Between rights and contract: arbitration agreements and non-compete covenants as a hybrid form of employment law.

• Author: Estlund, Cynthia L.

The employment relationship is governed largely by contract, but with a heavy overlay of "rights": minimum terms and individual rights that are established by external law and are typically nonwaivable. But some terms of employment are governed neither by ordinary contract nor by ordinary rights, nor even by ordinary waivable rights. Both of the two most controversial contractual instruments in employment law today--non-compete covenants and mandatory arbitration agreements--take the form of written contracts; both waive important employee rights (the right to compete postemployment, the right to litigate future claims); and both are subject to substantive criteria of validity that are set by external law. Both bodies of law may be usefully described as recognizing "conditionally waivable" rights.

This Article aims first to show structural parallels between non-compete covenants and mandatory arbitration agreements that place them at a distinct intermediate point along the spectrum between nonwaivable rights and ordinary contract. Second, it seeks to uncover a common logic underlying the law's choice of this particular hybrid of rights and contract. The linchpin of that common logic lies in the threat that an unregulated waiver of one right (the right to compete or to litigate future claims) poses to adjacent employee rights that the law deems nonwaivable. Third, this Article deploys that underlying logic to offer a critical assessment of the law governing non-competes and arbitration agreements. Finally, this Article tentatively explores the broader potential usefulness of conditional waivability as a way of regulating some terms of employment. The intriguing potential of conditional waivability lies in its injection of some of the virtues of contract--especially flexibility and variability in the face of widely divergent and changing circumstances--into the pursuit of public goals and the realization of rights in the workplace.

INTRODUCTION I. SITUATING CONDITIONALLY WAIVABLE RIGHTS BETWEEN RIGHTS AND CONTRACT A. Rights Versus Contract B. A Primer on Non-Compete and Arbitration Agreements C. Parallel Problems Arising out of Conditional Waivability II. THE LOGIC OF CONDITIONALLY WAIVABLE RIGHTS A. Why Not Contract? B. Why Not Mandatory Employee Rights ? III. EVALUATING THE LAW OF NON-COMPETE COVENANTS AND MANDATORY ARBITRATION AGREEMENTS A. Assessing the Law of Non-Compete Agreements B. Assessing the Law of Mandatory Arbitration C. A Closing Word on Conditional Waivability IV. EXTENDING THE DOMAIN OF CONDITIONALLY WAIVABLE RIGHTS: PRELIMINARY THOUGHTS CONCLUSION INTRODUCTION

Employment law straddles the divide between public law and private law. That position reflects the dual nature of the employment relationship. On the one hand, that relationship is fundamentally contractual; it originates in an individual's agreement to work for an employer, and most of its terms--wage rates, benefits, hours of work, job duties, job security, and terminability--are set by the explicit or implicit agreement of the parties. Yet the employment relationship is also constrained by employee rights and entitlements that are established by external law, that reflect public values and interests, and that typically cannot be varied or waived by contract. For example, employees cannot agree to work for less than the minimum wage or tinder conditions that violate safety standards, nor can they agree to accept racial discrimination. (I will refer to all such entitlements here as "rights.") Much of employment law consists of the competing paradigms of rights and contract. (1)

Yet two of the most controversial and litigated instruments in contemporary employment law do not quite fit either the contract paradigm or the rights paradigm. Both mandatory arbitration agreements and non-compete covenants take the form of contracts--specifically, contracts that waive important employee rights; yet those contracts are not valid unless they meet specific substantive legal criteria drawn from external law." Mandatory arbitration agreements, which waive the right to litigate future legal claims in a judicial forum in favor of arbitration (and which I will hereafter call simply "arbitration agreements" (3)), are subject to conditions that aim to ensure the adequacy and fairness of the arbitral regime to which they commit the employee. For example, an agreement may be invalid if it requires employee plaintiffs to pay an excessive fee for the arbitrator's services, or if the process it prescribes is skewed toward the employer. Noncompete covenants, which constrain the right to practice one's occupation in competition with the employer after employment has ceased, are scrutinized for the legitimacy of the employer interests that they protect and the reasonableness of the restraints they place on postemployment competition. An agreement may be invalid, for example, if it lasts too long or reaches too far geographically, or if the employer cannot show that the agreement is needed to protect trade secrets or the like.

Beyond the fact that both agreements are increasingly common, frequently litigated, and controversial among employment lawyers and legal scholars, they may initially appear to have little in common. And, to be sure, the law of arbitration agreements and the law of non-compete covenants address very different normative and policy concerns. But these two kinds of agreements, and the bodies of law that govern them, turn out to share some interesting structural features. The two bodies of law exemplify an important intermediate or hybrid form of employment regulation, one that I will call "conditionally waivable rights." (4) In the case of both arbitration agreements and non-compete covenants, I will argue that conditional waivability provides a framework for protecting nonwaivable employee rights that lie immediately adjacent to the rights that can be waived, and that are at risk in these agreements, while giving the parties flexibility to achieve legitimate, mutually beneficial ends.

It is another question how well current law carries out that objective. That question, in turn, is complicated by the fact that both the law of non-compete covenants and the law of mandatory arbitration agreements come in stricter and more lenient versions. I find in both cases that the stricter versions of the law do a better job of protecting what needs protecting and accommodating what can be accommodated. In both cases, the law could be improved by a more systematic understanding of what is at stake, and how the solution of conditional waivability can and should work. In this Article, I seek to advance that end.

I begin in Part I by showing that non-compete covenants and mandatory arbitration agreements have more in common than meets the eye. The two bodies of law that govern them occupy a distinct intermediate point along the spectrum that runs from nonwaivable employee rights to ordinary contract. This distinctive hybrid of rights and contract gives rise to some characteristic problems and intriguing parallels between the two bodies of law. I proceed in Part II to investigate the logic of conditional waivability: why might the law in both areas have settled on conditional waivability as opposed to either ordinary contract or nonwaivability? I dig beneath the doctrine to identify parallel constellations of rights and interests, legitimate and illegitimate, that are at stake in the law of arbitration and non-compete agreements, and that might make sense of the law's choice of conditional waivability. In Part III, I deploy this analysis to cast a critical light upon existing law in both areas: given what is at stake in both arbitration and non-compete agreements, how well does the law do at setting and enforcing appropriate conditions for waiver? Finally, in Part IV, I venture some preliminary thoughts about the broader use of conditionally waivable rights within employment law.

Conditional waivability holds out the promise of introducing some of the virtues of contract--especially flexibility and variability in the face of widely divergent and changing circumstances--into the pursuit of public goals and the realization of rights in the workplace. It allows employees and employers to bargain within publicly constrained channels toward publicly sanctioned ends in light of particular circumstances and preferences. As the law of arbitration agreements and non-competes makes clear, conditional waivability is no panacea; indeed, it may have a built-in tendency to generate complexity, indeterminacy, and, as a result, litigation. Still, for some employment-related entitlements, this hybrid form of regulation might be a sensible way out of the familiar face-off between employment mandates and market ordering. As such, it might also point the way to real innovations in employment law and in workplace governance.

1. SITUATING CONDITIONALLY WAIVABLE RIGHTS BETWEEN RIGHTS AND CONTRACT

   Two of the hottest topics in employment law--both as subjects of academic inquiry and as areas of practice--are mandatory arbitration agreements and covenants not to compete. These two seemingly unrelated bodies of law have more in common than has been previously recognized. Both straddle the basic divide between contract and employee rights, for they take the form of contract yet are subject to distinctive legal constraints that protect employee rights. These two kinds of agreements and the law that governs them represent a distinctive hybrid of rights and contract that I call "conditionally waivable rights," and which seems to underlie some parallel doctrinal problems in the two areas.

   1. Rights Versus Contract

      The poles of the spectrum are familiar: on one end, the contractual paradigm of the employment relationship, and on the other, the domain of employee rights. Contract is the default mode of regulating employment relationships: unless the law has taken some issue off...