The Case for Noncompetes

97 Pages Posted: 28 Jan 2020 Last revised: 7 Jul 2020

See all articles by Jonathan Barnett

Jonathan Barnett

University of Southern California Gould School of Law

Ted M. Sichelman

University of San Diego School of Law

Date Written: January 9, 2020

Abstract

Scholars and other commentators widely assert that enforcement of contractual and other limitations on labor mobility deters innovation. Based on this view, federal and state legislators have taken, and continue to consider, actions to limit the enforcement of covenants not-to-compete in employment agreements. These actions would discard the centuries-old reasonableness standard that governs the enforcement of these provisions, often termed “noncompetes,” in all but four states (notably, California). We argue that this zero-enforcement position lacks a sound basis in theory or empirics. As a matter of theory, it overlooks the complex effects of contractual limitations on labor mobility in innovation markets. While it is frequently asserted that noncompetes may impede knowledge spillovers that foster innovation, it is frequently overlooked that noncompetes may encourage firms to invest in cultivating intellectual and human capital. As a matter of empirics, we show that two commonly referenced bodies of evidence fail to support zero enforcement. First, we revisit the conventional account of the rise of Silicon Valley and the purported fall of the Boston area as innovation centers, showing that this divergence cannot suitably be explained by differences in state law regarding noncompetes. Second, we show that widely cited empirical studies fail to support a causal relationship between noncompetes, reduced labor mobility, and reduced innovation. Given these theoretical and empirical complexities, we propose an error-cost approach that provides an economic rationale for the common law’s reasonableness approach toward contractual constraints on the circulation of human capital.

Keywords: non-competes, noncompetes, innovation, non-competition covenants, human capital, labor mobility, Silicon Valley, Route 128, covenants not to compete, training, employment law

JEL Classification: J4, J6, K31, L41, M5, O3

Suggested Citation

Barnett, Jonathan and Sichelman, Ted M., The Case for Noncompetes (January 9, 2020). 86 University of Chicago Law Review 953 (2020), Available at SSRN: https://ssrn.com/abstract=3516397 or http://dx.doi.org/10.2139/ssrn.3516397

Jonathan Barnett

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

Ted M. Sichelman (Contact Author)

University of San Diego School of Law ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
(619) 260-7512 (Phone)
(619) 260-2748 (Fax)

HOME PAGE: http://https://www.sandiego.edu/law/faculty/profiles/bio.php?ID=795

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