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Non-compete clause
In contract law, a non-compete clause (often NCC), restrictive covenant, or covenant not to compete (CNC), is a clause under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). In the labor market, these agreements prevent workers from freely moving across employers, and weaken the bargaining leverage of workers.
Non-compete agreements are rooted in the medieval system of apprenticeship whereby an older master craftsman took on a younger apprentice, trained the apprentice, and in some cases entered into an agreement whereby the apprentice could not compete with the master after the apprenticeship. Modern uses of non-compete agreements are generally premised on preventing high-skilled workers from transferring trade secrets or a customer list from one firm to a competing firm, thus giving the competing firm a competitive advantage. However, many non-compete clauses apply to low-wage workers or individuals who do not possess transferable trade secrets.
The extent to which non-compete clauses are legally allowed and enforced varies under different jurisdictions. Some localities and states ban non-compete clauses or highly restrict their applicability. In jurisdictions where non-compete agreements are legal, courts tend to evaluate whether a non-compete agreement covers a worker's move to a relevant industry and reasonable geographic area, as well as whether the former is still bound by the agreement over a reasonable time period. An employer bringing a lawsuit may also be asked to identify a protectable business interest that was harmed by the employee's move to a different firm.
Research shows that non-compete agreements make labor markets less competitive, reduce wages and reduce labor mobility. While non-compete agreements may incentivize company investment into their workers and research, they may also reduce innovation and productivity by employees who may be forced to leave a sector when they leave a firm. The labor movement tends to advocate for restrictions on non-compete agreements while support for non-compete agreements is common among some employers and business associations.
As far back as Dyer's Case in 1414, English common law chose not to enforce non-compete agreements because of their nature as restraints on trade. That ban remained unchanged until 1621, when a restriction that was limited to a specific geographic location was found to be an enforceable exception to the previously absolute rule. Almost a hundred years later, the exception became the rule with the 1711 watershed case of Mitchel v Reynolds which established the modern framework for the analysis of the enforceability of non-compete agreements.
Traditionally, non-competes were used to prevent high-skilled workers from transferring trade secrets or a customer list from one firm to a competing firm. However, such clauses can frequently be found in the contracts of low-wage workers and other workers who are unlikely to be in a position to share trade secrets.
When courts consider the enforceability of non-compete agreements, they usually ask the employer to identify a protectable business interest that was harmed by the employee's move to a different firm. Courts consider whether the non-compete covers a relevant industry (does the worker do work for a firm in the same industry?), reasonable geographic area, and reasonable time period.
University of Chicago Law School Professor Eric A. Posner has argued that since non-competes have an adverse impact on competition, they should be covered under a strong anti-trust regime, and the "law should treat noncompetes as presumptively illegal, allowing employers to rebut the presumption if they can prove that the noncompetes they use will benefit rather than harm their workers."
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Non-compete clause
In contract law, a non-compete clause (often NCC), restrictive covenant, or covenant not to compete (CNC), is a clause under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). In the labor market, these agreements prevent workers from freely moving across employers, and weaken the bargaining leverage of workers.
Non-compete agreements are rooted in the medieval system of apprenticeship whereby an older master craftsman took on a younger apprentice, trained the apprentice, and in some cases entered into an agreement whereby the apprentice could not compete with the master after the apprenticeship. Modern uses of non-compete agreements are generally premised on preventing high-skilled workers from transferring trade secrets or a customer list from one firm to a competing firm, thus giving the competing firm a competitive advantage. However, many non-compete clauses apply to low-wage workers or individuals who do not possess transferable trade secrets.
The extent to which non-compete clauses are legally allowed and enforced varies under different jurisdictions. Some localities and states ban non-compete clauses or highly restrict their applicability. In jurisdictions where non-compete agreements are legal, courts tend to evaluate whether a non-compete agreement covers a worker's move to a relevant industry and reasonable geographic area, as well as whether the former is still bound by the agreement over a reasonable time period. An employer bringing a lawsuit may also be asked to identify a protectable business interest that was harmed by the employee's move to a different firm.
Research shows that non-compete agreements make labor markets less competitive, reduce wages and reduce labor mobility. While non-compete agreements may incentivize company investment into their workers and research, they may also reduce innovation and productivity by employees who may be forced to leave a sector when they leave a firm. The labor movement tends to advocate for restrictions on non-compete agreements while support for non-compete agreements is common among some employers and business associations.
As far back as Dyer's Case in 1414, English common law chose not to enforce non-compete agreements because of their nature as restraints on trade. That ban remained unchanged until 1621, when a restriction that was limited to a specific geographic location was found to be an enforceable exception to the previously absolute rule. Almost a hundred years later, the exception became the rule with the 1711 watershed case of Mitchel v Reynolds which established the modern framework for the analysis of the enforceability of non-compete agreements.
Traditionally, non-competes were used to prevent high-skilled workers from transferring trade secrets or a customer list from one firm to a competing firm. However, such clauses can frequently be found in the contracts of low-wage workers and other workers who are unlikely to be in a position to share trade secrets.
When courts consider the enforceability of non-compete agreements, they usually ask the employer to identify a protectable business interest that was harmed by the employee's move to a different firm. Courts consider whether the non-compete covers a relevant industry (does the worker do work for a firm in the same industry?), reasonable geographic area, and reasonable time period.
University of Chicago Law School Professor Eric A. Posner has argued that since non-competes have an adverse impact on competition, they should be covered under a strong anti-trust regime, and the "law should treat noncompetes as presumptively illegal, allowing employers to rebut the presumption if they can prove that the noncompetes they use will benefit rather than harm their workers."