Interjurisdictional Competition in Enforcing Noncompetition Agreements: Regulatory Risk Management and the Race to the Bottom
64 Pages Posted: 13 Mar 2008 Last revised: 3 Mar 2009
This Article explores the possibility that one state could effectively eliminate the employment-law protections guaranteed by other states. If employers can incorporate by reference that state's law into their employment contracts, such an effective nullification could occur. An established trend in corporate law, this kind of regulatory risk management may soon endanger employee protections if policymakers fail to recognize and respond to the threat.
The phenomenon of states engaging in a regulatory race to the bottom in pursuit of business activity is familiar. Because firms take into account employment and labor standards (or the lack thereof) in deciding where to establish operations, states have incentives to maintain employer-friendly legal environments to attract business. While academics have long studied the potential effects of such territory-based competition on worker welfare, this Article considers another type of interjurisdictional competition that has received little attention in the employment-law literature. This variety is extraterritorial in nature: a state seeks to benefit by selling its law as a commodity to firms operating, in whole or in part, outside of its territory. Already common in corporate law, it is now emerging in employment contracting. By frustrating state-level employee protections, such competition could have dangerous implications for workers.
This Article examines why law-as-commodity competition is pervasive in the corporate area but, until recently, largely absent in employment contracting. To illustrate the changing dynamic, it then identifies the conditions favorable to competition in the enforcement of noncompetition agreements and considers other areas where this kind of competition could emerge.
How can states defend their workers and regulatory interests against the application of employer-friendly states' law within their borders? States have the power to reject contractual choice-of-law clauses, but this alone is not enough. Policymakers must also understand how firms and competing states might attempt to defeat local policy preferences through litigation techniques and aggressive judicial conduct. A state's failure to respond strategically to the rise of such a cooperative venture between firms and a competing state will result in creeping nullification of protections for local workers.
Keywords: interjurisdictional competition, regulatory competition, choice of law, choice of forum, forum selection clause, noncompetition agreement, restrictive covenant, employee rights, charter competition, risk management, employment contract, choice of law, conflicts of law, charter competition
JEL Classification: K31, K22
Suggested Citation: Suggested Citation