Employee Non-Compete Agreements as Section 1 Violations

To anyone with even a rudimentary understanding of antitrust law, it is obvious that employee non-compete agreements are at least potentially problematic. By definition, non-compete agreements are agreements not to compete. They are contracts in restraint of trade. But say the word antitrust in a non-compete case and most corporate lawyers and (unfortunately) even some judges will look at you like you are crazy.

The Magical (False) Distinction Between Antitrust & Employment Law

There is this pervasive notion that antitrust is something magical that exists only outside of the employment context. A few months back, I was sitting for my deposition in a $15+ million legal malpractice case where I was the plaintiff’s expert witness. The topic du jour: Antitrust and its intersection with a state unfair trade practices act (“little FTC Act” as some would say). The defendant’s lawyer repeatedly attempted to draw a distinction between what he perceived as “regular antitrust” cases and employment-related antitrust cases. His argument: The vast majority of my antitrust experience involved the intersection of antitrust and employment matters. As he saw it, these types of antitrust issues were not as real as, say, Standard Oil.  That is wrong and analytically incoherent. But an accurate reflection of the common misperception.

Non-Compete Illegality = Antitrust as Defense

Obviously, agreements not to compete can be illegal. For instance, take Florida. Florida is a relatively pro-non-compete jurisdiction (because of common law that courts have created— the statute itself is relatively neutral and the drafters have criticized Florida courts for expansively misinterpreting the law). But even in Florida, I have a decision holding that illegality can be a valid defense to non-compete enforcement. Salazar v. Hometeam, 230 So. 3d 619 (Fla. 2DCA 2017). That’s right: Illegality. Meaning that the non-compete agreement is an unreasonable restraint of trade and therefore illegal. In other words: Antitrust is always a potential defense to a non-compete agreement. But raising antitrust as a defense is much different that bringing an affirmative antitrust claim for violations of the Sherman Act. So how do we bridge that gap?

Non-Compete Agreements as Affirmative Antitrust Violations 

Antitrust standing: An antitrust plaintiff must be able to demonstrate harm to competition, harm of a type that the antitrust laws are intended to prevent, and their status as an efficient enforcer. In the right non-compete case, I see no problem satisfying antitrust standing. The employee no-poaching cases (e.g. Silicon Valley case) are much different than running an antitrust case based on a straight non-compete agreement. Because they involve what is a clearly horizontal restraint. But these cases show how you can demonstrate antitrust standing/injury in cases involving labor market restraints.

Per Se / Quick Look / Rule of Reason: This is basically the whole ballgame. Here’s the problem: Courts are hesitant to deem something a per se violation of antitrust law. Many courts act as if they are not allowed to find a per se violation unless the Supreme Court previously (and recently) has deemed the conduct at issue a per se violation. But that is not an accurate statement of the law. Let’s take a $10 an hour factory worker subject to a non-compete agreement. I say that is per se illegal. There is no pro-competitive justification. That non-compete agreement is being used to reduce labor market competition, restrict employee mobility, and – ultimately suppress wages. This sort of restraint is obviously pernicious and illegal.

Here is the wrinkle: Most courts will hesitate to deem an employee non-compete agreement a per se antitrust violation – even a clearly abusive factory worker non-compete – because of the consequences. Analytically and legally, a per se classification is 100% correct. Perhaps some very experienced, intelligent, well-respected senior judge on the SDNY (or someone similar) might be willing to go there. But that is the very small minority. Most judges will avoid the argument like this: It’s an employee non-compete agreement. Therefore, it is a vertical restraint of trade. Vertical restraints of trade can never be per se antitrust violations. Rule of reason applies.

That does not mean the $10 an hour factory worker loses his antitrust case. But that makes it much harder. Upshot: The plaintiff must push for per se treatment, or, at the very least, urge the court to reserve on the issue until trial— because factual issues dictate which standard should apply. You will have a much easier time convincing a court to defer the ruling than to grant you per se treatment. But let’s assume an early ruling kicks you over to the rule of reason universe. There is still a possible case, but it will be tough sledding.

The biggest obstacle here is establishing that the non-compete agreement at issue actually is having adverse impacts on competition in the relevant market. Like I said: Tough sledding. You are much better off with a class of plaintiffs and impacts that can be aggregated. Or if you can find a way, even in a single plaintiff case, to use evidence of the aggregate market impact (e.g. declaratory judgment that goes beyond just the single plaintiff’s non-compete agreement).

Bottom line: Getting per se treatment early on, or, getting a decision on the applicable standard deferred until trial puts you in an incredibly strong position. Getting kicked over to rule of reason makes it a dogfight — unless it’s a class action and you have compelling statistical evidence of harm to competition in the relevant market.

Jonathan Pollard is an attorney, expert witness, writer, and business consultant based in Fort Lauderdale, Florida. He is widely regarded as an expert on non-compete law. Pollard has extensive experience serving as litigation, arbitration, or consulting counsel in a wide range of non-compete, trade secret, antitrust, false advertising, and unfair competition matters. He has appeared in or on the New York Times, Bloomberg, PBS News Hour, The Guardian, Inc. Magazine, FundFire, Law360, Litigation Commentary & Review, and more. His office can be reached at 954-332-2380.