitrust principles.  I’ll take it a step further:  Most states that have non-compete laws have some sort of legitimate business interest test.  First, as a threshold matter, the relevant non-compete agreement must be ancillary to some employment or transaction.  Some state laws say that and others don’t, but that premise really needs to be presumed.  Why?  Because if the relevant restrictive covenants are not ancillary to anything, and just exist as naked restraints of trade, then they are naked restraints of trade and per se illegal.   But if the restraints are ancillary to employment or sale of a business, then in most jurisdictions, you move into analyzing the existence of a legitimate business interest.  The legitimate business interest test is really just a codification of the classic antitrust rule of reason analysis.  Do you see what just happened there?  Non-compete agreements are evaluated under one of the two big ticket antitrust frameworks:  per se illegality or rule of reason.

I have tried to explain this framework in Florida state trial courts.  It has resulted in judges looking at me like I’m a crazy person and opposing counsel openly mocking me.  Just to take Florida as an example:  In Florida, and particularly in Florida state trial court, the vast majority of judges are completely unfamiliar with the antitrust principles that underlie Florida non-compete law.  To be clear:  Certain Florida appellate courts are very tuned into this (especially the 4th and 5th DCA).  But the state trial court judges simply do not understand the law’s origins.  As a result, they often treat non-compete cases as pure breach of contract cases.  That is completely wrong.

As I have previously noted, in any non-compete case, there are two lenses.  First, you must view the restrictions at issue through the antitrust lens.  Are the restrictions ancillary to employment or the sale of a business?  No?  Then they’re probably naked restraints and outright illegal.  If the restrictions are ancillary, are they reasonably necessary to protect a legitimate business interest?  Only once you have answered that question in the affirmative does the case transform from a restraint of trade case into a breach of contract case.  So you move to the second lens:  The breach of contract lens.  But even that gets sticky, because the restrictions may have to be revised (i.e. narrowed) and the contract blue-penciled (basically edited by the court).

So that is the relevant background for what I’m about to discuss.

Monopolists Have Antitrust Exposure for Abusing Non-Compete Agreements 

I don’t consider this a thought experiment or a pure hypothetical.  It’s just a matter of time until it happens:  At present, somewhere in America, some monopolist in some industry is abusing non-compete agreements and has subjected itself to antitrust exposure.  Let me explain:

Antitrust 101.  For this type of case, we need a monopolist.  Let’s call the company Monopoly Enterprises.  Monopoly Enterprises has 65% of the Florida market in widgets.  Start-Up-Co is a new entrant to the Florida widget market and an industry rival.  Monopoly Enterprises makes all of its employees sign non-compete agreements.  Start-Up-Co wants to hire some engineers and technicians and pays more than Monopoly Enterprises.  Start-Up goes on LinkedIn, finds some engineers at Monopoly and offers them jobs.  Monopoly gets wind of this and either threatens a lawsuit or files a lawsuit, resulting in the engineers not going to work for Start-Up.  Alright, let’s attack this:

If ME has market power and is abusing non-compete agreements to lock up employees when there is no legitimate business interest, that is exclusionary and anticompetitive conduct.  So we are in the ballpark of an attempted monopolization or monopoly maintenance claim under Section 2 of the Sherman Act.

Now it gets sticky:  First thing the defendant is going to do is start yelling about Noerr Pennington doctrine and petitioning immunity.  Basically:  We have a right to use and enforce non-compete agreements to protect our business and our conduct is completely immune from the antitrust laws.

Nice try, but bullshit.  First, some of the conduct at issue is not immune whatsoever.  Lots of companies use non-compete agreements and send out threatening cease & desist letters but rarely file a lawsuit.  If ME’s non-compete is bogus/overbroad and it is sending out cease & desist letters to squash competition, that’s not immune from antitrust scrutiny under Noerr Pennington or petitioning immunity.  Further, even if ME is filing non-compete lawsuits, that conduct is not necessarily immune from antitrust scrutiny.  The best comparison is sham patent lawsuits by monopolists (I litigated one of those when I was at Boies Schiller & Flexner).  Are some non-compete lawsuits objectively baseless shams?  Absolutely.

You are even more levels of complexity depending on jurisdiction:  Say a monopolist in NC is using dramatically over-broad non-compete agreements that last 7 years and cover the entire world.  That’s purely unenforceable under NC law (which does not blue pencil) and any lawsuit on such a non-compete is arguably objectively baseless, a sham, and not immunized under Noerr Pennington.

The missing element:  The competing company – Start-Up-Co in the above fact pattern – must have antitrust injury and be an efficient enforcer.  In lots of industries, any legitimate competitor will do (e.g. hospitals suing other hospitals routinely get antitrust standing).

So there you have it.  Mark my words:  One of these days, I’m going to whack some monopolist for abusing non-compete agreements.  And the other side is probably going to go apoplectic, threaten to Rule 11 me, then realize that, yeah, they’ve got a problem.

Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida.  He focuses his practice on non-compete, trade secret, trademark and unfair competition.  His office can be reached at 954-332-2380.