A covenant not to compete is a contractual restriction upon an individual's ability to compete with another person or entity following the termination of some transaction or relationship between the two. Because of the increasing emphasis in the American economy on technically skilled employees and service oriented businesses, the covenant not to compete has become a standard addition to employment contracts. Moreover, the number of litigated and reported cases may represent only a small percentage of the actual number of employment restrictions currently in force. Regardless of their validity and enforceability, covenants not to compete chill the free movement of employees and eliminate competition among actual and potential employers. Because of both these effects and the existence of many unchallenged covenants of questionable validity, the judicial system must clearly define the legal parameters of the enforceability of such covenants.
Traditionally, scholars in this area have generally been content to organize the voluminous case law available and describe the patterns of legal analysis contained therein. This Article instead suggests a unifying theory for consistently resolving all litigation of covenants not to compete. This theory focuses on the employer's protectable interest and limits postassociational restraints to the extent of this interest. This Article proposes that the appropriate sources of both the definition of protectable interest and the limitation on injunctive relief are those agency and unfair competition doctrines that justify postassociational restraints in the absence of contractual restrictions. Under this approach, the terms of any agreement will generally be viewed as superfluous. This Article concludes that the covenant not to compete and related contract law rules should, in most cases, be given no effect.
Involuntary Servitude: The Current Enforcement of Employee Covenants Not to Compete – A Proposal for Reform (with Henry M. Schaffer), 57 S. Cal. L. Rev. 531 (1984)