Earlier this month, the Federal Trade Commission (FTC) proposed a new rule banning most employee noncompete agreements. The rule has drawn a lot of attention for its scope: it would stretch the FTC’s rulemaking authority and, in the process, preempt the laws of at least 47 states. Less attention, however, has been paid to its departure from historical practice. For hundreds of years, courts have examined noncompetes case by case, invalidating them only when their restrictions are unreasonable in context. The new rule would flip that approach on its head—marking perhaps the sharpest break from legal tradition in recent memory.
To its credit, the FTC acknowledges that noncompetes have deep historical roots. It points to a 1711 English common-law decision, Mitchel v. Reynolds, which it calls the “foundation” of American noncompete law. Reading that description, you might think that Mitchel provides some precedent for the FTC’s approach. But it doesn’t. It endorsed no strict rule against noncompetes. In fact, it did the opposite: it significantly liberalized their use.
To appreciate Mitchel’s significance, you have to go back centuries earlier. In 1414, while Henry V still sat on the English throne, the King’s Bench decided the first known noncompete case: John Dyer’s Case. According to the surviving report, Dyer had given a bond promising not to work in the dyeing trade for six months. Before the bond expired, he was sued for breaking it. But on the appointed day in court, the plaintiff failed to show up. Dyer then told the court that he had not broken the bond at all. That is, he had stayed out of the dyeing trade.
The court decided the case in Dyer’s favor. But in its opinion, it suggested that he would have been on even stronger ground had he demurred at law. The common law, the court explained, did not recognize restraints on the pursuit of a lawful trade. Such restraints were presumptively invalid. And in fact, had the plaintiff shown up to enforce such a restraint, he could have been thrown in jail.
For centuries, Dyer’s Case stood for the principle that trade restraints were presumptively invalid. Courts cited it not only to void noncompetes, but also to strike down restrictive guild ordinances. Dyer’s Case and the right to pursue a trade became bedrocks of the common law.
But that all changed with Mitchel. Mitchel arose out of a prosaic transaction: the lease of a bakery. As part of the lease, the owner agreed not to start another bakery in the same parish for five years. But he evidently broke that promise, and the leasee sued him for damages. When the case got to court, the owner cited the rule from Dyer’s Case. The promise was unenforceable, the owner said, because all trade restraints were void.
The court disagreed. It acknowledged that trade restraints were generally unenforceable. But that rule was not absolute. Restraints were clearly unenforceable when they existed only to suppress trade. But some restraints in fact promoted trade. And the owner’s noncompete fell into this second category. The noncompete was limited to a specific time and place. It was supported by “good and adequate consideration.” And most important, it was part of a “proper and useful contract.” The owner had done nothing but agree to limit his own action. He had done that to seal a legitimate, socially productive deal. And he had every right to make that kind of deal under the common law. His agreement and the resulting restraint were, therefore, valid and enforceable.
What explains this evolution—from the flat ban in Dyer’s Case to the contextual approach in Mitchel? The answer lies in social and economic change. In the fifteenth century, much of English commerce was controlled by a network of guilds. Operating under royal patents, these guilds adopted rules restricting trade within their jurisdictions. One common rule required a worker to complete a seven-year apprenticeship before opening a practice. Another rule barred outsiders from setting up competing trades. Combined, these rules locked people into their original towns and professions. A worker could not realistically move to a new place or start a new trade. So if the worker agreed not to pursue his original trade in his hometown, he had no other way to make a living. He couldn’t support his family or contribute to society. He became, effectively, a public charge.
But in the seventeenth century, guilds began to lose their grip. Workers gained new mobility; and as a result, courts came to see noncompetes as less of an economic death sentence. A worker could sign a noncompete and still have other options. Courts therefore loosened the rules: noncompetes were enforceable as long as they were limited and used to promote useful transactions. This is the change seen in Mitchel.
Mitchel would go on to have a long life on both sides of the Atlantic. In fact, it came to be seen as the basis for the American approach to trade restraints. It played an especially important role in shaping federal antitrust law—an influence it owed mostly to William Howard Taft.
Today, Taft is most famous for being the only person to serve as both U.S. President and Chief Justice of the U.S. Supreme Court. But before holding either post, he sat as a judge on the Sixth Circuit Court of Appeals. And there, he authored one of the foundational decisions of American antitrust law, United States v. Addyston Pipe & Steel Co.
Taft wrote Addyston in 1899. At the time, the Sherman Antitrust Act was less than a decade old. Section 1 of the Act banned all contracts in restraint of trade. But it was still unclear how far that ban reached. Did it ban literally all trade restraints? Or did it ban only those that would have been illegal under prior law? In Addyston, Taft reasoned that section 1 could not be taken literally. After all, every contract restrained trade to some extent. So rather than ban all restraints, Congress must have meant to ban only unreasonable ones. And to define reasonableness, Taft reached back to Mitchel. Under Mitchel, he wrote, restraints were reasonable when they were (a) “ancillary” to a legitimate transaction, and (b) necessary to protect the benefits of that transaction. In other words, they were reasonable when they promoted competition and unreasonable when they suppressed it. That distinction, however, required courts to examine restraints in context. They couldn’t simply condemn all restraints out of hand.
Courts still use that approach today. Under the so-called rule of reason, courts condemn trade restraints under section 1 only when they suppress competition on balance. A few restraints are so obviously anticompetitive that courts consider them per se illegal. But for all other restraints, courts look to context.
Just as federal courts were developing this contextual approach, a similar one took root in the states. Most noncompetes continued to be subject to state regulation. And the vast majority of states continued to allow noncompetes in some form. States recognized that while many noncompetes restricted trade, others promoted trade by protecting investments. So they required noncompetes to be reasonable and tailored to legitimate business interests. Reasonableness, of course, is not self-defining. So states looked to multiple factors: the noncompete’s purpose, its geographic scope, its length, and what kinds of things it blocked the worker from doing. Only if those factors suggested that the noncompete was overbroad would it be declared unenforceable.
To be sure, some states have recently taken a fresh look at noncompetes. Since 2016, eleven of them have restricted noncompetes for lower-earning or hourly employees. And at least four have required employers to either report noncompetes or give advance notice to workers. These reforms were widely expected to continue in the coming years. As states studied the new laws and their effects, they might have adopted more reforms. Other states might even have adopted reforms of their own.
The FTC’s rule, however, cuts that process short. Dismissing the contextual approach, the rule assumes that noncompetes are unfair methods of competition in almost all cases. And embedded in that assumption is an unstated premise: that every judge, legislator, and sovereign state to consider the issue so far has gotten the balance wrong. Though courts and lawmakers have taken a contextual approach for centuries, the rule asserts that noncompetes have always been an oppressive mechanism for restricting worker mobility. This truth has always been available; it just took six hundred years to uncover it.
That view is staggering in its arrogance. It tosses out centuries of judicial balancing in favor of a flat, per se ban. And it does so in the face of contrary state, federal, and international precedent. Every authority since Mitchel has recognized that at least some noncompetes protect investments and promote trade. The new rule not only rejects that consensus, but preempts it in favor of the opposite view.
Admittedly, this historical disconnect may be academic. For a variety of reasons, the rule seems unlikely to stand up in court. And groups like the U.S. Chamber of Commerce have already signaled that they intend to sue. So the rule may become little more than a historical footnote itself. But of course, as in all things, only time will tell.
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