Protecting employer investment in training: Noncompetes vs. repayment agreements

Duke Law Journal

Volumn 54, Issue 5, 2005, Pages 1295-1320

  Long, Brandon S ^a  

^a NONE

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EID: 33747884229     PISSN: 00127086     EISSN: 00127086     Source Type: Journal    
DOI: None     Document Type: Review

References (168)

1. See PETER CAPPELLI, THE NEW DEAL AT WORK 1-16 (1999) (discussing economic factors driving change in employer-employee relations).
2. Traditionally, noncompete agreements restricted an employee from competing with an employer within a specified geographic region and for a finite term after the employment period ended. See generally Harlan M. Blake, Employee Agreements Not to Compete, 73 HARV. L. REV. 625 (1960) (defining noncompetition agreements and tracing the legal enforceability of noncompetes throughout English and American law).
3. See infra notes 33-34 and accompanying text.
4. See infra Part II.B.
5. LA. REV. STAT. ANN. § 23:921(A)(1) (West 2003).
6. Id. § 23:921(C).
7. Swat 24 Shreveport Bossier, Inc. v. Bond, 808 So.2d 294 (La. 2001).
8. See Jennifer A. Faroldi, What's Still Brewing in the 2003 Legislative Session?, LA. EMP. L. LETTER, June 2003, at 4 ("[Y]ou currently can't prevent former employees from working fora competing business.").
9. Swat 24, 808 So.2d at 296. The facts of the case are fairly straightforward. The employee had been promoted by the employer, a construction company, to the position of production manager, a status that required him to sign a noncompete agreement. The noncompete agreement had stipulated that the employee would not "serve as an officer, employee, director, agent or consultant of any business, which is in direct or indirect competition with" the employer. Id. at 296-97. In striking down this contract, the court examined the legislative records behind section 23:921 and concluded that the statute's legislative intent demanded that the exception in subsection (C) only applied to employees who establish their own competing businesses, not to employees who chose to work for already-existing competitors. Id. at 302-07.
10. Id.
11. Id. at 313 (Traylor, J., dissenting).
12. 2003 La. Sess. Law Serv. 428 (West).
13. This tension between the legislature and the courts is common in the area of noncompete law. In the late 1980s and early 1990s, the state of Texas endured a similar conflict. The Texas Supreme Court had interpreted the state's noncompete statute narrowly, refusing to enforce noncompetes against at-will employees. The Texas legislature followed this decision with a law specifically including at-will employees under the purview of the noncompete statute. For a detailed description of this conflict, see Katherine V.W. Stone, Knowledge at Work: Disputes over the Ownership of Human Capital in the Changing Workplace, 34 CONN. L. REV. 721, 744-46 (2002).
14. La. House Chamber Proceedings Day 20, Discussion of House Bill 1770 (May 7, 2003) (statement of Rep. Jack Smith), available at http:/house.louisiana.gov/ rmaiehive/2003/May2003.htm.
15. Id.
16. Id.
17. See id. ("Look at the company. They're going to make an investment in that individual, they're going to give him an education, they're going to train him . . . and all they want in return is 'don't compete against me for two years' . . . . I think it's a fair trade.").
18. See infra Part III.A.
19. See generally U.S. Dep't of Labor, Strategic Plan FY 2003-FY 2008 (2003) [hereinafter U.S. Dep't of Labor Plan] (describing the changing American workforce and the Department's goals for improving labor conditions), available at http://www.dol.goy/_sec/stratplan/main.him.
20. See U.S. Dep't of Labor, Report on the American Workforce 5 (2001) [hereinafter U.S. Dep't of Labor Report] (describing the twentieth-century innovations that have transformed the American workplace, including "[c]ommunication devices, measuring devices, computer controlled equipment, [and] the x-ray"), available at http://www.bis.gov/opub/rtaw/rtawhome.htm.
21. Id.
22. See id. at 6 (providing that men and women with college degrees earn almost two-thirds percent more than those with only high school degrees). This study also reports that in the year 2000 the unemployment rate for individuals with only a high school degree approached 4 percent, whereas the rate for college graduates approximated only 1.5 percent. Id. at 193.
23. U.S. Dep't of Labor Plan, supra note 19, at 3;
24. see also U.S. Dep't of Labor Report, supra note 20, at 3 ("Over the course of the 20th century, the composition of the labor force shifted from industries dominated by primary production occupations, such as farmers and foresters, to those dominated by professional, technical, and service workers.").
25. U.S. Dep't of Labor Plan, supra note 19, at 4.
26. See id. at 3 ("Increasingly, the majority of jobs will need workers who have acquired knowledge and skills via two-year colleges, vocational training, moderate to long-term on-the-job training, and real world experience.").
27. U.S. Dep't of Labor Report, supra note 20, at 6.
28. See also U.S. Dep't of Labor Plan, supra note 19, at 41 ("Knowledge workers now account for a third of the American workforce, outnumbering factory workers by two to one.").
29. See Stone, supra note 13, at 722 ("Employees see the growth of their human capital and the enhancement of their labor market opportunities as one of the benefits of the job. Jobs are often evaluated and selected on the basis of whether and how much opportunity for learning and skill enhancement are provided.").
30. CAPPELLI, supra note 1, at 24. The same study found that 47 percent of workers characterize their interest in professional development as "important." Id.
31. Many company Web sites, and especially those of professional service firms, tout their emphasis on employee training to help attract talented workers. See, e.g., AIG, Career Development, at http://www.aig.com/careers/ about_dev_frameset.htm (last visited June 19, 2005) (on file with the Duke Law Journal);
32. Bank of America, Team Bank of America, at http://www.bankofamerica.com/ teambank/index.cfm?template=tb_leaddev (last visited June 19, 2005) (on file with the Duke Law Journal);
33. McKinsey & Company, Broaden Your Career Options, at http://www.mckinsey.com/aboutus/careers/undergraduates/broadencareeroptions/ index.asp (last visited June 19, 2005) (on file with the Duke Law Journal).
34. King & Spalding LLP, K&S University, at http://www.kslaw.com/ training/training.asp (last visited June 19, 2005) (on file with the Duke Law Journal).
35. See, e.g., Workforce Investment Act of 1998, Pub. L. No. 105-220, 112 Stat. 936 (codified in scattered sections of 20 U.S.C. and 29 U.S.C.).
36. Id. In its statement of purpose, the Workforce Investment Act proclaims the following: The purpose of this subchapter is to provide workforce investment activities, through statewide and local workforce investment systems, that increase the employment, retention, and earnings of participants, and increase occupational skill attainment by participants, and, as a result, improve the quality of the workforce, reduce welfare dependency, and enhance the productivity and competitiveness of the Nation.
37. U.S.C. § 2811 (2000).
38. Gary Becker argues that employer investment in training is, in actuality, an employee investment, since the employee presumably agrees to a lower salary in payment for the acquired skills. GARY S. BECKER, HUMAN CAPITAL: A THEORETICAL AND EMPIRICAL ANALYSIS, WITH SPECIAL REFERENCE TO EDUCATION 33-51 (3d ed. 1993) (discussing specific and general training of employees by their employers).
39. Daron Acemoglu & Jörn-Steffen Pischke, Beyond Becker: Training in Imperfect Labor Markets, 109 ECON. J. 112 (Feb. 1999) (noting the advantages of investment in workplace training instead of general education, because on-the-job training allows employers to target specific skill sets required to keep the business on pace with technological progress).
40. ARISTOTLE, NICOMACHEAN ETHICS 34 (Martin Ostwald trans., 1962).
41. In-house training has become less common as companies struggle to assess what skills are required in an ever-changing economy. CAPPELLI, supra note 1, at 198-220. Rather, as new degree-specific schools like the University of Phoenix grow in popularity, employers find it more cost effective to outsource training to third parties. In those cases, employers might pay for training in a specific discipline with hopes of building a narrower knowledge base within the company. By Cappelli's account, 72 percent of the University of Phoenix's tuition revenue is derived from employers subsidizing their employees' schooling. Id. at 209.
42. David Lange, Guest Commentary, Training Programs Should Be Seen as Investment, Not Expense, NASHVILLE BUS. J., Sept. 15, 2003, available at http://www.bizjournals.com/nashville/stories/2003/09/15/smallbS.html?t= printable.
43. See Stewart E. Sterk, Restraints on Alienation of Human Capital, 79 VA. L. REV. 383, 392-93 (1993) (discussing the risk of employer investment in training if long-term employment contracts are not upheld).
44. CAPPELLI, supra note 1, at 46.
45. Id.
46. The growing number of opportunities awaiting those who choose to leave their employer after being trained exacerbates this problem. See id at 182-87 (providing examples of the widespread use of "golden handcuffs" and signing bonuses as methods of poaching top talent away from competing businesses).
47. See Rachel S. Arnow-Richman, Bargaining for Loyalty in the Information Age: A Reconsideration of the Role of Substantive Fairness in Enforcing Employee Noncompetes, 80 OR. L. REV. 1163, 1203-04 (2001) ("[D]espite the strategic importance of cultivating internal talent, employers may not make such investments for fear that their efforts will merely aid the competition.").
48. Id.
49. See, e.g., UniCredito Italiano SPA v. JPMorgan Chase Bank, 288 F. Supp. 2d 485, 499 (S.D.N.Y. 2003) ("Sophisticated parties . . . are held to the terms of their contracts."); Wiard v. Liberty Northwest Ins. Corp., 79 P.3d 281, 285 (Mont. 2003) ("[T]he parties to a contract may agree to anything that is not illegal, criminal, or immoral . . . .").
50. But see Maureen B. Callahan, Comment, Post-Employment Restraint Agreements: A Reassessment, 52 U. CHI. L. REV. 703, 704 (1985) (suggesting that although American law generally upholds agreements arrived at by competent parties, post-employment restraints do not share this presumption of validity).
51. S. See Stone, supra note 13, at 740 ("When an employment relationship includes a covenant not to compete . . . it is reasonable to assume that the employee has consented to restrictions on his or her post-employment activities. Accordingly, there is a strong argument for courts to enforce the covenant . . . .").
52. See, e.g., Water Servs., Inc. v. Tesco Chems., Inc., 410 F.2d 163, 170 (5th Cir. 1969) ("Although covenants not to compete are proper to protect trade secrets they may also be valid simply to prevent a former employee's using his expertise against his former employer.");
53. see also Blake, supra note 2, at 627 ("From the point of view of the employer, postemployment restraints are regarded as perhaps the only effective method of preventing unscrupulous competitors or employees from appropriating valuable trade information and customer relationships for their own benefit.").
54. See Arnow-Richman, supra note 12, at 1170 ("[N]oncompetes can be seen as legal tools necessary to preserve key business interests and relationships.").
55. See Blake, supra note 2, at 627 (suggesting that employers might require covenants to protect investment in research and development).
56. See infra Part III.A.
57. See infra Part III.A.
58. Mitchel v. Reynolds, 24 Eng. Rep. 347, 348-50 (Ch. 1711).
59. See generally Callahan, swpra note 44 (arguing that the "restraint-of-trade" rationale, the "employee-protection" rationale, and the "loss-to-society" rationale do not sufficiently warrant unenforceability of noncompetes).
60. Blake, supra note 2, at 627.
61. Id.
62. Id.
63. See, e.g., ABC v. Wolf, 420 N.E.2d 363, 368 (N.Y. 1981) (recognizing that despite a "strict approach to enforcement of . . . covenants," public policy mandates skepticism toward restrictions "impairing the employee's ability to earn a living or the general competitive mold of society"); All-Pak, Inc. v. Johnston, 694 A.2d 347, 351 (Pa. Super. Ct. 1997) ("[I]n determining whether to enforce a post-employment restrictive covenant, we must balance the interest the employer seeks to protect against the important interest of the employee in being able to earn a living in his chosen profession.").
64. See Stone, supra note 13, at 722 ("Employees see the growth of their human capital and the enhancement of their labor market opportunities as one of the benefits of the job.");
65. U.S. Dep't of Labor Plan, supra note 19, at 5 ("The fast pace of technological change will . . . require that workers commit themselves to lifelong learning if [the] Nation's workforce is to remain competitive in the 21st Century.").
66. See Schmidl v. Cent. Laundry & Supply Co., 13 N.Y.S.2d 817, 823 (Sup. Ct. 1939) (recognizing a greater differential in bargaining power between employer and employee than between two corporate entities); Arthur Murray Dance Studios v. Witter, 105 N.E.2d 685, 704 (Ohio 1952) (expressing concern that an employee's bargaining disadvantage could produce "a rash, improvident promise"). But see Hilb, Rogal, & Hamilton Agency of Dayton v. Reynolds, 610 N.E.2d 1102, 1107 (Ohio Ct. App. 1992) ("While an employment relationship may by definition result in an employer having a slightly better bargaining position than an employee, this disparity in bargaining power is inherent in the relationship and is not sufficient to render a contract unenforceable absent a showing of [abuse].").
67. See, e.g., Tarr v. Stearman, 105 N.E. 957, 961 (Ill. 1914) (finding the interests of the public to be "paramount," and stressing concern for not just "the financial profits to be made from trades or professions, but the convenience of the public as well").
68. Callahan, supra note 44, at 712.
69. See Blake, supra note 2, at 686 (recognizing that the courts usually look at the burden on the employee and "almost never" consider the injury to society separately);
70. Callahan, supra note 44, at 706 ("[T]hough [the 'loss to society rationale] is not much relied upon today, these agreements were once considered a threat to the economy because they could remove a productive person from the work force.").
71. Arthur Murray Dance Studios, 105 N.E.2d at 687.
72. See Tamara Loomis, Non-Compete Pacts: Whether These Agreements Hold Up Is Uncertain, N.Y.L.J., Aug. 24, 2000, at 6 ("At the end of the day, however, the one thing that is certain with a non-compete agreement is that nothing is certain.").
73. See Bendinger v. Marshalltown Trowell Co. [sic], 994 S.W.2d 468, 472 (Ark. 1999) ("We review cases involving covenants not to compete on a case-by-case basis."); 42 AM. JUR. 2D Injunctions § 138 (2003) ("A court may look at the equities on both sides in deciding whether to issue an injunction prohibiting a former employee from competing with his or her former employer . . . .").
74. See, e.g., All Stainless Inc. v. Colby, 308 N.E.2d 481, 485 (Mass. 1974) (determining enforceability by weighing "the reasonable needs of the former employer. . . against both the reasonableness of the restraint imposed on the former employee and the public interest").
75. S. See Peter J. Whitmore, A Statistical Analysis of Noncompetition Clauses in Employment Contracts, 15 J. CORP. L. 483, 485 (1990) ("[I]t still is difficult for lawyers to predict confidently how a court will react to any given noncompetition clause.");
76. Greg T. Lembrich, Note, Garden Leave: A Possible Solution to the Uncertain Enforceability of Restrictive Employment Covenants, 102 COLUM. L. REV. 2291, 2303 (2002) ("The lack of consistency that courts have demonstrated in deciding these cases has led to an atmosphere of uncertainty, which may help to explain why lawyers find it very difficult to advise clients.").
77. See Whitmore, supra note 65, at 485 ("[T]he ambiguity surrounding the enforceability of these clauses has resulted in vast amounts of litigation and reported appellate decisions.")
78. One factor often undervalued in the determination of noncompete enforceability is the degree to which employer investment must be protected. Put simply, the greater the cost of an investment, the higher the return an employer expects. See infra Part III.B. Employer incentive to train employees hinges on seeing a return on that investment. See supra Part I. Likewise, employer incentive to establish noncompetes is directly related to the ability to enforce them without costly litigation. Given the difficulty in balancing each of the given policy considerations and the unpredictability of judicial enforcement, this Note stipulates that the employer must assume greater responsibility in ensuring the validity of its noncompetes. See infra Part III.B. One type of noncompete that might be more consistently upheld, advocated herein as an alternative to traditional noncompetes, is the post-employment repayment agreement, discussed infra Part III.B.
79. California law, for instance, stipulates that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." CAL. BUS. & PROF. CODE § 16600 (West 1997). California courts have interpreted this statute to accept not even "reasonable" restraints of trade. See, e.g., Metro Traffic Control v. Shadow Traffic Network, 22 Cal. App. 4th 853, 859 (Cal. Ct. App. 1994) ("Section 16600 has specifically been held to invalidate employment contracts which prohibit an employee from working for a competitor when the employment has terminated, unless necessary to protect the employer's trade secrets."). Courts will, however, allow a very limited exception if the employee is "barred from pursuing only a small or limited part of the business, trade or profession." IBM v. Bajorek, 191 F.3d 1033, 1040 (9th Cir. 1999) (quoting Campbell v. Bd. of Trs. of The Leland Stanford Junior Univ., 817 F.2d 499, 502 (9th Cir. 1987)). Other states, such as Alabama and North Dakota, have devised similar statutory prohibitions of noncompetes. ALA. CODE § 8-1-1(a) (1975); N.D. CENT. CODE § 9-08-06 (1987) (voiding noncompetes, and making statutory exceptions only for the sale of a business or the dissolution of a partnership).
80. See Outsource Int'l., Inc. v. Barton, 192 F.3d 662, 670-71 (7th Cir. 1999) (Posner, J., dissenting) (advocating widespread enforcement of noncompetes and the application of a reasonableness test only to address questions of fraud, duress, or unconscionability); see also Eraser Co. v. Kaufman, 138 N.Y.S.2d 743, 750-51 (Sup. Ct. 1955) ("Negative covenants in employment contracts are not presumptively invalid and will be enforced in the absence of proof that they are unconscionable, inequitable, or in contravention of public policy.");
81. Callahan, supra note 11, at 725 ("[T]he doctrine of unconscionability provides an appropriately limited mechanism for protecting employees in those narrow circumstances where judicial scrutiny of contracts is actually justified.")
82. The "blue pencil" test has been applied in a few variations. Some courts take a restrictive approach by removing only the unreasonable provisions of a contract that are easily severable from the valid provisions. See, e.g., Hahn v. Drees, Perugini & Co., 581 N.E.2d 457, 461-62 (Ind. Ct. App. 1991) (eliminating an easily removable phrase that suggested an employee would not be allowed to deal with clients obtained prior to his employment); Bridgestone/Firestone, Inc. v. Lockhart, 5 F. Supp. 2d 667, 683 (S.D. Ind. 1998) (reserving the right to remove overly broad restrictions from the terms of a contract when doing so does not expand the original language of the agreement). More commonly, modern courts exercise greater freedom to modify or rewrite unreasonable provisions that are unenforceable as written.
83. See, e.g., Nestle Food Co. v. Miller, 836 F. Supp. 69, 78 (D.R.I. 1993) (applying Rhode Island's "rule of partial enforcement" to modify the terms of a noncompete when necessary to protect the employer's interests).
84. Courts are generally more likely to uphold noncompetes for sale of businesses than for employment contracts. In the former situation, a noncompete will restrict the seller of a business from competing with the buyer for a particular duration after the sale is consummated. The sales price of a business will include the value of that business' goodwill. Serena L. Kafker, Golden Handcuffs: Enforceability of Noncompetition Clauses in Professional Partnership Agreements of Accountants, Physicians, and Attorneys, 31 AM. BUS. L. J. 31, 33 (1993).
85. See, e.g., Amex Distrib. Co. v. Mascari, 724 P.2d 596, 600 (Ariz. Ct. App. 1986) ("Restrictive covenants which tend to prevent an employee from pursuing a similar vocation after termination of employment are disfavored."); Poole v. Incentives Unlimited, Inc., 548 S.E.2d207, 209 (S.C. 2001) ("[C]ovenants will be critically examined and construed against the employer."); Modern Env'ts, Inc. v. Stinnett, 561 S.E.2d 694, 695 (Va. 2002) ("[C]ovenants in restraint of trade are not favored, will be strictly construed, and, in the event of an ambiguity, will be construed in favor of the employee.");
86. see also Gillian Lester, Restrictive Covenants, Employee Training, and the Limits of Transaction-Cost Analysis, 76 IND. L.J. 49, 54 (2001) ("As a presumptive matter, contracts restricting postemployment employee mobility are unenforceable at common law.").
87. See supra notes 61-70.
88. RESTATEMENT (SECOND) OF CONTRACTS § 188 (1981) characterizes this test as follows: (1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if (a) the restraint is greater than is needed to protect the promisee's legitimate interest, or (b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public.
89. For examples of cases demonstrating this analysis, see Blake, supra note 1, at 651-84.
90. Id.
91. Though many scholars agree that the "loss-to-society" rationale is not favored by most contemporary courts, at least a handful of cases have employed this policy argument when determining the enforceability of restrictive covenants against physicians and dentists. See Kafker, supra note 71, at 37-41 (discussing cases that anticipate the injury to society resulting from enforceability of noncompetes against physicians and dentists). It is worth mentioning that the public interest argument works both ways for these cases: courts might strike down a noncompete for restricting a doctor's ability to provide medical services to a particular region, but conversely courts might uphold a noncompete that will distribute doctors to other areas of the state. Id.
92. Blake, supra note 2, at 651-84.
93. Lester, supra note 2, at 54-57;
94. see also, e.g., Availability Inc. v. Riley, 336 So. 2d 668, 669-70 (Fla. Dist. Ct. App. 1976) (upholding a noncompete restricting an employee from working within a one-hundred-mi le radius when the employer conducted 85 percent of its business within that radius and when the employee was "otherwise well able to support himself and his family"); Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d376, 382 (Iowa 1983) ("Proximity to customers is only one aspect. Other aspects, including the nature of the business itself, accessibility to information peculiar to the employer's business, and the nature of the occupation which is restrained, must be considered along with matters of basic fairness.").
95. For a general discussion of time, geography, and scope restrictions, see Blake, supra note 2, at 674-84.
96. Id.
97. See, e.g., Ma & Pa, Inc. v. Kelly, 342 N.W.2d 500, 502 (Iowa 1984) (distinguishing the discharge of an employee from an employee resignation and finding a "discharge [to be] a factor opposing the grant of an injunction").
98. Compare Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70-72 (2d Cir. 1999) (applying New York law to uphold a noncompete when the employer seeking enforcement demonstrated that the employee had built unique relationships with a limited group of clients in the real estate title insurance industry and that those clients had been developed at the employer's expense) with Vander Werf v. Zunica Realty Co., 208 N.E.2d 74, 77 (111. App. Ct. 1965) (refusing injunctive relief to an employer when there was "no showing by defendant that [the employer's] methods of doing business were original or unique").
99. See, e.g., Lester, supra note 72, at 54-55.
100. UNIF. TRADE SECRETS ACT § 1, 14 U.L.A. 433 (1990).
101. Whereas the Trade Secrets Act merely provides a tort remedy for an employer once trade secret disclosure occurs, a restrictive noncompete ideally prevents disclosure from occurring in the first place. Also, if charges are brought against an employee for breach of trade secret law, the employer risks disclosure of the protected asset in court. Lester, supra note 72, at 53. For these reasons, noncompetes "fill a gap where other legal and extra-legal mechanisms fall short." Id. For a general discussion of the need for noncompetes in trade secret law,
102. see id. at 52-53.
103. 8"". The misappropriation of customer lists generated for both sales of services, such as accounting or consulting companies, and sales of fungible goods have been deemed as "protectable interests." See, e.g., Farr Assoc., Inc. v. Baskin, 530 S.E.2d 878, 881 (N.C. Ct. App. 2000) (finding that a behavioral consulting firm had a protectable interest in limiting the risk of client misappropriation by a consultant-employee when "work require[d] that its Consultants develop an intimate relationship with its clients"); Arnow-Richman, supra note 12, at 1176 n.40 ("Cases which are particularly convincing to courts are those in which the product sold is fungible or where it is easy for the customer to mistake the sales person with the actual employer.").
104. See Erika Morphy, The Real Cost of CRM, NEWSFACTOR TECHNOLOGY NEWS (Oct. 29, 2001) ("[P]er-seat costs for high-complexity projects that have 1,000 users start at around US$50,000 and slowly drop to about $15,000 as the number of users increases to 5,000.") at http://www.newsfactor.com/ story.xhtml?slory id 1=4447 (on file with the Duke Law Journal);
105. Emma Nash, The High Cost of CRM, COMPUTERWEEKLY.COM (Aug. 17, 2001) (describing the rising cost of CRM software) at http://www.computerweekly.com/ Article105058.htm (on file with the Duke Law Journal).
106. See supra note 87.
107. See infra Part III.A.
108. See infra Part III.A.
109. See CAPPELLI, supra note 1, at 1-16.
110. See, e.g., USAchem, Inc. v. Goldstein, 512 F.2d 163, 167 n.4 (2d Cir. 1975) ("[T]he fact that a former employee was trained by the employer is not a basis for granting an injunction enforcing a restrictive covenant."); Kelsey-Hayes Co. v. MaJeki, 765 F. Supp. 402, 407 (E.D. Mich. 1991), vacated, 889 F. Supp. 1583 (E.D. Mich. 1991) (holding that "whatever expertise defendant developed as a computer programmer at Kelsey-Hayes, with the assistance of on-the-job instruction and published manuals, has been his alone, historically, and would not fall within the proscription of contracts protecting an employer's propriety or confidential information"); Clark Paper & Mfg. Co. v. Stenacher, 140 N.E. 708, 711-12 (N.Y. 1923) (refusing to protect an employer's investment in the general training of a wrapping paper salesperson); Kidde Sales & Serv., Inc. v. Peairson, 493 S.W.2d 326, 330 (Tex. Civ. App. 1973) (stating the court's unwillingness to enforce noncompetes to protect training "even if the training was complex and extensive").
111. Stone, supra note 13, at 751
112. (citing Peter J. Whitmore, A Statistical Analysis of Noncompetition Clause s in Employment Contracts, 15 J. CORP. L. 483, 524-25 & n.243 (1990)).
113. See, e.g., Borg-Warner Protective Serv. Corp. v. Guardsmark, Inc., 946 F. Supp. 495, 501 (E.D. Ky. 1996) (finding a private security firm's investment in fire safety and security training videos for guards, an eighty-hour on-the-job formal training course, and time off for guards to grow accustomed to a new client site, taken together, rose to the level of a judicially protectable interest). An interesting comparison can be made between the need to protect an investment in training, as has been discussed throughout this article, and the protection of an investment in public image. In the case of Beckman v. Cox Broad. Corp., 296 S.E.2d 566 (Ga. 1982), the Georgia Supreme Court upheld a noncompete restricting a news meteorologist from competing "on air" against his employer for six months after the employment period ended. Id. at 569. In reaching its decision, the court observed the significant investment of ©750,000 made by the employer news station to develop and promote the weatherman's public persona. Id. at 567, n.2. The employer argued that the publicity generated through the promotional campaign enhanced the weatherman's image, making him more marketable to competing news stations and eradicating the employer's investment. Id. at 569. Much like human capital of skills and aptitude, the court recognized the weatherman's ownership of his own image and personality created by the employer's promotion; the employee was free to take the investment with him to his new employer. Id. at 569. However, the court also found that the news station's interest in protecting its investment in the weatherman's image outweighed the cost imposed upon the weatherman by the noncompete. Id. This case merely serves as a reminder that the analysis presented can be applied across a broad cross section of fact patterns relating to employer investment.
114. See Arnow-Richman, supra note 12, at 1192-93 ("Since the proper inquiry is whether confidential information has been transmitted, it has been held that even where the employer expends funds to support formalized training, such expenditures are insufficient to support a noncompete if the employee gains only generalized knowledge or experience.");
115. Lester, supra note 72, at 57 ("Even where an employer can demonstrate costly training expenditures, a court is unlikely to enforce a covenant to protect them absent the additional presence of trade secrets, confidential information, or protectible client relationships.").
116. BECKER, supra note 33, at 33-51.
117. Id. at 33.
118. Id.
119. See id. at 46 (arguing that investments in specific training lost when employees leave do not accrue to new employers); id at 40 ("The property right of the worker in his skills is the source of his incentive to invest in [general] training by accepting a reduced wage during the training period and explains why an analogy with unowned innovations is misleading.").
120. Id. at 34.
121. See id. at 34 ("Hence it is the trainees, not the firms, who bear the cost of general training and profit from the return.").
122. Id.
123. Id. at 40. To observe how this theory plays out within a "real world" hypothetical, see Lester, supra note 72, at 62-63.
124. Establishing the difficulty in drawing lines between specific and general training, Becker points out that "[m]uch on-the-job training is neither completely specific nor completely general but increases productivity more in the firms providing it and falls within the definition of specific training." BECKER, supra note 33, at 40.
125. Examples of firm-specific training might include education in how to use a firm's proprietary software, follow operating procedures, or sell the firm's products or services.
126. BECKER, supra note 33, at 40-42.
127. Id. at 42.
128. Id.
129. Id. at 42-46.
130. Id.
131. Id. at 46.
132. See Paul H. Rubin & Peter Shedd, Human Capital and Covenants Not to Compete, 10 J. LEGAL STUD. 93, 96 (1981) ("If training is truly specific, the employer needs no assurance that the worker will continue to work for him, for there is no other market in which the employee can sell his skill.").
133. Id. at 96-97.
134. Id. 97-99.
135. Id.
136. Id. at 105-07.
137. See Acemoglu & Pischke, supra note 34, at 4 (alluding to studies that "do not find lower wages for workers in training programs, and even when wages are lower, the amounts typically appear too small to compensate firms for the loss").
138. See id. at 5: There are also many examples of firms that send their employees to college, MBA or literacy programs, and problem-solving courses, and pay for the expenses while the wages of workers who take up these benefits are not reduced. In addition, many large companies, such as consulting firms, offer training programs to college graduates involving general skills. These employers typically pay substantial salaries and bear the full monetary costs of training, even during periods of full-time classroom fraining.
139. See supra note 2.
140. These are discussed infra Part III.B.
141. This argument assumes training occurs in discrete periods, as opposed to continually throughout the period of employment.
142. This problem seems particularly troublesome in industries in which training is front-loaded in an employee's career. Occupations that require sizable up-front training, with little need for further training to keep pace with market needs, seem to be quite vulnerable to restrictions imposed by traditional noncompetes. On the other hand, careers in which the required employee skill sets are constantly evolving might have more of a demand for ongoing training; for those careers, this problem seems less daunting.
143. RESTATEMENT, .swpra note 74, § 188.
144. See, e.g., Orkin Exterminating Co. v. Foti, 302 So. 2d 593, 598 (La. 1974) (finding that an employer expense of $261.50 to furnish one day of training in 1970 did not justify restricting an employee from competing in 1973 and 1974, since "the employer had long received the benefit of its investment through the employee's two years of managerial service afterwards").
145. See, e.g., Brunswick Floors, Inc. v. Guest, 506 S.E.2d 670, 672-73 (Ga. App. Ct. 1998) (rejecting an employment contract on grounds that a noncompete restriction imposed throughout an eightymile radius exceeded what was necessary to protect an employer's investment in a business training trip, but ignoring whether the amount spent on training had been recovered over the course of the employee's eighteen-month tenure after the training was received);
146. see also supra notes 79-83 and accompanying text.
147. Anthony W. Kraus, Repayment Agreements for Employee Training Costs, 1993 LAB. L.J. 49, 49 (1993). Further alternatives to noncompetes exist. Popular in Great Britain, "garden-leave" contracts require employees to provide employers with a specified period of notice prior to departing, but in return employers agree to pay the employee's salary during that time to ensure that the employees do not compete.
148. See, e.g., Lembrich, supra note 61, at 2314 ("Given the uncertain enforceability of restrictive covenants in the United States and the success that garden leave has enjoyed in England, it is not surprising that many American employers have begun inserting garden leave clauses into the employment contracts of their key employees."). Another option advocated by some companies requires an employee to obtain a specified degree or amount of training before being hired, shifting training costs to the employee.
149. CAPPELLI, supra note 1, at 204-05.
150. For a discussion of how repayment agreements are typically devised, see id at 49-50.
151. Kraus, supra note 127, at 51 ("To date, very few cases appear to have considered training cost repayment agreements under restrictive covenant law.").
152. Id. at 50.
153. See, e.g., National Training Fundv. Maddux, 751 F. Supp. 120, 121-22 (S.D. Tex. 1990) (requiring an employee to repay the cost of training after acquiring a new skill at his employer's expense); see also COLO. REV. STAT. ANN. § 8-2-113(2)(c) (West 2003) (enforcing noncompetes that "provid[e] for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years").
154. 67 F.3d 1333 (7th Cir. 1995).
155. Id. at 1335.
156. See, e.g., Dental East, P.C. v. Westercamp, 423 N.W.2d 553, 555 (Iowa App. 1988) (enforcing a noncompete that required a payment penalty if the employee, a dentist, chose to break the agreement for one year after termination); Holloway v. Faw, Casson & Co., 572 A.2d510, 525-26 (Md. 1990) (upholding a "fee equivalent remedy" that required an accountant to repay his former partnership in the event that the partner competed within a prescribed geographic area).
157. 603 N.E.2d 157 (Ind. Ct. App. 1992).
158. Id. at 161.
159. Id. at 158-59.
160. Id. at 161.
161. See Stone, supra note 13, at 755 ("[T]o be enforceable, a training repayment agreement must be written narrowly.").
162. See supra text accompanying note 39.
163. This holds especially true for companies that reserve significant budgets for training expenses. Software products such as Oracle or Peoplesoft provide comprehensive financial budgeting software that allows businesses to manage training expenses and forecast the feasibility of effective training. See Oracle, Oracle E-Business Suite, at http://www.oracle.com/applications (last visited June 6, 2005) (on file with the Duke Law Journal).
164. See Lester, supra note 72, at 76 ("I would share with a handful of other commentators some optimism about a hybrid approach in which restrictive covenants are deemed unenforceable by statute, with an explicit exception made for discrete training repayment contracts.");
165. Stone, supra note 13, at 755-56 (arguing that the enforcement of a repayment agreement, "unlike enforcement of a broad covenant not to compete, does not undermine [the] psychological contract" between employer and employee).
166. Kraus, supra note 127, at 51.
167. William R. Groth, Response to Gillian Lester and Steward J. Schwab: An Indiana Perspective, 76 IND. L.J. 77, 78 (2001).
168. Loomis, supra note 62, at 5 (quoting David A. Weisberg, who was then a partner in the nowdefunct firm of Brobeck, Phleger & Harrison LLP).