Covenants Not to Compete in Employment Contracts: Worth a Closer Look in the Classroom

• Published date: 01 January 2015
• DOI: http://doi.org/10.1111/jlse.12024
• Author: Tonia Hap Murphy
• Date: 01 January 2015

Journal of Legal Studies Education

Volume 32, Issue 1, 131–171, Winter 2015

Covenants Not to Compete in

Employment Contracts: Worth a

Closer Look in the Classroom

Tonia Hap Murphy*

I. Introduction

Covenants not to compete (“noncompetes”) are a well-recognized risk man-

agement tool for employers. Noncompetes prohibit employees from “en-

gag[ing] in the same type of business for a stated time in the same market” as

the employer.1Noncompetes are controversial, especially if employees had

little choice on whether to agree and are left with few attractive employment

options. Employers, on the other hand, argue the need for such covenants.

News coverage of noncompetes abounds.2For example, an October

2013 report covered a Subway Restaurant manager in Detroit who signed a

covenant not to compete with her employer’s business within one hundred

miles for one year.3When the manager left and took a job with a competing

*Teaching Professor, Mendoza College of Business, University of Notre Dame. I thank Professors

Shelley McGill and Norman Bishara for their insightful comments on an earlier draft of this arti-

cle. Thanks to Professor Laura Hollis, whose suggestion of expanded coverage of noncompetes

in my graduate course set me on this research path. I am also grateful to Pat and Maria Murphy

for their close reading and helpful suggestions.

1Black’s Law Dictionary 420 (9th ed. 2009). Noncompetes are also commonly found in

partnership agreements and contracts for the sale of a business. Id. Noncompetes in those

contexts are subject to different legal treatment than noncompetes in employment agreements.

See infra note 56.

2See, e.g., Steve Greenhouse, Noncompete Clauses Increasingly Pop Up in Array of Jobs,N.Y. Times,

June 9, 2014, at B1.

3Amy Lange, Woman Looking for Work After Subway Enforces Non-Compete Contract,MyFOXDe-

troit.com (Oct. 30, 2013, 6:40 PM), http://www.myfoxdetroit.com/story/23823034/woman-

fighting-to-work-at-another-restaurant-after-subway-enforces-non-compete-contract#ixzz2

uRfZe4wX.

C2015 The Author

Journal of Legal Studies Education C2015 Academy of Legal Studies in Business

131

132 Vol. 32 / The Journal of Legal Studies Education

sandwich shop in violation of the agreement, Subway’s attorney advised both

her and her new employer of Subway’s intent to enforce the provision. She

was promptly fired from the new job.4Another recent report concerned

the noncompete signed in 2012 by the new University of Arkansas football

coach, Bret Bielema. Coach Bielema agreed not to coach football at another

Southeastern Conference school until after 2018.5

Students themselves may have been asked to sign noncompetes as a

condition of obtaining employment or even internships. One student who

took a summer internship with a party planning firm after her sophomore

year, for example, was required to sign a noncompete providing that for a

period of two years after the internship, she may not

control, manage, operate, be employed or engaged by, or otherwise assist or

engage in, or assist any other person in engaging in, any aspect of the Business . . .

including without limitation by performing service in any executive, managerial,

sales, market, or research capacity, anywhere in the United States or in any other

country in which the [company] is then doing business.6

It is impossible to know exactly how prevalent noncompetes are be-

cause they usually become public only in those cases that lead to litigation.

According to legal scholars, they are common and becoming more so.7Non-

competes are particularly prevalent in industries that rely on protection of

4Id.

5Gregory D. Hanscom, When Coaches Can’t Compete: Non-Competes in Sports,Noncom-

peteNews.com (Sept. 30, 2013, 8:00 AM), http://www.noncompetenews.com/post/

2013/09/30/When-Coaches-Cant-Compete-Non-Competes-in-Sports.aspx (linking to PDF of ac-

tual employment contract).

6E-mail from student to author (Oct. 28, 2013, 3:18 PM EDT) (on file with author) (providing

copy of employment contract). The media have reported on interns signing noncompetes. See,

e.g., Greenhouse, supra note 2 (describing noncompetes required of summer camp counselors

and interns at electronics firm).

7See, e.g., Ken Matheny & Marion Crain, Symposium: Law, Loyalty, and Treason:How Can the Law

Regulate Loyalty Without Imperiling It?: Disloyal Workers and the “Un-American” Labor Law,82N.C. L.

Rev. 1705, 1745 (2004) (“[N]oncompetes are proliferating in number”); Charles A. Sullivan,

The Puzzling Persistence of Unenforceable Contract Terms,70Ohio St. L.J. 1127, 1149 (2009) (“In

the past, only the most valuable employees . . . were subject to noncompetition clauses. Today,

however, many at-will employees are also subject to such restrictions”); see also Greenhouse, supra

note 2.

2015 / Covenants Not to Compete in Employment Contracts 133

intellectual property such as software development8or scientific research.9

Companies also seek the protection of noncompetes when employee skill or

goodwill presents competitive advantage. For such reasons, noncompetes are

common in the contracts of salespeople10 and of key personnel in media,11

service industries,12 and management.13 They may be required for employ-

ees, managers, and partners of accounting firms.14 Indeed, noncompetes

have been found in contracts for employees as varied as “factory welders to

CEOs, computer programmers to yoga instructors, doctors to bakers, lawyers

to artists, marketing strategists to bioengineers.”15 Many students will be

asked to sign noncompetes early in their careers. Therefore, this is the sort

8Matt Villano, The Noncompete Clause: Balk at Your Own Risk,NYTimes.com (Jan. 21, 2007),

http://www.nytimes.com/2007/01/21/business/yourmoney/21advi.html?_r=0.

9Matt Marx, The Firm Strikes Back: Non-Compete Agreements and the Mobility of TechnicalProfessionals,

76 Am. Soc. Rev. 695, 696 (2011) (“[N]early half of technical professionals in several industries

are subject to non-competes.”).

10E.g., Sam Williams, Agreements with Employed and Independent Sales Reps, Inside

Tucson Business (May 4, 2012, 12:00 PM), http://www.insidetucsonbusiness.com/sales

marketing/sales judo/agreements-with-employed-and-independent-sales-reps/article_5c97

6624--954f-11e1-b925-0019bb2963f4.html.

11Cathy Packer & Johanna Cleary, Rediscovering the Public Interest: An Analysis of the Common Law

Governing Post-Employment Non-Compete Contracts for Media Employees,24Cardozo Arts & Ent.

L.J. 1073, 1073–74 (2007) (“[T]he use of such contracts has ‘exploded to restrict everyone

from the anchor to the tape editor.’”). This article cites sources suggesting a high prevalence

of noncompetes in contracts of employees in radio, television, newspaper, advertising, public

relations, and Internet-related industries. Id. at 1074.

12See, e.g., Eric Ostroff, Protecting Trade Secrets in the Restaurant Industry,Protecting Trade

Secrets (July 31, 2013), http://tradesecretslaw.wordpress.com/2013/07/31/protecting-trade-

secrets-in-the-restaurant-industry/ (describing lawsuit brought by Miami restaurant to enforce

noncompete against departed “celebrity” chef); Greenhouse, supra note 2 (reporting court order

enforcing twelve-month noncompete in employment contract of hairstylist).

13See Norman D. Bishara et al., When Do CEOs Have Covenants Not to Compete in Their Employ-

ment Contracts? 52–53, http://ssrn.com/abstract=2166020 (Feb. 11, 2013), 68 Vand. L.Rev.

(finding a statistically significant trend toward greater usage of noncompetes in CEO contracts,

especially in jurisdictions that are willing to enforce them, and especially in longer-term contracts

and in profitable firms).

14Michael C. Lasky & Daniel S. Greenberg, The Increased Importance of Non-Compete Agreements

for Accounting Firms, CPA J. 54, 54 (Aug. 2012) (citing “growing numbers” of accounting firms

requiring noncompetes).

15Orly Lobel, Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids,

and Free Riding 51 (2013).