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"Open, competitive markets are a foundation of economic liberty. But markets that suffer from a lack of competition can result in a host of harms. In uncompetitive markets, firms with market power can raise prices for consumers, depress wages for workers, and choke off new entrants and other upstarts. " FTC Commissioner Rohit Chopra1
I. Introduction
Agreements not to compete are generally an anathema to free market advocates. Independent profit maximization is one of the fundamental assumptions of the neoclassical economic model and necessary to its conclusion that markets yield results that are Pareto efficient.2 Consistent with this theory, and practical experience, agreements among competitors, or potential competitors, to divide a market, or fix price or quantity are per se violations under our antitrust laws.3
Despite this fact, even some ardent free market advocates have argued on behalf of the enforcement of covenants not to compete in the employment relationship.4 The traditional economic argument in favor of enforcing noncompetes assumes that labor markets are competitive and workers freely enter into such agreements in return for higher wages associated with work in research on behalf of the employer and/or access to employer developed trade secrets and customer contacts.5 This arrangement is desirable to the employer because it helps protect his or her investment in research, trade secrets, and customer contacts, against appropriation if the employee were to leave to work for a competitor.6 It is argued that society also benefits from such arrangements because the increase in production from the employer's investment in research and customer contacts more than make up for societal losses due to the constraints on the employee's labor mobility.7
However, economic theory also embraces a more sinister view of such agreements. Given their constraints on labor mobility, there is a natural concern that employers might use noncompetes to limit labor market competition and perhaps product market competition. Recent discussions of labor market monopsony power have cited the potential role of noncompetes in extending employer power by creating "market friction" that prevents employees from selling their labor to the highest valued use. 8 Under this view, the covenant not only allows the employer to pay the employee less than a competitive wage, but also raise the recruiting costs of competitors, allowing the employer...