Tcl - from Dyer's Case to Hard Bargains: Six Centuries of Covenants Not to Compete - April 2007 - Historical Perspectives

• Publication year: 2007
• Pages: 39
• Citation: Vol. 36 No. 4 Pg. 39

36 Colo.Law. 39 Colorado Lawyer 2007.

2007, April, Pg. 39. TCL - From Dyer's Case to Hard Bargains: Six Centuries of Covenants Not to Compete - April 2007 - Historical Perspectives

The Colorado Lawyer
April 2007
Vol. 36, No. 4 [Page 39]

Departments
Historical Perspectives

From Dyer's Case to Hard Bargains: Six Centuries of Covenants Not to Compete

by Bill C. Berger

Bill C. Berger is a shareholder in the Denver law firm Stettner Miller, P.C. He is a former Co-Chair of the CBA's Labor and Employment Law Section and is an Adjunct Professor of Law at the University of Denver Sturm College of Law, where he teaches employment law - (303) 534-0273, ext 104, bberger@stetmil.com. The author thanks Diane L Burkhardt, Faculty Liaison at the University of Denver Sturm College of Law, Westminster Law Library, for her invaluable assistance in locating many of the authorities needed for this article.

Readers are encouraged to contact Frank Gibbard with topic suggestions and to volunteer to write articles for the Historical Perspectives Department - Frank_Gibbard@ca10.uscourts.gov or (303) 844-5306.

Judges and litigators bogged down in cases dealing with covenants not to compete might think they are victims of the modern age. Covenants have become common, especially in Colorado's technology industries; however, they are far from modern. Anglo-American courts have been wrestling with covenants for six centuries.(fn1)

The first American case dealing with covenants not to compete was reported in 1811,(fn2) and the first English case was decided four centuries earlier in 1414. That decision was titled simply Dyer's Case.(fn3) In Dyer's Case, the court announced that all restraints on a worker's trade are void

For the next three centuries, with only a few exceptions, English courts followed Dyer's Case, rejecting almost all covenants.(fn4) In 1711, Chief Judge Parker, who later became the Earl of Macclesfield,(fn5) announced what became known as the "rule of reason." The rule of reason imposed a general standard of reasonableness for covenants not to compete.(fn6)

In 1831, Chief Judge Tindal articulated what has become the modern common law test in Horner v. Graves.(fn7) In this case, Tindal identified the major factors that courts still use for determining reasonableness. He wrote:

[T]he greater question is, whether this is a reasonable restraint of trade. And we do not see how a better test can be applied to the question whether reasonable or not, than by considering whether the restraint is such only as to afford a fair protection to the interests of the party in favour of whom it is given, and not so large as to interfere with the interests of the public. Whatever restraint is larger than the necessary protection of the party, can be of no benefit to either, it can only be oppressive; and if oppressive, it is, in the eye of the law, unreasonable. Whatever is injurious to the interests of the public is void, on the grounds of public policy.(fn8)

The final English case that often is cited as fundamental regarding covenants not to compete was decided in 1894.(fn9) There, Lord Macnaghten brought the courts back to Dyer's Case and reemphasized the general rule that covenants are void:

The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to the public policy and therefore void.(fn10)

These cases are of particular interest in Colorado. One need only read Colorado's statute(fn11) and case law(fn12) to recognize that Lord Parker's rule of reason is still alive here. This is no coincidence. The first reported Colorado case on covenants was decided in 1909 in Freudenthal v. Espey.(fn13) There, the Colorado Supreme Court reviewed many historical cases and relied on them as the basis for its decision.(fn14)

Dyer's Case

The first published decision to address restraints on a worker's trade - Dyer's Case - held that such restraints are void. The individual was a dyer. His former employer sought to enforce a restraint that would have prohibited the worker from competing for only six months and, then, only within one village. Modern courts might have little or no problem enforcing such a restraint.

However, in 1414, even the concept of a restraint was so offensive that the judge threatened the former employer with prison. The decision was announced in archaic Norman French, which has given us many tongue-twisting maxims, such as: "(P)er Dieu si le plaintiff fuit icy il irra al prison, tanque il ust fait fine an Roye."(fn15) Translated into English, this reads: "By God, if the plaintiff were here, he should go to prison until he paid a fine to the King."(fn16)

Historical Context

To understand why a judge would be so shocked by a six-month restraint, one must recall what was happening in Europe at the time. Dyer's Case followed on the heels of the Black Death in 1348. The Black Death had decimated Europe's workforces and, in 1349, England criminalized voluntary unemployment by passing the Ordinance of Labourers.(fn17) The thought that private individuals might, by contract, eliminate even one able-bodied worker from one village's workforce for just six months was too much for the judge to bear.

The Rule of Reason

In 1563, the Statute of Apprentices was passed. It imposed a mandatory seven-year restraint, during which apprentices could not compete; some guilds added an eighth year or even more. To prevent further restraints, a law was passed, called the Act for Avoiding of Exactions Taken Upon Apprentices.

The law changed in 1711, when Chief Judge Parker announced in Mitchel v. Reynolds(fn18) what has become known as the rule of reason. By 1711, the extreme labor shortages following the Black Death had ended. As labor shortages eased, a system of guilds developed...