Restrictive Covenants, Employee Training, and the Limits of Transaction-Cost Analysis

Indiana Law Journal

Volumn 76, Issue 1-2, 2001, Pages 48-76

  Lester, Gillian ^a  

^a NONE

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EID: 0346311413     PISSN: 00196665     EISSN: None     Source Type: Journal    
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References (187)

1. I am unaware of any empirical study directly measuring the prevalence of restrictive covenants in practice. But see Peter J. Whitmore, A Statistical Analysis of Noncompetition Clauses in Employment Contracts, 15 J. CORP. L. 483, 484-85 (1990) (reporting a more than doubling of appellate decisions on restrictive covenants between the late 1960s and late 1980s and reviewing literature suggesting that this reflects an underlying increase in the actual use of covenants in employment contracts). For a discussion of the industries and occupations represented in appellate litigation, see id. at 519-23.
2. I am unaware of any empirical study directly measuring the prevalence of restrictive covenants in practice. But see Peter J. Whitmore, A Statistical Analysis of Noncompetition Clauses in Employment Contracts, 15 J. CORP. L. 483, 484-85 (1990) (reporting a more than doubling of appellate decisions on restrictive covenants between the late 1960s and late 1980s and reviewing literature suggesting that this reflects an underlying increase in the actual use of covenants in employment contracts). For a discussion of the industries and occupations represented in appellate litigation, see id. at 519-23.
3. A well-known example is Paul H. Rubin & Peter Shedd, Human Capital and Covenants Not to Compete, 10 J. LEGAL STUD. 93 (1981).
4. Oliver Williamson famously described opportunism as "self-interest seeking with guile." OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING 47 (1985).
5. When I use the term "transaction-cost economics," I am referring loosely to the extensive body of scholarship growing out of Ronald Coase's early conception of the firm as a mechanism for reducing the costs of transactions. Although one could present a more refined description of the distinctions between the "organizational failures," "property rights," and other strains of theory within this broader rubric, that is beyond the scope of my essay. For a general discussion of the growth and scope of ideas about the firm as a mechanism for reducing transaction costs, see PAUL MILGROM & JOHN ROBERTS, ECONOMICS, ORGANIZATION AND MANAGEMENT chs. 8 & 9 (1992).
6. Scott E. Masten, About Oliver E. Williamson, in FIRMS, MARKETS, AND HIERARCHIES: THE TRANSACTION COST ECONOMICS PERSPECTIVE 37, 49 (Glenn R. Carroll & David J. Teece eds., 1999).
7. Although the patterns of change are somewhat more complicated than the text implies, reviews of empirical studies on changes in job stability suggest that there was indeed a decline in the 1990s. E.g., PETER CAPPELLI, THE NEW DEAL AT WORK: MANAGING THE MARKET-DRIVEN WORKFORCE 133-36 (1999); David Neumark, CHANGES IN JOB STABILITY AND JOB SECURITY: A COLLECTIVE EFFORT TO UNTANGLE, RECONCILE, AND INTERPRET THE EVIDENCE (Nat'l Bureau of Econ. Research, Working Paper No. 7472, 2000).
8. Although the patterns of change are somewhat more complicated than the text implies, reviews of empirical studies on changes in job stability suggest that there was indeed a decline in the 1990s. E.g., PETER CAPPELLI, THE NEW DEAL AT WORK: MANAGING THE MARKET- DRIVEN WORKFORCE 133-36 (1999); David Neumark, CHANGES IN JOB STABILITY AND JOB SECURITY: A COLLECTIVE EFFORT TO UNTANGLE, RECONCILE, AND INTERPRET THE EVIDENCE (Nat'l Bureau of Econ. Research, Working Paper No. 7472, 2000).
9. For a discussion of these changes, see CAPPELLI, supra note 6, at 47-48 (arguing that rising employee turnover has reduced employers' incentives to invest in training employees).
10. Recent inroads into analyzing trade secrets and restrictive covenants in the high-mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
11. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
12. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High-Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
13. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High-Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
14. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
15. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui-Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
16. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
17. Recent inroads into analyzing trade secrets and restrictive covenants in the high- mobility, high-technology economy include ALAN HYDE, WORKING IN SILICON VALLEY: ECONOMIC AND LEGAL ANALYSIS OF A HIGH-VELOCITY LABOR MARKET (forthcoming 2002); Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 608-09 (1999) (explaining Silicon Valley's success compared to Massachusetts's Route 128 as resulting from California's legal prohibition on restrictive covenants); Alan Hyde, Silicon Valley's High- Velocity Labor Market, 11 J. APPLIED CORP. FIN. 28, 28-29 (1998) [hereinafter Hyde, High- Velocity]; Christine M. O'Malley, Covenants Not to Compete in the Massachusetts High-Tech Industry: Assessing the Need for a Legislative Solution, 79 B.U. L. REV. 1215 (1999) (advocating Massachusetts's adoption of a statute modeled after Colorado law); Hanna Bui- Eve, Note, To Hire or Not to Hire: What Silicon Valley Companies Should Know About Hiring Competitors' Employees, 48 HASTINGS L.J. 981, 1001-02 (1997) (summarizing California statutory and decisional law on noncompetition agreements); and Alan Hyde, The Wealth of Shared Information: Silicon Valley's High-Velocity Labor Market, Endogenous Economic Growth, and the Law of Trade Secrets, at http://www.andromeda.rutgers.edu/~hyde (Sept. 1998) [hereinafter Hyde, Wealth] (explaining Silicon Valley's comparative success in terms of both the prohibition on covenants not to compete and the reluctance of California firms to bring trade secrets lawsuits).
18. See Edmund W. Kitch, The Law and Economics of Rights in Valuable Information, 9 J. LEGAL STUD. 683, 708 (1980).
19. Sometimes golden handcuffs take the form of stock options that vest only after the employee has been with the company for a minimum period. These deferred compensation schemes might also be unreliable retention devices for different reasons. See CAPPELLI, supra note 6, at 185-86 (discussing the examples of IBM, in which some employees' incentives to stay collapsed with a collapse in the stock price in the early 1990s, and the converse example of Microsoft, where booming stock prices in the late 1990s led some key employees whose stock options had vested to cash in their stock options and form start-ups).
20. Kitch, supra note 9, at 709.
21. The question of whether trade secret law is a species of property or tort has given rise to some debate. See Catherine L. Fisk, Working Knowledge: Trade Secrets and Restrictive Covenants in Employment and the Rise of Corporate Intellectual Property, 1800-1920, 52 HASTINGS L.J. (forthcoming 2001) (manuscript at 74 n.277, on file with author) (discussing this point of ambiguity).
22. UNIF. TRADE SECRETS ACT, 14 U.L.A. 433 (1985).
23. Id. §1(4), 14 U.L.A. 438.
24. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §44 (1995). Section 39 defines a trade secret as "any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others." Id. at § 39. This UTA-compatible definition is an expansion of the previous definition that appeared in the first Restatement of Torts, in that it eliminates the distinction drawn in the Restatement of Torts between trade secrets and other confidential information that has economic value. RESTATEMENT OF TORTS § 757 cmt. b (1939). For a discussion of this expansion of trade secret law, see Edmund W. Kitch, The Expansion of Trade Secrecy Protection and the Mobility of Management Employees: A New Problem for the Law, 47 S.C. L. REV. 659, 659-64 (1996).
25. The problem of low probability of detection is compounded by the fact that it would be difficult (for liquidity reasons) to magnify the size of the sanction to a sufficient level that elicits deterrence equivalent to that of an enforceable restrictive covenant.
26. Kitch, supra note 9, at 690-91; see also Rubin & Shedd, supra note 2, at 105 (arguing use of contractual mechanisms may be a pragmatic response to the difficulty of knowing ex ante whether information will be deemed a trade secret).
27. Kitch, supra note 9, at 690-91; see also Rubin & Shedd, supra note 2, at 105 (arguing use of contractual mechanisms may be a pragmatic response to the difficulty of knowing ex ante whether information will be deemed a trade secret).
28. I should note here that the question of whether the enforcement of restrictive covenants is the optimal way to encourage innovation is not uncontroversial. See Gilson, supra note 8, at 608-09; Hyde, High-velocity supra note 8, at 33; see also Kitch, supra note 9, at 722-23 (speculating that courts may be hostile to restrictive covenants because such restrictions inefficiently reduce the depth and continuity of the labor market); infra text accompanying notes 111-13.
29. I should note here that the question of whether the enforcement of restrictive covenants is the optimal way to encourage innovation is not uncontroversial. See Gilson, supra note 8, at 608-09; Hyde, High-velocity supra note 8, at 33; see also Kitch, supra note 9, at 722-23 (speculating that courts may be hostile to restrictive covenants because such restrictions inefficiently reduce the depth and continuity of the labor market); infra text accompanying notes 111-13.
30. I should note here that the question of whether the enforcement of restrictive covenants is the optimal way to encourage innovation is not uncontroversial. See Gilson, supra note 8, at 608-09; Hyde, High-velocity supra note 8, at 33; see also Kitch, supra note 9, at 722-23 (speculating that courts may be hostile to restrictive covenants because such restrictions inefficiently reduce the depth and continuity of the labor market); infra text accompanying notes 111-13.
31. Beverly Glen Music, Inc. v. Warner Communications, Inc., 224 Cal. Rptr. 260, 261 (Cal. Ct. App. 1986) (holding judicial compulsion of personal services would violate the Thirteenth Amendment); ABC, Inc. v. Wolf, 420 N.E.2d 363, 366 (N.Y. 1981) (same). The enforceability problem due to involuntary servitude, however, is salient only where the contract requires specific performance. Traditional analysis does not speak to the reasons why parties could not enter into long-term contracts enforceable through damages. I will take as given the difficulties in enforcing long-term contracts for purposes of this Article (although I recognize that this position may be debatable in itself).
32. For histories of the common law on covenants not to compete, see Harlan M. Blake, Employee Agreements Not to Compete, 73 HARV. L. REV. 625, 625-46 (1960); Fisk, supra note 12. See also Benjamin Aaron & Matthew W. Finkin, The Law of Employee Loyalty in the United States, 20 COMP. LAB. L. & POL'Y J. 321 (1999) (situating the law of restrictive covenants within the broader legal realm of employee loyalty). A minority of states, such as California, simply deem restrictive covenants unenforceable by statute, though these statutes usually contain narrow exceptions. CAL. BUS. & PROF. CODE §§16600-16602.5 (West 1997) (exceptions include covenants attached to sale of goodwill of a business or upon dissolution of partnership or limited liability corporation); see also ALA. CODE § 8-1-1 (1993); COLO. REV. STAT. ANN. § 8-2-113 (West 1994); HAW. REV. STAT. § 480-4(c) (1993); LA. REV. STAT. ANN. 23:921 (West 1998); MONT. CODE. ANN. §§ 28-2-703, -704 (2000); N.C. GEN. STAT. § 75-4 (2000); N.D. CENT. CODE § 9-08-06 (1987); OKLA. STAT. ANN. tit. 15, § 217 (West 1999).
33. For histories of the common law on covenants not to compete, see Harlan M. Blake, Employee Agreements Not to Compete, 73 HARV. L. REV. 625, 625-46 (1960); Fisk, supra note 12. See also Benjamin Aaron & Matthew W. Finkin, The Law of Employee Loyalty in the United States, 20 COMP. LAB. L. & POL'Y J. 321 (1999) (situating the law of restrictive covenants within the broader legal realm of employee loyalty). A minority of states, such as California, simply deem restrictive covenants unenforceable by statute, though these statutes usually contain narrow exceptions. CAL. BUS. & PROF. CODE §§16600-16602.5 (West 1997) (exceptions include covenants attached to sale of goodwill of a business or upon dissolution of partnership or limited liability corporation); see also ALA. CODE § 8-1-1 (1993); COLO. REV. STAT. ANN. § 8-2-113 (West 1994); HAW. REV. STAT. § 480-4(c) (1993); LA. REV. STAT. ANN. 23:921 (West 1998); MONT. CODE. ANN. §§ 28-2-703, -704 (2000); N.C. GEN. STAT. § 75-4 (2000); N.D. CENT. CODE § 9-08-06 (1987); OKLA. STAT. ANN. tit. 15, § 217 (West 1999).
34. For histories of the common law on covenants not to compete, see Harlan M. Blake, Employee Agreements Not to Compete, 73 HARV. L. REV. 625, 625-46 (1960); Fisk, supra note 12. See also Benjamin Aaron & Matthew W. Finkin, The Law of Employee Loyalty in the United States, 20 COMP. LAB. L. & POL'Y J. 321 (1999) (situating the law of restrictive covenants within the broader legal realm of employee loyalty). A minority of states, such as California, simply deem restrictive covenants unenforceable by statute, though these statutes usually contain narrow exceptions. CAL. BUS. & PROF. CODE §§16600-16602.5 (West 1997) (exceptions include covenants attached to sale of goodwill of a business or upon dissolution of partnership or limited liability corporation); see also ALA. CODE § 8-1-1 (1993); COLO. REV. STAT. ANN. § 8-2-113 (West 1994); HAW. REV. STAT. § 480-4(c) (1993); LA. REV. STAT. ANN. 23:921 (West 1998); MONT. CODE. ANN. §§ 28-2-703, -704 (2000); N.C. GEN. STAT. § 75-4 (2000); N.D. CENT. CODE § 9-08-06 (1987); OKLA. STAT. ANN. tit. 15, § 217 (West 1999).
35. Donahue v. Permacel Tape Corp., 127 N.E.2d 235, 240 (Ind. 1955) ("Knowledge, skill and information (except trade secrets and confidential information) become a part of the employee's personal equipment. . . . These things cannot be taken from him, although he may forget or abandon them." (citing Jewel Tea Co. v. Grissman, 279 N.W. 544, 545 (S.D. 1938))); Reed, Roberts Assocs. v. Strausman, 353 N.E.2d 590, 593 (N.Y. 1976) (stating that "no restrictions should fetter an employee's right to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment"). Note that to make the review of doctrine more manageable, I focus mainly on the (fairly typical) laws of Illinois, New York, and Indiana.
36. A famous articulation of this rationale for the rule appears in Arthur Murray Dance Studios v. Witter, 105 N.E.2d 685, 703-04 (Ohio C.P. 1952) (stating that an "[employee's] individual bargaining power is seldom equal to that of his employer"). See also RESTATEMENT (SECOND) OF CONTRACTS § 188 cmt. g ("Post-employment restraints are scrutinized with particular care because they are often the product of unequal bargaining power . . . .").
37. Gillespie v. Carbondale and Marion Eye Ctrs., Ltd., 622 N.E.2d 1267, 1269 (Ill. App. Ct. 1993) ("Because Illinois courts abhor restraints on trade and encourage fair competition, restrictive covenants in employment contracts are carefully scrutinized."); Hahn v. Drees, Peruguni & Co., 581 N.E.2d 457, 459 (Ind. Ct. App. 1991) ("Covenants . . . are not favored in the law because they are in restraint of trade."); Reed, Roberts Assocs., 353 N.E.2d at 593 (explaining judicial disfavor of covenants partly because "our economy is premised on the competition engendered by the uninhibited flow of services, talent, and ideas").
38. This list is not fully inclusive. Restrictive covenants might also, for example, permit an employer to prevent a unique employee, such as an athlete or artist, from departing after the employer has made an investment in promoting the unique employee's talents. See generally Margaret N. Kniffin, Employee Noncompetition Covenants: The Perils of Performing Unique Services, 10 RUTGERS-CAM. L.J. 25, 36-52 (1978) (reviewing doctrine on restraints enforceable on basis of employee uniqueness).
39. Geritex Corp. v. Dermarite Indus., L.L.C., 910 F. Supp. 955, 959 (S.D.N.Y. 1996) (stating protectible employer interests include trade secrets and confidential customer lists); Ackerman v. Kimball Int'l, Inc., 634 N.E.2d 778, 781-84 (Ind. Ct. App. 1994) (stating courts will enforce a covenant to protect trade secrets, so long as it meets other requirements of enforceability), vacated in part, adopted in part, 652 N.E.2d 507 (Ind. 1995). This is so even in some states, such as California, that statutorily prohibit covenants not to compete. See e.g., Loral Corp. v. Moyes, 219 Cal. Rptr. 836, 840 (Cal. Ct. App. 1985) (holding that use of former employer's confidential information to lure customers away could be legally restricted despite state statute prohibiting covenants not to compete because nondisclosure agreement is legally distinct from covenant not to compete). But cf. Gilson, supra note 8, at 607-08 (failing to locate case law that specifically upheld a covenant not to compete because it protected underlying trade secrets).
40. Ivy Mar Co. v. C.R. Seasons Ltd., 907 F. Supp. 547, 556-57 (E.D.N.Y. 1995) (holding customer list protectible as a trade secret when the names on the list could not be readily ascertainable, and developing the list entailed great employer effort or expenditure).
41. See, e.g., Label Printers v. Pflug, 564 N.E.2d 1382, 1387 (Ill. Ct. App. 1991) (finding protectible interest where employer has "near-permanent" relationship with customers with whom, but for the employment, employee would not have encountered; "near-permanence" is a function of, inter alia, time, cost, and difficulty of developing and maintaining clientele, as well as continuity and duration of relationship (citing Reinhardt Printing Co. v. Feld, 490 N.E.2d 1302 (Ill. Ct. App. 1986))); Hahn, 581 N.E.2d at 460 (finding protectible good will includes right to restrict former employee from enticing away old customers (citing Donahue v. Permacel Tape Corp., 127 N.E.2d 235, 241 (Ind. 1955))). Edmund Kitch, in a recent article, notes that with the advent of the UTA and subsequent expansion of the definition of trade secrets, some cases in which the interest protected by a restrictive covenant formerly was seen to extend beyond trade secrets might now fit within the definition of trade secrets. Kitch, supra note 9, at 665.
42. See Cockerill v. Wilson, 281 N.E.2d 648, 651 (Ill. 1972) (veterinarian); Canfield v. Spear, 254 N.E.2d 433, 434 (Ill. 1969) (physician); Sarah Bush Lincoln Health Ctr. v. Perket, 605 N.E.2d 613, 617 (Ill. Ct. App. 1993) (stating "near-permanence" of employer relationship with patients, and thus protectibility of interest in patients, is inherent in the medical professional and veterinary context); Gelder Medical Group v. Webber, 363 N.E.2d 573, 577 (N.Y. 1977) (physician); Karpinski v. Ingrasci, 268 N.E.2d 751, 755-56 (N.Y. 1971) (oral surgeon); Zellner v. Stephen D. Conrad, M.D., P.C., 589 N.Y.S.2d 903, 905-06 (N.Y. App. Div. 1992) (holding opthamologist's clients a protectible interest of former employer-clinic). But see the recent decision of the Second Circuit under New York law in Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999), affirming the lower court's decision to recognize an insurance company's protectible interest in a salesman's relationships with clients whose identities were widely known in the highly competitive business of selling real estate title insurance. Id. at 71. In what is arguably an expansion of the spirit if not the letter of New York precedent, the court held that the salesman's client relationships were protectible as unique services, a classification that in the past had been reserved for the services of employees such as acrobats and corporate officers, rather than salespersons. Id. at 72.
43. Ivy Mar, 907 F. Supp. at 558; Springfield Rare Coin Galleries, Inc. v. Mileham, 620 N.E.2d 479, 485 (Ill. App. Ct. 1993).
44. RESTATEMENT (SECOND) OF CONTRACTS § 188(1)(a), (b), & cmts. b, c, & d (1981). The seminal holding on the enforceability of reasonable restraints remains the eighteenth-century English decision of Mitchel v. Reynolds, 24 Eng. Rep. 347 (Ch. 1711) (establishing restraints on competition presumptively unenforceable, though presumption may be rebutted if restraint is reasonable). See also, e.g., Ivy Mar, 907 F. Supp. at 558-59 (reviewing the general factors that influence reasonableness); Abbott-Interfast Corp. v. Harkabus, 619 N.E.2d 1337, 1340-41 (Ill. App. Ct. 1993); Donahue v. Permacel Tape Corp., 127 N.E.2d 235, 239 (Ind. 1955); Waterfield Mortgage Co. v. O'Connor, 361 N.E.2d 924, 926-27 (Ind. Ct. App. 1977); Mallory Factor, Inc. v. Schwartz, 536 N.Y.S.2d 752, 753 (N.Y. App. Div. 1989).
45. Blake, supra note 20, at 686-87; Milton Handler & Daniel E. Lazaroff, Restraint of Trade and the Restatement (Second) of Contracts, 57 N.Y.U. L. REV. 669, 731-49 (1982); Whitmore, supra note 1, at 508-19.
46. Blake, supra note 20, at 686-87; Milton Handler & Daniel E. Lazaroff, Restraint of Trade and the Restatement (Second) of Contracts, 57 N.Y.U. L. REV. 669, 731-49 (1982); Whitmore, supra note 1, at 508-19.
47. Blake, supra note 20, at 686-87; Milton Handler & Daniel E. Lazaroff, Restraint of Trade and the Restatement (Second) of Contracts, 57 N.Y.U. L. REV. 669, 731-49 (1982); Whitmore, supra note 1, at 508-19.
48. House of Vision, Inc. v. Hiyane, 225 N.E.2d 21, 25 (Ill. 1967); Schmidl v. Central Laundry & Supply Co., 13 N.Y.S.2d 817, 824 (N.Y. Gen. Term 1939).
49. Donahue, 127 N.E.2d at 241 (holding that a restriction on competition in the United States and Canada was overbroad where an employee's former responsibilities in manufacturing and selling adhesive tape had been limited to northern Indiana); Commercial Bankers Life Ins. Co. v. Smith, 516 N.E.2d 110, 114-15 (Ind. Ct. App. 1987) (holding covenant restricting employee from competing in state, where employee had previously worked only in northern Indiana, overbroad).
50. Ebbeskotte v. Tyler, 142 N.E.2d 905, 909 (Ind. Ct. App. 1957) (discussing restrictive covenant limited to city and vicinity where former employer operated business); NCR Corp. v. Rotondi, 450 N.Y.S.2d 198, 199 (N.Y. App. Div. 1982).
51. Norlund v. Faust, 675 N.E.2d 1142, 1155 (Ind. Ct. App. 1997) (holding opthamologist could enjoin former employee optometrist from contacting optometrists who referred patients to former employer, but could not enjoin former employee from acting as an optometrist in association with any opthamologist within specified counties, because the latter would prevent him from practicing his livelihood); Karpinski v. Ingrasci, 268 N.E.2d 751, 754 (N.Y. 1971) (holding covenant preventing oral surgeon from practicing dentistry in a particular territory for a particular period following departure from oral surgery practice overbroad because it extended beyond oral surgery).
52. E.g., Schmidl, 13 N.Y.S.2d at 824 (granting employer injunction enforcing restrictive covenant that prohibited employee from soliciting, for nine months postdeparture, any clients he brought to former employer's business).
53. Total Health Physicians v. Barrientos, 502 N.E.2d 1240, 1242-43 (Ill. App. Ct. 1986) (limiting the geographic area of an overbroad covenant to an area that is reasonable); Akhter v. Shah, 456 N.E.2d 232, 235 (Ill. App. Ct. 1983); Consumers' Oil Co. v. Nunnemaker, 41 N.E. 1048, 1051 (Ind. 1895); Young v. Van Zandt, 449 N.E.2d 300, 304 (Ind. Ct. App. 1983); Career Placement of White Plains, Inc. v. Vaus, 354 N.Y.S.2d 764, 773 (N.Y. Gen. Term 1974); Schmidl, 13 N.Y.S.2d at 824. Earlier cases required that a covenant be clearly divisible before severance was permissible, but this requirement has softened over time in many jurisdictions. See, e.g., Bridgestone/Firestone Inc. v. Lockhart, 5 F. Supp. 2d 667, 683 (S.D. Ind. 1998); Hahn v. Drees, Perugini & Co., 581 N.E.2d 457, 462 (Ind. Ct. App. 1991) (holding where contract is divisible, and where it will not lead to the addition of any new terms, court may "blue pencil" unreasonable provisions to make the contract reasonable as a whole); B.D.O. Seidman v. Hirschberg, 93 N.Y.2d 382, 395 (N.Y. 1999).
54. Springfield Rare Coin Galleries v. Mileham, 620 N.E.2d 479, 486 (Ill. App. Ct. 1993).
55. Brunner v. Hand Indus., Inc., 603 N.E.2d 157, 160-61 (Ind. Ct. App. 1992) (holding an agreement unenforceable because it restrained an employee's use of "general training and skills").
56. E.g., Beckman v. Cox Broadcasting Corp., 296 S.E.2d 566, 568 (Ga. 1982) (holding employer may legitimately protect investment in time and money in developing employee's skills); see also Milwaukee Area Joint Apprenticeship Training Comm. for the Elec. Indus. v. Howell, 67 F.3d 1333, 1339 (7th Cir. 1995) (holding loan agreement obligating electrician to repay cost of training to joint union-multiemployer training-apprenticeship trust fund if he went to work for a noncontributing employer within the industry was not a restrictive covenant because it did not enjoin competition generally, only recoupment of training costs in the event of accepting employment with certain competitors); Borg-Warner Prot. Servs. Corp. v. Guardsmark, Inc., 946 F. Supp. 495, 500-02 (E.D. Ky. 1996) (applying both Tennessee and Kentucky law to find security contractor's investment in training security guards on-the-job to satisfy needs of hiring firm was a legitimate basis for enforcing covenant that prohibited employees from working for successor contractor); Rogers v. Runfola & Assocs., Inc., 565 N.E.2d 540, 544 (Ohio 1991) (holding employer investment in time and money for equipment, facilities, support staff, and training is protectible interest); Atlantic Tool & Die v. Kacic, No. 2717-M, 1998 WL 801913, at *4 (Ohio Ct. App. Nov. 18, 1998) (holding protectible interest arose out of costly and specialized - but not confidential - training conferred on employee in the area of tool and die manufacturing quality control).
57. See, e.g., Brunswick Floors, Inc. v. Guest, 506 S.E.2d 670, 673 (Ga. Ct. App. 1998) (holding that although investment in extensive training may be protectible interest, sending employee from Brunswick, Georgia, to Kansas City for all-expense-paid training program in advanced carpet installation, and to Atlanta for certification course in floor installation, was insufficient investment in training to uphold covenant not to compete within eighty-mile radius for two years).
58. COLO. REV. ANN. STAT. § 8-2-113(2)(c) (West 1994) (permissible to have covenant that provides for recovery of expense of educating and training an employee who has served an employer for a period of less than two years); FLA. STAT. ANN. § 542.335(1)(b)(5) (West 1985) ("extraordinary or specialized training" is a legitimate business interest); LA. REV. STAT. ANN. § 23:921 (West 1998) (legitimate employer interests include training and advertising).
59. Louisiana Revised Statutes section 23:921, which included among protectible interests employer investments in training and advertising, was amended in 1989 to eliminate the special exception for training and advertising.
60. E.g., Dyer v. Pioneer Concepts, Inc., 667 So. 2d 961, 964 (Fla. Dist. Ct. App. 1996) (holding employee trained in stripping floors and operating equipment leased to grocery stores, and enrolled in seminars on interpersonal skills, hiring and firing employees, and repairing equipment, did not have extraordinary training pursuant to definition of legitimate business interest); Hapney v. Cent. Garage, Inc., 579 So. 2d 127, 132 (Fla. Dist. Ct. App. 1991) (holding in order to be "extraordinary," training must exceed "what is usual, regular, common, or customary in the industry in which the employee is employed"; employer's investment in extending air-conditioning installer and repairer's skills to include cruise-control units and cellular telephones not extraordinary); see also Orkin Exterminating Co. v. Foti, 302 So. 2d 593, 597 (La. 1974) (holding on-the-job training such as employee sales and training meetings, and training courses in the administrative needs of the employer itself, cannot be considered the sort of training that is protectible pursuant to (former) Louisiana Revised Statutes section 23:921, which requires investment in "substantial" sums for "special" training or extensive advertising of the employee); Educ. for Living Seminars, Inc. v. Leone, 558 So. 2d 250, 254 (La. Ct. App. 1990) (holding restrictive covenant unenforceable despite employer outlay of $7900 in tuition for course related to employment, because money not spent on "special training," but instead on advanced skills in an area - leading seminars - where employee was already skilled).
61. See Anthony W. Kraus, Repayment Agreements for Employee Training Costs, 44 LAB. L.J. 49, 50-52 (1993) (reviewing cases in which courts have enforced training-cost repayment agreements).
62. See Brunner v. Hand Indus., Inc., 603 N.E.2d 157, 160-61 (Ind. Ct. App. 1992).
63. See Christopher T. Wonnell, The Contractual Disempowerment of Employees, 46 STAN. L. REV. 87, 108-10 (describing how employees' inability to commit themselves to employer for some period into the future disempowers employees because it makes employers either unwilling to hire them or willing to hire them only at a depressed wage).
64. See Stewart E. Sterk, Restraints on Alienation of Human Capital, 79 VA. L. REV. 383, 454-56 (1993) (arguing that the inalienability of human capital is inegalitarian because the young and the talented are its principal beneficiaries).
65. E.g., Phillip J. Closius & Henry M. Schaffer, Involuntary Nonservitude: The Current Judicial Enforcement of Employee Covenants Not to Compete - a Proposal for Reform, 57 S. CAL. L. REV. 531, 548-49 (1984).
66. See supra note 6; see also Harvey J. Goldschmid, Antitrust's Neglected Stepchild: A Proposal for Dealing with Restrictive Covenants Under Federal Law, 73 COLUM. L. REV. 1193, 1204-07 (arguing restrictive covenants give employers too much control over competition within their industry, and they should therefore be subject to federal antitrust laws); Rubin & Shedd, supra note 2; Charles A. Sullivan, Revisiting the "Neglected Stepchild": An Antitrust Treatment of Postemployment Restraints of Trade, 1977 U. ILL. L. F. 621, 647-50 (arguing courts should expand the applicability of antitrust law to examine more explicitly the market impact of postemployment restraints on trade).
67. See supra note 6; see also Harvey J. Goldschmid, Antitrust's Neglected Stepchild: A Proposal for Dealing with Restrictive Covenants Under Federal Law, 73 COLUM. L. REV. 1193, 1204-07 (arguing restrictive covenants give employers too much control over competition within their industry, and they should therefore be subject to federal antitrust laws); Rubin & Shedd, supra note 2; Charles A. Sullivan, Revisiting the "Neglected Stepchild": An Antitrust Treatment of Postemployment Restraints of Trade, 1977 U. ILL. L. F. 621, 647-50 (arguing courts should expand the applicability of antitrust law to examine more explicitly the market impact of postemployment restraints on trade).
68. See supra note 6; see also Harvey J. Goldschmid, Antitrust's Neglected Stepchild: A Proposal for Dealing with Restrictive Covenants Under Federal Law, 73 COLUM. L. REV. 1193, 1204-07 (arguing restrictive covenants give employers too much control over competition within their industry, and they should therefore be subject to federal antitrust laws); Rubin & Shedd, supra note 2; Charles A. Sullivan, Revisiting the "Neglected Stepchild": An Antitrust Treatment of Postemployment Restraints of Trade, 1977 U. ILL. L. F. 621, 647-50 (arguing courts should expand the applicability of antitrust law to examine more explicitly the market impact of postemployment restraints on trade).
69. See MICHAEL J. TREBILCOCK, THE COMMON LAW OF RESTRAINT OF TRADE: A LEGAL AND ECONOMIC ANALYSIS 120-23 (1986); Maureen Callahan, Comment, Post-Employment Restraint Agreements: A Reassessment, 52 U. CHI. L. REV. 703, 715, 718 (1985); York Moody Faulkner, Comment, A Market Analysis of Anticompetition Agreements in Labor Contracts, 1991 BYU L. REV. 1657, 1675-76 (1991).
70. See MICHAEL J. TREBILCOCK, THE COMMON LAW OF RESTRAINT OF TRADE: A LEGAL AND ECONOMIC ANALYSIS 120-23 (1986); Maureen Callahan, Comment, Post-Employment Restraint Agreements: A Reassessment, 52 U. CHI. L. REV. 703, 715, 718 (1985); York Moody Faulkner, Comment, A Market Analysis of Anticompetition Agreements in Labor Contracts, 1991 BYU L. REV. 1657, 1675-76 (1991).
71. See MICHAEL J. TREBILCOCK, THE COMMON LAW OF RESTRAINT OF TRADE: A LEGAL AND ECONOMIC ANALYSIS 120-23 (1986); Maureen Callahan, Comment, Post-Employment Restraint Agreements: A Reassessment, 52 U. CHI. L. REV. 703, 715, 718 (1985); York Moody Faulkner, Comment, A Market Analysis of Anticompetition Agreements in Labor Contracts, 1991 BYU L. REV. 1657, 1675-76 (1991).
72. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
73. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
74. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
75. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
76. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
77. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
78. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple, rather than bilateral, monopoly. Id. If the more powerful party is the firm, it may find it privately rational to pay a wage below that which will elicit maximal productivity from workers (because the surplus captured may exceed the returns from paying higher wages). Id. This outcome, argues Gottesman, may be suboptimal from a societal standpoint and may justify laws such as the NLRA that are designed to equalize bargaining power between parties. Id.
79. See, e.g., Benjamin Klein, Transaction Cost Determinants of "Unfair" Contractual Arrangements, 70 AM. ECON. REV. 356, 360-61 (1980) (stating contracts facially appearing one-sided may contain a counterweight in the form of implicit, or reputationally driven, checks on opportunistic behavior); Stewart J. Schwab, The Law and Economics Approach to Workplace Regulation, in GOVERNMENT REGULATIONOFTHE EMPLOYMENT RELATIONSHIP 91, 111-13 (Bruce E. Kaufman ed., 1997) (stating numerous forms of transaction costs may justify intervention, but inequality of bargaining power is not one of them); Michael L. Wachter & Randall D. Wright, The Economics of Internal Labor Markets, 29 INDUS. REL. 240, 254-55 (1990) (arguing that despite certain efficiency justifications for unions, defending inalienable entitlements under the National Labor Relations Act ("NLRA") in the name of failures of bargaining power, while perhaps sensible in the 1930s, seems strained today). But see Michael H. Gottesman, Wither Goest Labor Law: Law and Economics in the Workplace, 100 YALE L.J. 2767, 2787 (1991) (reviewing PAUL C. WEILER, GOVERNING THE WORKPLACE: THE FUTURE OF LABOR AND EMPLOYMENT LAW (1990)), who argues that the characterization of the employment relation as a bilateral monopoly collapses if one party is more powerful than the other. Assuming the existence of surplus due to asset specificity, one party may be able to extract more of the surplus than the other, effectively rendering the relationship a simple,
80. See, e.g., TREBILCOCK, supra note 51, at 135-39, 143 (expressing skepticism that employer monopsony power, if it existed, would manifest itself in a restrictive covenant disadvantageous to the employee); Callahan, supra note 51, at 715-23 (asserting that many employees who sign postemployment restraints are likely to be inventors who possess considerable bargaining power); Kitch, supra note 9, at 686-88 (stating that courts do not distinguish between sophisticated and unsophisticated employees, making the bargaining power criterion suspect; moreover, parties can always renegotiate); Sterk, supra note 48, at 406-08 (arguing that the anticompetitive effect of restrictive covenants will be insignificant); William H. White, "Common Callings" and the Enforcement of Postemployment Covenants in Texas, 19 ST. MARY'S L.J. 589, 596-98 (1988) (arguing that duress and unconscionability are valid mechanisms for protecting employees from restrictive covenants, but a covenant cannot be invalidated simply because unequal bargaining power exists).
81. See, e.g., TREBILCOCK, supra note 51, at 135-39, 143 (expressing skepticism that employer monopsony power, if it existed, would manifest itself in a restrictive covenant disadvantageous to the employee); Callahan, supra note 51, at 715-23 (asserting that many employees who sign postemployment restraints are likely to be inventors who possess considerable bargaining power); Kitch, supra note 9, at 686-88 (stating that courts do not distinguish between sophisticated and unsophisticated employees, making the bargaining power criterion suspect; moreover, parties can always renegotiate); Sterk, supra note 48, at 406-08 (arguing that the anticompetitive effect of restrictive covenants will be insignificant); William H. White, "Common Callings" and the Enforcement of Postemployment Covenants in Texas, 19 ST. MARY'S L.J. 589, 596-98 (1988) (arguing that duress and unconscionability are valid mechanisms for protecting employees from restrictive covenants, but a covenant cannot be invalidated simply because unequal bargaining power exists).
82. See, e.g., TREBILCOCK, supra note 51, at 135-39, 143 (expressing skepticism that employer monopsony power, if it existed, would manifest itself in a restrictive covenant disadvantageous to the employee); Callahan, supra note 51, at 715-23 (asserting that many employees who sign postemployment restraints are likely to be inventors who possess considerable bargaining power); Kitch, supra note 9, at 686-88 (stating that courts do not distinguish between sophisticated and unsophisticated employees, making the bargaining power criterion suspect; moreover, parties can always renegotiate); Sterk, supra note 48, at 406-08 (arguing that the anticompetitive effect of restrictive covenants will be insignificant); William H. White, "Common Callings" and the Enforcement of Postemployment Covenants in Texas, 19 ST. MARY'S L.J. 589, 596-98 (1988) (arguing that duress and unconscionability are valid mechanisms for protecting employees from restrictive covenants, but a covenant cannot be invalidated simply because unequal bargaining power exists).
83. See, e.g., TREBILCOCK, supra note 51, at 135-39, 143 (expressing skepticism that employer monopsony power, if it existed, would manifest itself in a restrictive covenant disadvantageous to the employee); Callahan, supra note 51, at 715-23 (asserting that many employees who sign postemployment restraints are likely to be inventors who possess considerable bargaining power); Kitch, supra note 9, at 686-88 (stating that courts do not distinguish between sophisticated and unsophisticated employees, making the bargaining power criterion suspect; moreover, parties can always renegotiate); Sterk, supra note 48, at 406-08 (arguing that the anticompetitive effect of restrictive covenants will be insignificant); William H. White, "Common Callings" and the Enforcement of Postemployment Covenants in Texas, 19 ST. MARY'S L.J. 589, 596-98 (1988) (arguing that duress and unconscionability are valid mechanisms for protecting employees from restrictive covenants, but a covenant cannot be invalidated simply because unequal bargaining power exists).
84. See, e.g., TREBILCOCK, supra note 51, at 135-39, 143 (expressing skepticism that employer monopsony power, if it existed, would manifest itself in a restrictive covenant disadvantageous to the employee); Callahan, supra note 51, at 715-23 (asserting that many employees who sign postemployment restraints are likely to be inventors who possess considerable bargaining power); Kitch, supra note 9, at 686-88 (stating that courts do not distinguish between sophisticated and unsophisticated employees, making the bargaining power criterion suspect; moreover, parties can always renegotiate); Sterk, supra note 48, at 406-08 (arguing that the anticompetitive effect of restrictive covenants will be insignificant); William H. White, "Common Callings" and the Enforcement of Postemployment Covenants in Texas, 19 ST. MARY'S L.J. 589, 596-98 (1988) (arguing that duress and unconscionability are valid mechanisms for protecting employees from restrictive covenants, but a covenant cannot be invalidated simply because unequal bargaining power exists).
85. See Callahan, supra note 51, at 721-22.
86. TREBILCOCK, supra note 51, at 147; Callahan, supra note 51, at 714-15. Callahan further argues that even if the employer did have market dominance, allowing it to enforce postemployment restraints would not imply that the agreement was anticompetitive. Any costs resulting from allowing a dominant market player to prolong its dominance by eliminating competitors would be offset by gains resulting from encouragement of investment in research and training. Id. at 715.
87. TREBILCOCK, supra note 51, at 147; Callahan, supra note 51, at 714-15. Callahan further argues that even if the employer did have market dominance, allowing it to enforce postemployment restraints would not imply that the agreement was anticompetitive. Any costs resulting from allowing a dominant market player to prolong its dominance by eliminating competitors would be offset by gains resulting from encouragement of investment in research and training. Id. at 715.
88. See supra text accompanying notes 30-37.
89. E.g., Callahan, supra note 51, at 725-27.
90. See, e.g., Faulkner, supra note 51, at 1677-78. Faulkner advocates a two-part test in which the court assesses whether, at the time of contracting, the market was competitive and the employee had full information: judged, respectively, by whether the employee was qualified for other acceptable jobs, and whether a reasonable person similarly situated would have entered into the anticompetition agreement at the same wage. Id. Although the author does not label it as such, this proposed test is functionally similar to the test for unconscionability, which itself may take into account monopoly power and information asymmetry in assessing procedural fairness. In contrast to the usual application of unconscionability doctrine, however, the author recommends reformation, rather than invalidation, of covenants that fail the test. Id.
91. GARY S. BECKER, HUMAN CAPITAL: A THEORETICAL AND EMPIRICAL ANALYSIS WITH SPECIAL REFERENCE TO EDUCATION 40 (3d ed. 1993). See also the classic article by Jacob Mincer, On-the-Job Training: Costs, Returns, and Some Implications, 70 J. POL. ECON. 50 (1962). Human capital is the investment, embodied in a person, in human resources expected to improve productivity. It includes schooling, on-the-job experience, and skills training. See BECKER, supra, at 29-58 (describing the various types of human capital). The discussion herein focuses almost exclusively on on-the-job experience and training.
92. GARY S. BECKER, HUMAN CAPITAL: A THEORETICAL AND EMPIRICAL ANALYSIS WITH SPECIAL REFERENCE TO EDUCATION 40 (3d ed. 1993). See also the classic article by Jacob Mincer, On-the-Job Training: Costs, Returns, and Some Implications, 70 J. POL. ECON. 50 (1962). Human capital is the investment, embodied in a person, in human resources expected to improve productivity. It includes schooling, on-the-job experience, and skills training. See BECKER, supra, at 29-58 (describing the various types of human capital). The discussion herein focuses almost exclusively on on-the-job experience and training.
93. GARY S. BECKER, HUMAN CAPITAL: A THEORETICAL AND EMPIRICAL ANALYSIS WITH SPECIAL REFERENCE TO EDUCATION 40 (3d ed. 1993). See also the classic article by Jacob Mincer, On-the-Job Training: Costs, Returns, and Some Implications, 70 J. POL. ECON. 50 (1962). Human capital is the investment, embodied in a person, in human resources expected to improve productivity. It includes schooling, on-the-job experience, and skills training. See BECKER, supra, at 29-58 (describing the various types of human capital). The discussion herein focuses almost exclusively on on-the-job experience and training.
94. See BECKER, supra note 59, at 33-40 (describing the ideas summarized in this paragraph).
95. Federal law makes this more difficult at the low end of the wage scale. The Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 206(g) (Supp. IV 1998), permits explicitly reduced "training wages" in only a limited range of circumstances. For example, employers are permitted to pay employees under the age of twenty an "opportunity wage," that is, a wage of $4.25 per hour (which is below the federal minimum wage) for the first ninety days of employment. Id. § 206(g)(1). The FLSA similarly permits below-minimum wages for learners, apprentices, and messengers, but only under certain limited circumstances specified in the regulations. Id. § 214(a) (1994).
96. See, e.g., Blake, supra note 20, at 652; Kitch, supra note 9, at 685.
97. See, e.g., Blake, supra note 20, at 652; Kitch, supra note 9, at 685.
98. See, e.g., TREBILCOCK, supra note 51; Callahan, supra note 51; Faulkner, supra note 51; Edward M. Schulman, An Economic Analysis of Employee Noncompetition Agreements, 69 DENV. U. L. REV. 97 (1992).
99. See, e.g., TREBILCOCK, supra note 51; Callahan, supra note 51; Faulkner, supra note 51; Edward M. Schulman, An Economic Analysis of Employee Noncompetition Agreements, 69 DENV. U. L. REV. 97 (1992).
100. See, e.g., TREBILCOCK, supra note 51; Callahan, supra note 51; Faulkner, supra note 51; Edward M. Schulman, An Economic Analysis of Employee Noncompetition Agreements, 69 DENV. U. L. REV. 97 (1992).
101. See, e.g., TREBILCOCK, supra note 51; Callahan, supra note 51; Faulkner, supra note 51; Edward M. Schulman, An Economic Analysis of Employee Noncompetition Agreements, 69 DENV. U. L. REV. 97 (1992).
102. BECKER, supra note 59, at 40-51 (discussing the concept of specific training).
103. Id. at 43.
104. See Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297, 298 (1978) (elaborating the concept of quasi rents, defined as the excess of the value of an asset over its salvage value, that is, the value of its next best use to another renter); see also, WILLIAMSON, supra note 3, at 242.
105. See Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297, 298 (1978) (elaborating the concept of quasi rents, defined as the excess of the value of an asset over its salvage value, that is, the value of its next best use to another renter); see also, WILLIAMSON, supra note 3, at 242.
106. See WILLIAMSON, supra note 3, at 243 (arguing that the unexpected severing of a relationship in which there is asset specificity can nonetheless occur and lead to loss of value; for this reason, organizational features must be crafted with care towards preserving these assets); Klein et al., supra note 66, at 298.
107. See WILLIAMSON, supra note 3, at 243 (arguing that the unexpected severing of a relationship in which there is asset specificity can nonetheless occur and lead to loss of value; for this reason, organizational features must be crafted with care towards preserving these assets); Klein et al., supra note 66, at 298.
108. The combination of implicit and explicit contracts designed to reduce transaction costs in the employment relationship is otherwise known as an internal labor market. See Wachter & Wright, supra note 52, at 252-53, 256-57 (stating that an internal labor market contemplates long-term relationships between the parties in which the desire to avoid disruption of the relationship or retaliation dampens incentives to engage in opportunistic behavior); see also Edward B. Rock & Michael L. Wachter, The Enforceability of Norms and the Employment Relationship, 144 U. PA. L. REV. 1913, 1921-27 (1996) (describing the mechanisms by which internal labor markets dampen incentives for opportunistic behavior).
109. The combination of implicit and explicit contracts designed to reduce transaction costs in the employment relationship is otherwise known as an internal labor market. See Wachter & Wright, supra note 52, at 252-53, 256-57 (stating that an internal labor market contemplates long-term relationships between the parties in which the desire to avoid disruption of the relationship or retaliation dampens incentives to engage in opportunistic behavior); see also Edward B. Rock & Michael L. Wachter, The Enforceability of Norms and the Employment Relationship, 144 U. PA. L. REV. 1913, 1921-27 (1996) (describing the mechanisms by which internal labor markets dampen incentives for opportunistic behavior).
110. BECKER, supra note 59, at 43-44.
111. See generally Klein, supra note 52.
112. Klein et al., supra note 66, at 316.
113. See Klein et al., supra note 66, at 305 (assuming adequate information about when and how severely a contract will be broken, if the short-run gains from opportunism are inadequate to offset the present value of foregone future returns to reputational capital, the transaction will not occur). This also assumes the firm transacts with multiple similarly situated workers and that there is communication among them.
114. MARGARET M. BLAIR, OWNERSHIP AND CONTROL: RETHINKING CORPORATE GOVERNANCE FOR THE TWENTY-FIRST CENTURY 259 (1995).
115. But see Hyde, High-Velocity, supra note 8, at 31-32, who argues that in a tight-knit regional economy such as Silicon Valley, reputational sanctions may be quite salient. In his case study, however, Hyde argues that the reputational sanctions may cut in the direction of disfavoring litigation to protect intellectual property embedded in human capital, even when based on potentially legitimate claims.
116. Id. at 32.
117. Due to the fear of liability, firms may be increasingly reluctant to provide detailed references. See, e.g., Robert S. Adler & Ellen R. Peirce, Encouraging Employers to Abandon Their "No Comment" Policies Regarding Job References: A Reform Proposal, 53 WASH. & LEE L. REV. 1381, 1387-88 (1996) (reviewing empirical literature showing that employers are reluctant to provide references, or provide overly positive references, for fear of lawsuits by former employees); Checking References of Applicants is Risky Business but Necessary Step, 17 HUM. RESOURCES REP. (BNA) 145 (Feb. 15, 1999) (giving anecdotal accounts of employer reluctance to give references for fear of liability for defamation or discrimination); J. Hoult Verkerke, Legal Regulation of Employment Reference Practices, 65 U. CHI. L. REV. 115, 141 (1998) (mentioning employers' notorious reluctance to give candid assessments of former employees when providing references).
118. Due to the fear of liability, firms may be increasingly reluctant to provide detailed references. See, e.g., Robert S. Adler & Ellen R. Peirce, Encouraging Employers to Abandon Their "No Comment" Policies Regarding Job References: A Reform Proposal, 53 WASH. & LEE L. REV. 1381, 1387-88 (1996) (reviewing empirical literature showing that employers are reluctant to provide references, or provide overly positive references, for fear of lawsuits by former employees); Checking References of Applicants is Risky Business but Necessary Step, 17 HUM. RESOURCES REP. (BNA) 145 (Feb. 15, 1999) (giving anecdotal accounts of employer reluctance to give references for fear of liability for defamation or discrimination); J. Hoult Verkerke, Legal Regulation of Employment Reference Practices, 65 U. CHI. L. REV. 115, 141 (1998) (mentioning employers' notorious reluctance to give candid assessments of former employees when providing references).
119. Due to the fear of liability, firms may be increasingly reluctant to provide detailed references. See, e.g., Robert S. Adler & Ellen R. Peirce, Encouraging Employers to Abandon Their "No Comment" Policies Regarding Job References: A Reform Proposal, 53 WASH. & LEE L. REV. 1381, 1387-88 (1996) (reviewing empirical literature showing that employers are reluctant to provide references, or provide overly positive references, for fear of lawsuits by former employees); Checking References of Applicants is Risky Business but Necessary Step, 17 HUM. RESOURCES REP. (BNA) 145 (Feb. 15, 1999) (giving anecdotal accounts of employer reluctance to give references for fear of liability for defamation or discrimination); J. Hoult Verkerke, Legal Regulation of Employment Reference Practices, 65 U. CHI. L. REV. 115, 141 (1998) (mentioning employers' notorious reluctance to give candid assessments of former employees when providing references).
120. Here, though, a familiar litany of new avenues for opportunism crops up. It may be difficult, for example, to draft a contract that reflects all future contingencies. Complexity, bounded rationality, and lack of complete information may result in explicit contracts having inaccurate, vague, or open terms, leading to downstream opportunism in the course of parties' attempts to fill gaps in and/or enforce the agreement. See OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS 66-67 (1975); Klein, supra note 52, at 357 (stating "[t]he size of the hold up potential is a multiplicative function of two factors: the presence of specific capital, that is, appropriable quasi-rents, and the cost of contractually specifying and enforcing delivery of the service in question").
121. Here, though, a familiar litany of new avenues for opportunism crops up. It may be difficult, for example, to draft a contract that reflects all future contingencies. Complexity, bounded rationality, and lack of complete information may result in explicit contracts having inaccurate, vague, or open terms, leading to downstream opportunism in the course of parties' attempts to fill gaps in and/or enforce the agreement. See OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS 66-67 (1975); Klein, supra note 52, at 357 (stating "[t]he size of the hold up potential is a multiplicative function of two factors: the presence of specific capital, that is, appropriable quasi-rents, and the cost of contractually specifying and enforcing delivery of the service in question").
122. Rubin & Shedd, supra note 2, at 99.
123. TREBILCOCK, supra note 51, at 148.
124. Rubin & Shedd, supra note 2, at 96-97.
125. Id. at 98-99.
126. Id. at 99.
127. Id. at 97-98.
128. Id. at 101-02.
129. Id. at 103-07.
130. Id. at 105-07.
131. Id. at 104.
132. Id. at 107.
133. Professor Kitch speculates that in the case of covenants prohibiting postemployment use of trade secrets, the requirement of evidence of employer investment in secrecy can be rationalized as a surrogate for a visible symbol informing employees of the intention that the information be kept secret. Kitch, supra note 9, at 698-99.
134. Blake's classic article pointed out the central problem of distinguishing between trade secrets or confidential information embodied in human capital and an employee's nonconfidential training: "In modern laboratories, design centers, and planning conferences, where do trade secrets begin and the employee's intellectual tools of the trade end?" Blake, supra note 20, at 668.
135. 603 N.E.2d 157 (Ind. Ct. App. 1992).
136. Id. at 158-59.
137. Id. at 159.
138. Id. at 158-59.
139. Id. at 159.
140. Id. at 158-59.
141. Id. at 160-61.
142. Id. at 160.
143. Id.
144. Rubin & Shedd, supra note 2, at 107.
145. TREBILCOCK, supra note 51, at 147.
146. Id. at 147.
147. Id. at 147-48. Trebilcock assumes that if the market is workably competitive, restrictions on postemployment competition will have a trivial effect on the market in question, and the case for enforcement is weak.
148. Id. at 148.
149. Id. at 149. More generally, where it is ambiguous whether customer relations and other informational assets constitute a protectible interest, the employer would bear the burden of quantifying damages caused by the competing former employee in excess of the competitive threat already presented by business rivals. Id. Even where the existence of a protectible interest is unambiguous, Trebilcock would relax the presumption of injunctive relief, shifting to a liability rule where, prima facie, the costs imposed on the employee by the injunction outweigh the likely benefits of enforcement to the employer. Here, too, the employer would bear the burden of proving its actual damages, which, once determined, would essentially serve as a judicially-facilitated "buy-out" option for the employee. Trebilcock assumes that this method would get around some of the difficulties parties may have in striking Coasean bargains on their own. Id. at 150.
150. Researchers have only recently begun to tackle the difficult methodological problem of testing the training-wage hypothesis, with mixed results. See, e.g., Jonathan R. Veum, Training, Wages, and the Human Capital Model, 65 S. ECON. J. 526, 533-36 (1999) (showing that data from the National Longitudinal Survey of Youth reflects an inverse relationship between formal initial training and starting wage, as predicted by the human-capital model). But see Daniel Parent, Wages and Mobility: The Impact of Employer-Provided Training, 17 J. LAB. ECON. 298, 309-13 (1999) (using the same data set, finding that the inverse correlation exists only for very early training; there is no evidence that wages are reduced while workers are being trained in later years).
151. Researchers have only recently begun to tackle the difficult methodological problem of testing the training-wage hypothesis, with mixed results. See, e.g., Jonathan R. Veum, Training, Wages, and the Human Capital Model, 65 S. ECON. J. 526, 533-36 (1999) (showing that data from the National Longitudinal Survey of Youth reflects an inverse relationship between formal initial training and starting wage, as predicted by the human-capital model). But see Daniel Parent, Wages and Mobility: The Impact of Employer-Provided Training, 17 J. LAB. ECON. 298, 309-13 (1999) (using the same data set, finding that the inverse correlation exists only for very early training; there is no evidence that wages are reduced while workers are being trained in later years).
152. Trebilcock acknowledges these difficulties, but argues that unless courts "engage in these kinds of inquiries, then they are driven back to the elusive and at least as indeterminate distinctions between personal skills of the employee and specialized employer know-how, and between personal skills and customer connections." TREBILCOCK, supra note 51, at 139. My point of departure with Trebilcock is on the question of whether rejecting his technically demanding rule renders the existing rule the only viable alternative. As I will discuss momentarily, I believe there are still other approaches worth exploring.
153. In the context of collective bargaining law, for example, some scholars have fruitfully applied transaction-cost analysis to defend imposition of penalties on parties who act strategically to appropriate rents fromjoint surplus. Kenneth Dau-Schmidt, in whose honor this symposium is held, has argued persuasively that collective bargaining rules on bargaining in good faith should be strictly enforced if we believe that the NLRA is in large part designed to regulate wasteful strategic rent-seeking between parties. See Kenneth G. Dau-Schmidt, A Bargaining Analysis of American Labor Law and the Search for Bargaining Equity and Industrial Peace, 91 MICH. L. REV. 419, 498-99 (1990). Although this makes good sense in the context of the more ritual, formalized bargaining process we expect under the NLRA, the question of what constitutes bad faith may prove more elusive in the present context.
154. See supra text accompanying notes 9-16.
155. See generally Robert G. Bone, A New Look at Trade Secret Law: Doctrine in Search of a Justification, 86 CAL. L. REV. 241, 304 (1998) ("Focusing on contract principles will direct courts toward the proper issues and away from open-ended inquiries into poorly defined standards of commercial morality. Intellectual property will be the better for the change.").
156. I should note that a rule requiring analysis that exceeds judges' competency is not necessarily bad. See, e.g., Gillian K. Hadfield, Judicial Competence and the Interpretation of Incomplete Contracts, 23 J. LEGAL STUD. 159 (1994). Hadfield argues that in the area of contracts in which mutuality is satisfied by an obligation of "good faith," such as long-term requirements or supply contracts, a standard may be preferable to a bright-line rule even though it may be beyond some judges' competence to apply a standard assessing good faith and fair dealing. Id. at 163-64. The reason is that bright-line rules will lead potential defendants to overcomply with the established categorical rule, and the costs of overcompliance may outweigh the costs of undercompliance that would occur in absence of judicial enforcement. Id. at 164.
157. I should note that a rule requiring analysis that exceeds judges' competency is not necessarily bad. See, e.g., Gillian K. Hadfield, Judicial Competence and the Interpretation of Incomplete Contracts, 23 J. LEGAL STUD. 159 (1994). Hadfield argues that in the area of contracts in which mutuality is satisfied by an obligation of "good faith," such as long-term requirements or supply contracts, a standard may be preferable to a bright-line rule even though it may be beyond some judges' competence to apply a standard assessing good faith and fair dealing. Id. at 163-64. The reason is that bright-line rules will lead potential defendants to overcomply with the established categorical rule, and the costs of overcompliance may outweigh the costs of undercompliance that would occur in absence of judicial enforcement. Id. at 164.
158. I should note that a rule requiring analysis that exceeds judges' competency is not necessarily bad. See, e.g., Gillian K. Hadfield, Judicial Competence and the Interpretation of Incomplete Contracts, 23 J. LEGAL STUD. 159 (1994). Hadfield argues that in the area of contracts in which mutuality is satisfied by an obligation of "good faith," such as long-term requirements or supply contracts, a standard may be preferable to a bright-line rule even though it may be beyond some judges' competence to apply a standard assessing good faith and fair dealing. Id. at 163-64. The reason is that bright-line rules will lead potential defendants to overcomply with the established categorical rule, and the costs of overcompliance may outweigh the costs of undercompliance that would occur in absence of judicial enforcement. Id. at 164.
159. See supra text accompanying notes 51-58.
160. See supra note 75 (discussing various avenues for opportunism in the drafting and enforcement of long-term contracts).
161. Mark Romaniuk, an attorney with the Indianapolis law firm of McHale, Cook & Welch, in his commentary on my paper at this Symposium, also described the following practice used by some firms. When an employee commences employment, the employee signs an off-the-rack covenant that would likely be deemed overbroad if tested in court. Upon separation, the employer gives the employee a letter modifying the covenant so that it is more narrowly tailored to the particular employee's appropriable skills and the scope of the external market for those skills. In this way, the employer reduces the likelihood that the covenant will be invalidated if enforced. If the employee lacks information about the law or is unable to predict the circumstances of his departure, he may not have adjusted his wage demands to offset the overbroad covenant, and during the time of employment, may have operated under the belief that his freedom to seek alternative employment was more constrained than it actually was.
162. See supra text accompanying notes 80-82.
163. See Terry R. Boesch, What's Really at Issue in Restrictive Covenant Litigation: A Commentary Inspired by Staidl, 2 EMPLOYEE RTS. & EMP. POL'Y J. 439, 439-42 (1998) (arguing that employers may use the procedural devices associated with an injunction in a strategic fashion; for example, using an ex parte restraining order to restrict an employee's mobility pending consideration of the request for a permanent injunction, during which time the employee may suffer reputational losses).
164. See TREBILCOCK, supra note 51, at 141-42.
165. See supra note 20. California's statute does not expressly exempt restrictive covenants that protect trade secrets, but courts have interpreted it as leaving room for such contracts. See, e.g., Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1043 (N.D. Cal. 1990) (acknowledging judicial recognition in California of an exception to the prohibition on enforcement of restrictive covenants where trade secrets are being protected).
166. See, e.g., Gilson, supra note 8; Hyde, High-Velocity, supra note 8; Hyde, Wealth, supra note 8.
167. See, e.g., Gilson, supra note 8; Hyde, High-Velocity, supra note 8; Hyde, Wealth, supra note 8.
168. See, e.g., Gilson, supra note 8; Hyde, High-Velocity, supra note 8; Hyde, Wealth, supra note 8.
169. Gilson, supra note 8, at 608-09; Hyde, High-Velocity, supra note 8, at 29.
170. Gilson, supra note 8, at 608-09; Hyde, High-Velocity, supra note 8, at 29.
171. Gilson, supra note 8, at 600-01; Hyde, High-Velocity, supra note 8, at 31-32.
172. Gilson, supra note 8, at 600-01; Hyde, High-Velocity, supra note 8, at 31-32.
173. Gilson, supra note 8, at 627-29 (cautioning that the success of the Silicon Valley experience may depend on the characteristics of regional industrial infrastructure); Hyde, High- Velocity, supra note 8, at 33-37 (recommending additional empirical research on the generalizability of the Silicon Valley phenomenon).
174. Gilson, supra note 8, at 627-29 (cautioning that the success of the Silicon Valley experience may depend on the characteristics of regional industrial infrastructure); Hyde, High-Velocity, supra note 8, at 33-37 (recommending additional empirical research on the generalizability of the Silicon Valley phenomenon).
175. See CAPPELLI, supra note 6, at 182-87, 198-200. Cappelli speculates that firms are reducing investments in training employees because poaching has become increasingly prevalent in American industry. He gives as examples: Ernst & Young's poaching a team of ninety employees from Coopers & Lybrand and the German electronics firm Siemans, which set up a high training-investment firm in the U.S., only to conclude that it had become the training outfit for local companies, and subsequently changed its strategy to providing less-extensive training.
176. See Anthony P. Carnevale & Donna Desrochers, Training in the Dilbert Economy, 53 TRAINING & DEV. 32, 34 (1999) (noting that opportunities for lifelong learning within a particular firm are declining); Laura Dresser & Joel Rogers, Sectoral Strategies of Labor Market Reform: Emerging Evidence from the U.S., in VOCATIONAL AND ADULT EDUCATION IN EUROPE 269, 278 (Fons van Wieringen ed., 1999) (describing the classic prisoners' dilemma whereby individually rational firms, each fearing that others will free ride on their efforts, will collectively underinvest in training). But see Margaret Olesen, What Makes Employees Stay?, 53 TRAINING & DEV. 48 (1999) (arguing that training can be a retention strategy).
177. See Anthony P. Carnevale & Donna Desrochers, Training in the Dilbert Economy, 53 TRAINING & DEV. 32, 34 (1999) (noting that opportunities for lifelong learning within a particular firm are declining); Laura Dresser & Joel Rogers, Sectoral Strategies of Labor Market Reform: Emerging Evidence from the U.S., in VOCATIONAL AND ADULT EDUCATION IN EUROPE 269, 278 (Fons van Wieringen ed., 1999) (describing the classic prisoners' dilemma whereby individually rational firms, each fearing that others will free ride on their efforts, will collectively underinvest in training). But see Margaret Olesen, What Makes Employees Stay?, 53 TRAINING & DEV. 48 (1999) (arguing that training can be a retention strategy).
178. See Anthony P. Carnevale & Donna Desrochers, Training in the Dilbert Economy, 53 TRAINING & DEV. 32, 34 (1999) (noting that opportunities for lifelong learning within a particular firm are declining); Laura Dresser & Joel Rogers, Sectoral Strategies of Labor Market Reform: Emerging Evidence from the U.S., in VOCATIONAL AND ADULT EDUCATION IN EUROPE 269, 278 (Fons van Wieringen ed., 1999) (describing the classic prisoners' dilemma whereby individually rational firms, each fearing that others will free ride on their efforts, will collectively underinvest in training). But see Margaret Olesen, What Makes Employees Stay?, 53 TRAINING & DEV. 48 (1999) (arguing that training can be a retention strategy).
179. See Laurie J. Bassi et al., Measuring Corporate Investments in Human Capital, in THE NEW RELATIONSHIP: HUMAN CAPITAL IN THE AMERICAN CORPORATION 368-70 (Margaret M. Blair & Thomas A. Kochan eds., 2000) (suggesting that the market systematically undersupplies information about the returns to human-capital investments).
180. Some scholars also suggest that firms may formalize the sharing of human-capital investments through training consortia. See Peter Cappelli, A Market-Driven Approach to Retaining Talent, 78 HARV. BUS. REV. 103, 111 (2000) (describing U.S. examples of private-training consortia); Kenneth G. Dau-Schmidt, Employment in the New Age of Trade and Technology: Implications for Labor and Employment Law, 76 IND. L.J. 1, 18-20 (2001) (advocating government-supported multiemployer training programs, financed by a payroll tax, that would coordinate employees' careers among multiple employers while also solving the collective action problem that creates disincentives to train a mobile workforce); Dresser & Rogers, supra note 116, at 278 (describing public and private training consortia in Europe).
181. Some scholars also suggest that firms may formalize the sharing of human-capital investments through training consortia. See Peter Cappelli, A Market-Driven Approach to Retaining Talent, 78 HARV. BUS. REV. 103, 111 (2000) (describing U.S. examples of private- training consortia); Kenneth G. Dau-Schmidt, Employment in the New Age of Trade and Technology: Implications for Labor and Employment Law, 76 IND. L.J. 1, 18-20 (2001) (advocating government-supported multiemployer training programs, financed by a payroll tax, that would coordinate employees' careers among multiple employers while also solving the collective action problem that creates disincentives to train a mobile workforce); Dresser & Rogers, supra note 116, at 278 (describing public and private training consortia in Europe).
182. Some scholars also suggest that firms may formalize the sharing of human-capital investments through training consortia. See Peter Cappelli, A Market-Driven Approach to Retaining Talent, 78 HARV. BUS. REV. 103, 111 (2000) (describing U.S. examples of private- training consortia); Kenneth G. Dau-Schmidt, Employment in the New Age of Trade and Technology: Implications for Labor and Employment Law, 76 IND. L.J. 1, 18-20 (2001) (advocating government-supported multiemployer training programs, financed by a payroll tax, that would coordinate employees' careers among multiple employers while also solving the collective action problem that creates disincentives to train a mobile workforce); Dresser & Rogers, supra note 116, at 278 (describing public and private training consortia in Europe).
183. Forthorough and thoughtful discussions advocating models in this vein, see O'Malley, supra note 8, at 1233-39; Schulman, supra note 63, at 120.
184. Forthorough and thoughtful discussions advocating models in this vein, see O'Malley, supra note 8, at 1233-39; Schulman, supra note 63, at 120.
185. COLO. REV. STAT. ANN. § 8-2-113(2)(c) (West 1994). Note that the Colorado statute contains a limited number of other exceptions as well, including restrictive covenants executed as part of the sale of a business and covenants that protect trade secrets. Id. § 8-2-113(2)(a)-(b). These exceptions also exist in California statutory and judicial law.
186. For a discussion of the courts' inconsistent approach to enforcing agreements that protect training costs, see supra notes 38-46 and accompanying text.
187. In a forthcoming article, Eric Talley and I attempt to develop a model for how courts might adjudicate disputes involving mutual investments in less readily quantifiable kinds of information and training, such as trade secrets. We argue for relatively weak entitlements, favoring liability over property rules in most instances. See GILLIAN LESTER & ERIC TALLEY, TRADE SECRETS AND MUTUAL INVESTMENTS (Univ. S. Cal. Law Sch., Olin Working Paper, forthcoming 2001).