Contract Theory and Some Realism About Employee Covenant Not to Compete Cases

Abstract

For centuries scholars have debated why the legal system enforces contracts, with no consensus having been reached. This failure of consensus suggests that judges likewise disagree as to why contracts are (or should be) legally enforced. If the American legal realists were correct--that legal doctrine is generally indeterminate and that judges use doctrine to simply justify a decision based on what the judge thinks is “right” or “fair” --this disagreement would be manifested in differing outcomes in contract cases with similar facts. Interestingly, this legal realist notion seems to be supported by how trial courts treat a particular type of contract dispute: the alleged breach of an employee covenant not to compete. Practitioners report that it is very difficult to predict how a trial court will respond to an employee non-compete case. Such unpredictability is likely caused by several factors. First, many judges are probably more hostile to such agreements than is current doctrine. Second, such cases are very fact-specific. Third, non-compete law is complicated and vague (and often involves a choice of law provision selecting law different from that of the forum state). This Article proposes, however, that the unpredictable nature is also caused by individual trial judges having different theories of why contracts are (or should be) enforced. Trial judges deciding such disputes have substantial discretion, and this Article proposes that judges use that discretion (consciously or subconsciously) to implement (as a factor) their particular theory of contract law in spite of applicable legal doctrine.

Keywords: Contract law, covenant not to compete, contract enforcement, employees, trial judges

JEL Classification: K12, K40