Economic Costs of Noncompete Agreements

January 7, 2012 / By Robert Wood

In his excellent concurrence in the Marsh USA case, Texas Supreme Court Justice Don Willett observed something that practitioners and trial court judges often forget or gloss over, namely, the adverse effect that unfair noncompete agreements can have on society at large.   Justice Willett noted:

“Restrictive covenants are not costless, and even a mutually acceptable noncompete can impose a deadweight loss on broader society. Courts should not confuse a noncompete’s impact on the employee with its impact on competition. A restraint may be perfectly agreeable to both parties today but still harm consumers tomorrow. . . . It remains the job of courts to be vigilant for practices that tend to servility, that deprive the public of desired services, and that quash rivals the enforced restriction rather than forceful competition.”

He continued:

“Noncompetes tailored to protectable business interests have their lawful place, but they should be used sparingly and drafted narrowly.   And employers must demonstrate special fax that legitimized the noncompete agreement. Squelching competition for its own sake is an enemy unworthy of protection. Competition by a former employee may well rile an employer, but companies do not have free reign to, by contract, indenture an employee or dampen everyday competition that benefits Texas and Texans.”

Obviously, noncompete agreements that serve legitimate interests are enforceable in Texas, as the Texas Supreme Court has confirmed on several occasions, most recently in the Marsh USA case itself.  Justice Willett urges trial courts to ensure that covenants not to compete are fair and reasonable, including from a societal standpoint.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood