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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. 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.
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. 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. 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.
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.
