The role of equity in employment noncompetition cases.
"Let me have no lying, it becomes none but tradesmen." (1)
I. INTRODUCTION
William Shakespeare penned these pejorative words before companies began guarding their investments from competitor encroachment with covenants not to compete. (2) In fact, it has been five hundred
In cases of employee poaching and mass defection, employers rely on the enforceability of anticompetitive covenants to protect themselves from such unscrupulous practices. (7) In addition to cases against departing workers, companies have resorted to business tort claims against competitors who unlawfully solicit employees to procure an unfair competitive advantage. (8) The success of these causes of action are often dependent on the validity of employee noncompetition agreements.
Companies utilize postemployment restrictions in order to prevent competitors and employees from appropriating confidential information and customer relationships. (9) The public policy benefits derived by enforcing these covenants are the protection of proprietary interests, facilitation of investment in research, and the encouragement of development in human capital (personnel). (10) The public policy costs of enforcing restrictive covenants include the potential of limiting competition, impeding the dissemination of information, and retarding the economic mobility of employees. (11) These conflicting concerns have been the motivating factor in continued judicial scrutiny of restrictive employment covenants. (12) This article will explain the evolution of restrictive covenants in the employment setting and then analyze an overlooked aspect of covenant-not-to-compete enforceability--the role of equitable doctrines.
Part II of this article describes the genesis of postemployment restrictions and the surrounding jurisprudence. (13) Part III of this article examines the case of UZ Engineered Products Co. v. Midwest Motor Supply Co., Inc. (Kimbell-Midwest). (14) UZ Engineered Products Co. is a case of first impression in which one employer argued the unreasonableness of restrictive covenants in a competitor's employment agreements. The novelty of the case is that the challenging party utilized identical covenants with its employees. This ingenuousness implicates the theories of equity discussed in Part IV. Part IV reviews the different types of equitable defenses and assesses their availability to bar a business from challenging the validity of the restrictive covenants of a competitor when its own employees are bound by restraints with the same or similar terms. The discussion involves three distinct, but related doctrines of estoppel, along with the doctrines of implied waiver and "clean hands." (15) By tracing these doctrines through three centuries of jurisprudence, the article explores the applicability of the canons of equity to modern-day business relations.
Part V proposes the implementation of an equitable ban to bar challenges to the enforceability of restrictive covenants in competitor-versus-competitor cases. Given the overriding public policy concern of protecting the ability of employees to pursue their livelihoods, (16) however, prudence is suggested in considering the wholesale importation of equity into the existing legal framework. The article concludes by offering guidance on the convergence of law and equity in a way that pragmatically incorporates modern ideas about the role of ethics, the value of human capital, and the economic and social advancement of society.
II. LAW OF RESTRICTIVE COVENANTS
This section outlines the evolution of the law of restrictive covenants in employment from the apprentice system of the Middle Ages through the American Revolution and to the present. The use of restrictive covenants in the employment relationship began during the English guild system. They were primarily used to bind apprentices to their masters for unreasonably long periods of time. The illicit use of restrictive covenants explains the long-standing judicial hostility toward them. The erosion of the guild system led to the adoption of a reasonableness analysis during the industrial revolution that became the law in the American colonies. This approach allowed courts to stay true to freedom of contract principles while at the same time allowing them to scrutinize the enforcement of restrictive covenants. During the last century, application of the rule began to shift slightly from concerns of employees to employer protection.
A. Apprentice System in England: Public Policy of Employee Protection
Employers began utilizing restrictive covenants in England as early as the fifteenth century. (17) During this era, the craft guilds were the prevalent means of entering a trade and earning employment. (18) The guilds serviced their communities not only as a particular form of economic organization, but also by embodying "'a whole social system' sanctioned 'by the force of public opinion and the pressure of moral and social conventions.'" (19)
The classes of members that constituted the guild system included masters, journeymen, and apprentices. (20) Apprentices learned their trade by indenturing themselves to master craftsmen for a customary period of years. (21) Upon completion of tenure for nominal or no wages, the apprentice would be free to practice his trade for hire until he could gain entry to the elite group of craftsmen. (22) For safety and social reasons, master craftsmen usually set up their businesses in the same town in which they had served as an apprentice. (23)
In addition to significant entry barriers to employment, difficulty of relocating geographically, and lack of flexibility in changing trades, the labor market became increasingly competitive during the late medieval period. (24) As a result, master craftsmen devised strategies to delay the members of the two lower classes from advancing to the next level on the hierarchy. (25) One such stratagem used by enterprising masters was to bind apprentices to longer than customary periods of servitude. (26) This tactic was, in effect, a self-enforced covenant not to compete. Whether to alter the erosion of traditional practices or to protect the apprentice from unethical masters engaging in anticompetitive activity, courts held that the longer periods of indenture were illegal per se. (27)
B. The Industrial Revolution: Development of a "Rule of Reason"
Gradually, over the course of the next three hundred years, the British economy began its transition to free market capitalism in the wake of colonial expansion and the industrial revolution. (28) With the changed industrial scene, the widespread reliance on the guild system of the late medieval period dissipated. (29) Indentures binding apprentices to longer than customary periods of servitude were replaced with contracts limiting future competition by former employees." (30)
The prevalence of factory work lowered entry barriers to particular career paths as aspiring workers traded years of service through the apprenticeship system for minimal training in specialized factory jobs. (31) The physical dangers and economic risks of travel lessened so that individuals in search of work were able to pursue greater geographic mobility. (32) Because of the breadth and scope of factory operations, however, personal relationships between master and servant weakened. (33) Without the long-standing social bond, workers became more dependent than ever on their chosen occupations. (34)
It was against this laissez-faire economic background that the black letter law declaring all personal restraints of trade void as against public policy was transformed to a doctrine of reasonableness. (35) In applying this new standard, English judges balanced the interests of the employer, employee, and society on a case-by-case basis. (36) Essentially, the courts examined the reasonableness of the restraint in terms of time and scope in relation to the employer's purpose for requiring the covenants. (37) The articulation of the reasonableness doctrine eventually came to be known as the "rule of reason." (38)
In comparing the benefit to the employer against the burden to the employee within the context of the existing social and economic system, judges were no longer reacting with the same degree of paternalism once exhibited toward apprentices in the guild system. (39) Rather, courts in the industrial age adapted the rule of reason to modern conditions and the philosophical ideas of economic liberalism. (40) Consequently, when employees bound themselves to contracts that limited their economic liberty, the courts were faced with the need to balance the preeminent societal values of freedom of the market against freedom of contract. (41)
C. Restrictive Covenants in America: Adoption of the Rule of Reason
The British approach to the enforceability of restrictive employment covenants was ultimately adopted in United States after the Revolutionary War. (42) As the U.S. economy shifted from agrarian to industrial-based, evolving American legal principles reflected the increasing importance of economic liberty. (43) Nevertheless, the reigning freedom of contract philosophy did not fully dominant the specialized area of restrictive employment covenants and the reasonableness test stood as a counterweight to unfettered freedom of contract in the employment area. (44) In applying the standard to covenants against competition, American courts were more sensitive than those in England to the burdens placed on employees. (45)
American courts, however, did acknowledge that the altered labor market following industrialization eliminated many of the objections to enforcing restrictive covenants of employment. (46) Despite the decline in employee bargaining power due to the demise of the craft unions and their monopoly on skilled labor, (47) judges examining the validity of postemployment restraints frequently noted the ease of changing careers, the shortage of labor, and the expanding opportunities to engage in commercial activities. (48) Thus, even prior to the New Deal legislation that alleviated the burdens of individual workers, (49) cases upholding covenants not to compete were becoming more common. (50)
The pendulum began to swing in favor of workers during the decade of the Great Depression. The rise of the industrial organization had led to a concentration in the ownership of productive property and greater inequalities in private economic power. (51) An increasing number of individuals without significant productive property became dependent on industrial employment. (52) Management of these large-scale companies had seized control of the production processes and redesigned them in an attempt to eliminate the problems of unskilled labor and diminished loyalty. (53) As public confidence in business collapsed with the stock market crash of 1929, (54) the application of the rule of reason was marked by greater caution and more careful scrutiny of restrictive covenants. (55)
Following the Great Depression, a human resource policy known as "scientific management" gained popularity. (56) It was characterized by defined job duties, promotion and retention policies, and longevity-linked benefit packages. (57) Even with the prevalence of lifetime tenure at most major companies by mid-century, however, the existence and enforcement of covenants not to compete were a matter of public concern. (58) While continuing to engage in an interest balancing analysis under the rule of reason, many courts were still rooted in notions of worker protection. (59)
During its hundred-year history in America, the rule of reason was refined from random interest balancing to a more structured "ends-means" analysis. (60) As an initial matter, courts assessed the purpose for which the employer sought protection from competition by its former employees. (61) Only if the employer was deemed to have a protected interest that the law acknowledged would the court then proceed to evaluate the content of restrictions for their reasonableness. (62)
Precedent soon established that employers had two interests worthy of protection in the form of a covenant not to compete in the employment situation. (63) First, courts held that an employer had a legitimate interest in retaining its customer base. (64) A company was entitled to the protection of its customer base in industries characterized by indistinguishable products, competitive prices, and heavy reliance on personal selling. (65) Second, courts repeatedly ruled that an employer had a legitimate interest in restraining the dissemination of its trade secrets and other confidential information. (66) Covenants with conditions that extended beyond the use of such knowledge and client influence were not enforced. (67)
D. Recent Developments: Enforcement and Employer Protection
The economic output of the country shifted from manufacturing products to services during the final quarter of the last century. (68) At the same time, the United States entered what has since been deemed the "information age." (69) Unlike the prior transformation from agrarian to manufacturing, where business relied primarily on physical labor and workers moved from farms to factories, the new knowledge-based economy utilizes mental labor and creativity as the primary sources of production. (70)
In order to keep pace with growing competition from abroad and the speed of technological change, the scientific management structures of the large manufacturing firms have begun to dismantle. (71) Limited positions of entry, hierarchical job ladders, and long-term employment have increasingly been replaced with short-term employment, lateral mobility, general training, and skill development. (72) Organizational behavior theories such as "competency-based organizations" and "total quality management" have been espoused to replace "scientific management." Company strategies emphasize organizational flexibility, product quality, speedy delivery of goods and services, and adaptability to customer desires. (73) This shift in the nature of production has been described as the "new workplace" involving "just-in-time production, just-in-time product design, and just-in-time workers." (74)
The recognition of individual skills and knowledge as a source of competitive advantage has made it difficult to distinguish between the employee and his or her work product. "The transmission of skills, experience, and composite knowledge ... [has become] inextricably bound up with the employees themselves." (75) The development of the worker as an employer-generated composite of knowledge and skills has been coupled with an increase in career mobility. (76) Technological advances and remote computer networking additionally provide increased geographic flexibility as individuals pursue "boundaryless" careers. (77) This dynamic environment has changed the employment relationship not only physically, but also psychologically. (78) An emerging "social" or "psychological" contract of employment has been used to describe modern employment relationships. (79) Employers are recruiting employees by offering human capital development. (80) Employees, in turn, increasingly measure the value of employment in terms of the market value of human capital development being offered and not by the older notion of job security. (81) Notwithstanding these changing attitudes and conditions in the labor market, the English rule of reason remains the doctrinal scheme in a majority of states in this country. (82)
Notions of substantive fairness, implicated by increased investments by employers in employee development and the subsequent trading by employees of their human capital to the highest bidder, has opened the pro-employee slant of the reasonableness analysis to criticism. (83) Some commentators have emphasized an economic perspective in analyzing restrictive covenants and advocate greater judicial enforcement. (84) It is clear that businesses will continue to utilize contracts restraining competition in an effort to police faltering employee loyalty and to retain their competitive edge. (85) The judicial trend also seems to be toward favoring employers in the protection of company-developed human capital and legitimate proprietary interests. (86)
III. A CASE OF FIRST IMPRESSION: UZ ENGINEERED PRODUCTS CO.
UZ Engineered Products Co. (87) represents the first case in the country to prohibit a challenge to the validity of postemployment conditions based upon principles of equity. UZ Engineered Products Co. (UZ) and Kimbell-Midwest compete in the maintenance, repair, and operations (MRO) industry. (88) They are among ten highly competitive businesses that sell nuts, bolts, and other small parts to a variety of companies engaged in the maintenance and repair of equipment throughout the country. (89) The companies in the MRO industry primarily sell their products through sales representatives who work solely on commission and make personal calls on active and potential customers. (90)
The importance of the sales force in the industry compels each company to expend significant effort and money training its sales personnel in customer development, company products information, and selling techniques. (91) The competitive nature of the industry, however, creates a high attrition rate for sales employees lured away by competitors. (92) As a result, MRO companies attempt to protect their customer bases and investments in personnel by executing contracts with employees containing temporal and geographic postemployment restrictions. (93)
A. The Facts
Over a one-year period, Kimbell-Midwest hired six salespersons of UZ and assigned them to geographic territories that substantially overlapped their previous sales territories at UZ. (94) Kimbell-Midwest knew that all six employees were bound by employment contracts with UZ containing noncompetition and nonsolicitation covenants. (95) The covenants specified that for a period of two years after leaving UZ, the salespersons would refrain from competing in their former sales territories and from soliciting UZ customers or other UZ employees. (96)
Kimbell-Midwest's interference with the contracts of UZ employees began with the hiring of Jeffrey Moore. (97) Mr. Moore worked for UZ as a sales manager for nearly two decades before accepting a similar position with Kimbell-Midwest. (98) The territory assigned to him was the same as the one he had managed for UZ. (99) After joining Kimbell-Midwest, Mr. Moore began soliciting UZ employees in violation of the nonsolicitation covenant. (100) As a result of his efforts, five other employees quit their jobs with UZ and began working with Kimbell-Midwest. (101) Kimbell-Midwest placed the former UZ employees in exactly the same territories that they had worked for UZ in violation of the noncompete clauses in their employment contracts. (102) In further violation of their restrictive covenants, these employees began calling on their former customers. (103)
B. The Lawsuit
Given the highly competitive nature of the industry, the investment in training, and the significance of personal selling, Kimbell-Midwest's successful solicitation of six members of the UZ sales force in violation of their restrictive covenants caused UZ to suffer significant financial losses and harm to its reputation. (104) UZ sued Kimbell-Midwest seeking compensatory and punitive damages. (105) In its complaint, UZ alleged claims of unfair competition and tortious interference with contract and business relations against Kimbell-Midwest for inducing the unlawful actions of its former employees. (106)
Kimbell-Midwest asserted various affirmative defenses. (107) It also counterclaimed for a declaratory judgment that UZ's noncompetition and nonsolicitation agreements were unreasonable and unenforceable. (108) UZ replied to the counterclaim and maintained, inter alia, that Kimbell-Midwest should be precluded from contesting the restrictive covenants because its own employment agreements contained the same restrictions. (109)
At the trial, the president and owner of Kimbell-Midwest testified that restrictive covenants were "important" to the MRO industry. (110) He further conceded that his company not only had the same restrictive terms as UZ in its own agreements, but that it also enforced those conditions. (111) Kimbell-Midwest's president additionally admitted that his company had confessed as part of a settlement with another competitor that the same restrictions were reasonable and enforceable. (112)
The court determined as a matter of law that all of the restrictive covenants in UZ's contracts were enforceable as written. (113) It concluded that the time and geographical restrictions imposed on UZ's former employees were reasonable and appropriate to protect its interests in the MRO industry. (114) In fact, the trial court declared that "[u]nder no circumstances is this agreement unreasonable." (115)
In reaching its decision to enforce the postemployment restrictions, the court declined to consider the fact that Kimbell-Midwest executed similar agreements with its own employees. (116) As such, the doctrine of estoppel was not addressed by the court in assessing the validity of the restrictive covenants. (117) The trial court explained:
[I]t's very difficult for this court to believe that [plaintiffs] should be able to sit here with their own agreements and argue that other people's agreements are invalid and they continue to use their own. But I don't think that's a factor that's supposed to be taken into consideration by me in making that determination. (118)
In its verdict, the jury found Kimbell-Midwest liable for tortiously interfering with the contracts between UZ and its former employees. (119) It awarded both compensatory and punitive damages. (120)
On appeal, Kimbell-Midwest challenged the jury award of damages as well as the trial court's determination that the restrictive covenants were reasonable and valid. (121) UZ asserted a cross-assignment of error that its contract conditions were additionally enforceable pursuant to the doctrine of estoppel. (122) UZ urged that an equitable ban was justified due to Kimbell-Midwest's contradictory conduct in challenging the negative employment covenants of UZ while having and enforcing its own. (123)
The appellate court agreed. It opined that "the trial court properly could have considered the effect of estoppel in evaluating the reasonableness or enforceability of the noncompete agreements." (124) Persuasive to the court in finding Kimbell-Midwest estopped from challenging the enforceability of UZ's postemployment conditions were the "virtually identical" territorial and time restrictions, an admission during trial by the company president that Kimbell-Midwest enforces its contract restrictions, and its prior settlement with another MRO company agreeing that the restrictive covenants were reasonable and enforceable. (125) Accordingly, the court of appeals adopted equity and precluded Kimbell-Midwest from seeking to void UZ's restrictive covenants on grounds of public policy. (126)
IV. EQUITABLE DEFENSES
When two competitors require their employees to execute identical postemployment restrictions, should maxims of equity preclude the defendant from challenging the enforceability of those restrictions in the plaintiff's contracts? The equitable principles applicable in such a situation are estoppel, clean hands, and implied waiver. Developed by judges more than two centuries ago using broad notions of fairness, these principles are applied to defeat the assertion of inconsistent positions in a court of law. (127) Because the doctrines rest on common ethical precepts and public policy rationales, one or more of these equitable defenses can be used to remedy contradictory positions in litigation. (128) The power granted under these doctrines permits both plaintiffs and defendants to block issues, claims, and, in some circumstances, entire cases. (129)
A. Doctrines of Estoppel
There are many equitable doctrines designated as "estoppel." Even those with the same label have different formulations or applications depending on the factual circumstances. (130) By their very nature, estoppel doctrines are not susceptible to fixed rules and formulaic application. As a result, courts frequently blur the distinctions between the estoppel doctrines and use the terms interchangeably. (131)
Notwithstanding the confusion in name and application, a number of estoppels are available to bar companies and their counsel from insisting, at different times, on the truth of two conflicting positions. (132) Four of these--equitable estoppel, judicial estoppel, collateral estoppel, and quasie-stoppel--are discussed below.
1. Equitable Estoppel
Equitable estoppel or estoppel in pais "can be traced to the English kings who 'estopped' the enforcement of decisions by the medieval 'courts of the common law.'" (133) Equitable estoppel originated in contract cases and is frequently invoked under the name of "promissory estoppel." (134) Scholars have also recognized the doctrine of equitable estoppel as an extension of the duty of good faith and fair dealing imposed upon each party to a contract. (135) The obligation is violated by "dishonest conduct such as ... asserting an interpretation [of the contract] contrary to one's own understanding or falsification of facts." (136) Invariably, "this principle, so equitable and legal, runs throughout all the transactions and contracts of civilized life." (137)
Equitable estoppel generally provides that a party may not take a position in litigation when that position is inconsistent with earlier conduct and the change would unfairly burden the other party. The object of equitable estoppel "is to prevent the unconscientious and inequitable assertion or enforcement of claims or rights which might have existed or been enforceable by other rules of law, unless prevented by the estoppel." (138) The court in Blake v. Irwin (139) listed a number of prerequisites for the application of equitable estoppel:
(1) an admission, statement, or act (including silence or inaction) is inconsistent with the claim that is later asserted and sued upon; (2) an action taken by second party on the faith of the admission, statement, or act [reliance]; and (3) an injury occurs to the second party if the first party is permitted to contradict or repudiate his admission, statement, or act. (140)
In assessing whether the foregoing three requirements have been met, courts have remained vigilant in protecting the rights of litigants against whom the doctrine of equitable estoppel is asserted. Courts have warned that the doctrine "should be applied with care and caution and only when all elements constituting estoppel clearly appear." (141) Other courts, however, view the doctrine as furthering the truth-seeking mission of the court and regularly invoke the doctrine to estop the assertion of inconsistent positions. (142)
In addition to actual reliance on the inconsistency, many jurisdictions mandate that the reliance be reasonable under the circumstances. (143) Notably, the requirement of "reliance" itself necessarily implies a prior relationship between the two parties to the litigation. (144) Therefore, a stranger to a transaction cannot assert or be bound by an estoppel that arises therein.
A litigant averring equitable estoppel must ordinarily show the party to be estopped had asserted the contradictory position willfully or through culpable negligence. (145) While the scienter element is not a model of clarity, it appears that negligence, reckless disregard, or knowledge are sufficient, and that bad faith or fraud are not required. (146) Thus, the doctrine of equitable estoppel is operative although the one making the representation believes the statement to be true. (147)
Courts have long viewed equitable estoppel as a flexible doctrine to be applied or denied as weighted by the equities between the parties. (148) The Ohio Court of Appeals' invocation of "estoppel" in UZ Engineered Products Co. to bar a challenge to the validity of employment restrictions evidences this philosophy. (149) Despite the facts that UZ had no knowledge of the terms of Kimbell-Midwest's restrictive covenants during the period of time that Kimbell-Midwest was raiding the UZ sales team and that there was no prior relationship between the two litigants to support a claim of reliance, the court still applied estoppel against Kimbell-West. (150)
2. Judicial Estoppel
Judicial estoppel, sometimes known as "the doctrine of preclusion" (151) was originally established in the United States during the Civil War era. (152) While judicial estoppel does not possess the universal acceptance of equitable estoppel, (153) those jurisdictions that do recognize it apply the doctrine to prevent a litigant from arguing inconsistent positions in the same or different proceedings. (154)
The conduct or statements to which the doctrine applies is narrower than equitable estoppel in that a party must make the prior inconsistency during a judicial (155) or quasi-judicial (156) proceeding. (157) Moreover, some courts limit judicial estoppel to only sworn oral or written statements. (158) Equitable estoppel applies regardless of whether the party asserted the prior position was in litigation or another context.
However, in contrast to equitable estoppel which typically estops only conflicts of fact and, occasionally, opinions, the maxim of judicial estoppel has been invoked to bar contradictory positions of law as well. (159) Additionally, judicial estoppel applies without regard to the requirements of privity (160) or reliance (161) required by the doctrine of equitable estoppel. (162)
The differences between equitable and judicial estoppel reflect the differences in their underlying purposes. (163) While the doctrine of equitable estoppel is directed to the relationship between the parties, the rule of judicial estoppel is intended to prohibit improper use of the judicial process. (164) Judicial estoppel prevents the perversion of the judicial system by protecting "the courts from being manipulated by chameleonic litigants who seek to prevail, twice, on opposite theories." (165)
The U.S. Supreme Court recently identified three criteria that typically inform the decision to apply judicial estoppel: (1) whether the two positions are clearly inconsistent, (2) "whether the party succeeded in persuading the court to accept its earlier position," and (3) whether "the party ... assert[ing] [the] inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party." (166)
In ascertaining the meaning of a "clear inconsistency," courts have explained that the "truth of one must necessarily preclude the truth of the other." (167) Some courts, however, are careful to look beyond any apparent inconsistency to ensure that the positions are truly inconsistent. (168)
On the issue of what constitutes "acceptance" in the prior proceeding, (169) courts have refused to elevate that requirement to "prior success" on the merits. (170) In fact, courts have found judicial acceptance by the mere consideration of the earlier position (171) or if the party gained a settlement based on the prior position. (172)
In analyzing the element of "unfairness," many jurisdictions have required the inconsistency to be intentional in nature. (173) One commentator states that the "gravamen of judicial estoppel ... is the intentional assertion of an inconsistent position that perverts the judicial machinery." (174) Hence, judicial estoppel is inapplicable when a party's prior position was based on inadvertence or mistake. (175) A change in the facts and circumstances has also been held to constitute reasonable grounds for asserting inconsistent positions. (176)
Despite the doctrinal framework provided by the Supreme Court's three criteria, (177) courts have observed that "It]he circumstances under which judicial estoppel may appropriately be invoked are probably not reducible to any general formulation of principle." Although courts recognize that there is "no pat formula for applying judicial estoppel," (178) all three criteria possess long-standing acceptance in the common law. (179)
In asking for judicial estoppel, UZ would have avoided the necessity of proving reliance and mutuality (prior relationship) usually required by equitable estoppel. (180) The fact that the president of Kimbell-Midwest admitted during the trial that his company enforced similar terms in its own agreements and that such covenants are important to the MRO industry provided compelling support for the application of judicial estoppel. (181)
The strongest argument against the application of the doctrine in restrictive covenant cases is the difficulty of proving clear inconsistency in a party's positions. This is because the validity of the conditions depend on the case-specific facts, such as the length of employment of the individual employee, the type of training provided by the employer, and the ability of the employee to find work in another industry or geographical area. (182) Nevertheless, the flexibility and adaptability of the doctrine of judicial estoppel should allow it to be used in order to prevent the manipulation of the judicial process exhibited in UZ Engineered Products Co.
3. Collateral Estoppel
Collateral estoppel is another doctrine employed to avert the threat that inconsistent positions pose to the integrity of the judicial process. (183) A species of the res judicata doctrine, it is commonly referred to as issue preclusion. Issue preclusion or collateral estoppel refers to the effect of a prior judgment in precluding subsequent litigation of the same issue of fact or law. (184)
Issue preclusion applies whether or not the issue arises on the same or a different claim. (185) The issue decided in the earlier proceeding must be identical to the issue given preclusive effect in the subsequent proceeding. (186) Issues are considered "identical" when the same facts and evidence will support a finding in both cases. (187) The fact that the second litigation involves a different contract than the first litigation does not preclude estoppel if the two contracts have the same or similar terms. (188) However, the doctrine ordinarily requires that the litigant estopped be the same party or in privity with the party to the former action. (189)
The collateral estoppel doctrine may be utilized offensively or defensively against an opposing litigant. Defensive use estops a plaintiff from relitigating issues that the plaintiff previously litigated against another opponent. (190) Offensive use estops a defendant from relitigating issues that the defendant previously litigated against another opponent. (191) Due to the potential unfairness that may result from offensive collateral estoppel, courts require proof that the defendant had sufficient incentive and opportunity to litigate in the first case. (192) While the preclusive effect of collateral estoppel is usually given to a former losing position, courts have also applied it to bind a litigant from controverting a former prevailing position. (193)
Unlike judicial estoppel, collateral estoppel requires the party in the previous lawsuit to have had a full and fair opportunity to litigate the issue that was relevant to the underlying position. (194) Additionally, collateral estoppel requires the litigation to have been the subject of a final judgment as compared to judicial estoppel, which prevents inconsistent positions whether or not they were the subject of a final judgment. (195) Similar to judicial estoppel, collateral estoppel attaches to court decisions as well as quasi-judicial decisions of administrative agencies and arbitration panels (196) The policies advanced by collateral and judicial estoppel are also the same. The U.S. Supreme Court explained that the objective of the doctrine of collateral estoppel is to "'foster ... reliance on judicial action by minimizing the possibility of inconsistent decisions' and to protect the judicial system from acquiring the 'aura of [a] gaming table.'" (197)
When a competitor's position on the enforceability of restrictive covenants is incorporated into a judgment, the doctrine of collateral estoppel may apply to bar the company from litigating a contrary position. (198) In UZ Engineered Products Co., for example, the confession of judgment in the settlement of the prior lawsuit constituted a basis for collateral estoppel. (199) While the admission that the terms in another competitor's contract were reasonable and enforceable did not have a judicial imprimatur, the Restatement (Second) of Judgments allows a former settlement to be considered a "final judgment." (200) Case law also confirms that the issues are "the same" if the contract terms are identical, regardless of whether those terms arose in the restrictive covenants of UZ or another competitor. (201)
4. Quasi-estoppel
Courts have acknowledged principles analogous to equitable estoppel that fall under the rubric of quasi-estoppel, which is also referred to as "estoppel by acquiescence" or "estoppel by election." (202) The concept of quasi-estoppel was recognized by the U.S. Supreme Court at the end of the nineteenth century in Simmons v. Burlington, Cedar Raids & Northern Railway Co.: (203)
"He who seeks equity must do equity," and "He who comes into equity must come with clean hands." "Even when it does not work a true estoppel upon the rights of property or of contract, it may operate by analogy to estoppel--may produce a quasi estoppel--upon the rights of remedy." (204)
Similar to the other estoppel concepts, quasi-estoppel is invoked when "the conscience of the court is repelled by the assertion of rights inconsistent with a litigant's past conduct." (205)
Like judicial estoppel, quasi-estoppel does not apply if the litigants based the prior inconsistent conduct on mistake or inadvertence. (206) In contrast to traditional notions of equitable estoppel, however, no reliance is necessary for the application of quasi-estoppel. (207) Furthermore, unlike judicial estoppel and collateral estoppel, the prior contradictory position need not have been asserted in a judicial setting. (208) Notwithstanding the minimal evidentiary requirements as compared with other estoppel doctrines, courts have described the doctrine of quasi-estoppel as requiring the inconsistent conduct to either benefit the party acting inconsistently or cause some detriment to the opposing party. (209)
The change of positions must also yield a consequence that the court deems "unconscionable." (210) The Supreme Court of Wyoming described the concept of unconscionability as "a form of fraud recognized in equity." (211) Similar to the defense of unconscionability under contract law, (212) the fraud should be "apparent from the intrinsic matter and subject of the bargain itself; such as no [person] in his senses and not under delusion would make on the one hand, and as no honest and fair [person] would accept on the other." (213) A textbook example of quasi-estoppel occurs when litigants seek to challenge the validity of a contract or other document when they had previously relied on its validity to their advantage. (214)
Whether the invocation of quasi-estoppel arises in a contract or other setting, it is a flexible doctrine that courts apply to prevent injustice in those jurisdictions that recognize it. (215) As is true with other estoppel doctrines, quasi-estoppel provides the flexibility that allows courts to intervene to prevent a litigant from contradicting its position regarding the enforceability of postemployment restrictions. The omission of "voluntariness" as an element of quasi-estoppel further allows its application to restrictive covenant cases even where the former employees claim that they had no choice but to sign such agreements. (216)
B. Doctrine of Implied Waiver
A litigant may establish the equitable defense of implied waiver by implication through intentional conduct inconsistent with asserting a legal right. (217) Waiver and estoppel are related but distinct concepts. (218) The intent to relinquish a right is a necessary element of waiver, but not estoppel, while detrimental reliance is a necessary element of equitable estoppel but not waiver. (219)
The doctrine of implied waiver has been raised in a variety of factual settings (220) and litigants most often use it in cases concerning contracts. (221) Because "[i]mplied waivers are generally not favored in the law," (222) the requisite intent to waive a legal right must be found by clear, decisive, and unequivocal conduct. (223) The Supreme Court of Alabama stated that "waiver requires the intentional relinquishment of a known right, and that intentional relinquishment must be shown in an unequivocal manner." (224) For example, an employer may not intend to forever bar future challenges to the validity of certain restrictive covenants by entering into a settlement conceding the reasonableness of such restrictions. A court may deem a company, however, to have intended to relinquish the right to challenge the validity of restrictive covenants when those same terms are incorporated in its own agreements. Evidence of any attempted or actual enforcement of those same terms would provide further confirmation of intent sufficient to invoke the doctrine of implied waiver. Accordingly, when a competitor has the same or similar employment agreements, the doctrine of implied waiver provides an additional ground to bar the competitor from challenging the restrictive covenants in other companies' agreements.
C. Doctrine of Clean Hands
Since the English barrister Richard Francis first coined the phrase, (225) it has been a well recognized canon of equity jurisprudence that "[a]ny party seeking equitable relief must come to the court with 'clean hands.'" (226) The U.S. Supreme Court declared:
[T]hat whenever a party who, as actor, seeks to set the judicial machinery in motion and obtain some remedy, has violated conscience, or good faith, or other equitable principle, in his prior conduct, then the doors of the court will be shut against him in limine; the court will refuse to interfere on his behalf, to acknowledge his right, or to award him any remedy. (227)
The clean hands doctrine is distinguishable from the equitable maxim that "one seeking equity must do equity." (228) The latter principle is "concerned primarily with the rights and duties of the parties." (229) The clean hands doctrine is "concerned primarily with protecting the [integrity of the judicial process] from improper action by a party." (230) The maxim is grounded on the historical concept that a court of equity represents the collective conscience of the public. (231)
In determining what constitutes "unclean hands," courts have declared that the "misconduct need not necessarily have been of such a nature to be punishable as a crime or as to justify legal proceedings of any character." (232) Instead, courts agree that "[a]ny willful act concerning the cause of action which rightfully can be said to transgress equitable standards of conduct is sufficient cause for invocation of the maxim." (233) In applying the doctrine, courts have described the required level of misfeasance as being "inequitable," "unconscionable," or deriving from a "bad motive." (234) The kind of conduct that lacks a proper equitable nature includes conduct that does not conform to "minimum ethical standards" in business. (235)
Courts of equity apply the clean hands doctrine only where the unconscionable act has a direct relation to the matter in controversy. (236) In other words, the violations of conscience must affect the equitable relations between the parties concerning "something brought before the court for adjudication." (237) While it is difficult to reconcile those cases determining if misconduct is related to the lawsuit or merely collateral, litigants may invoke the doctrine even if they have not suffered from the misconduct of their opponent. (238) Indeed the relevancy limitation does not wash a party's hands clean simply because the harm is to a third person or to the public. (239) Courts have liberally invoked the clean hands maxim to bar relief due to conduct that is in any way related to the lawsuit. (240) For instance, in a case between business competitors, a New York District Court invoked the maxim even where the deception constituting unclean hands worked no fraud on the defendant. (241)
In comparison to the equitable principles of estoppel, the clean hands doctrine is broader in application. (242) The doctrine is neither restricted in its use to a particular kind of prior conduct, such as in the case of judicial estoppel, nor does it require reliance on previous acts as a predicate to relief. (243) The absence of the requirement of prejudicial reliance allows the principle of clean hands to operate notwithstanding the lack of prior dealings between the parties. (244)
The clean hands doctrine is also more expansive than the equitable principle of implied waiver. Under the former principle, there is no need to prove that the party to be estopped intended to abandon a right asserted in the case by its previous conduct. In fact, the principle of clean hands does not mandate the establishment of any kind of intent or scienter. (245) Rather, courts may apply the clean hands doctrine to conduct deemed to smack of injustice. (246) "This maxim necessarily gives wide range to the equity court's use of discretion in refusing to aid the unclean litigant." (247) Conduct that does not measure up against both public and private standards of equity increases the likelihood that a court will justify dismissal by resort to the doctrine of clean hands. (248)
The familiar maxim in equity of "he who comes into equity must come with clean hands" is instructive in a case between business competitors for tortious interference with contract. While not limited to precluding inconsistent positions, a party can avail itself of the doctrine to defend against a challenge to the validity of its agreements when a competitor required its own employees to execute identical agreements. Moreover, a competitor's duplicity in enforcing its own agreements while challenging those of a competitor reaches the threshold of unfairness for a court to find the challenging party to have unclean hands.
V. USE OF EQUITY IN DETERRING UNETHICAL BUSINESS PRACTICES
The role of equity in advancing good business practices has a long history in the Anglo-American legal system. (249) The use of the doctrines of estoppel, implied waiver, and clean hands to deter employees from disregarding the restrictive covenants of their former employers or to preclude a competitor from challenging the reasonableness of the covenants is aligned with this tradition. (250) In evaluating the use of equity in competitor-versus-competitor noncompetition cases, equitable defenses employed in other contract cases can be applied by analogy. (251) The Supreme Court of Ohio stated 150 years ago:
I care not how his want of equity may be designated. Let it be said his words, his acts, or his silence, have equitably estopped him. Or, if some strict definition of estoppel forbid such an expression, ... [] add a new name to the body of legal nomenclature. [It is n]ot the name by which it may be distinguished, but the substance of equity which supports it ... (252)
Given this instruction, the Ohio court in UZ Engineered Products Co. embraced equity to estop a challenge by a party that the restrictions in a competitor's employment agreements were void as against public policy. (253)
The applicability of the UZ Engineered Products Co. decision to future noncompetition cases, however, should be approached with caution. (254) An equity-based inquiry should focus not only on the parties at bar, but it should consider other interests as well. (255) For instance, consideration should be given to the economic impact and anticompetitive effects of denying challenges to enforceability. (256) In assessing the economic impact of the application of equitable principles in this area, the growing contributions of the field of economics to the law of noncompetition agreements should be utilized. (257) It is crucial that any such analysis be industry-specific in order to best assess the benefits of knowledge spillover, incentives for innovation, (258) and whether economic efficiencies may be outweighed by other interests. (259) Ultimately, however, the role of equity in the enforceability of postemployment restraints will continue to rest on the demonstration of employer and employee good faith. (260)
If all companies are utilizing similarly worded negative covenants, the diminished bargaining leverage of the employee should also factor into the fairness equation. (261) Because the special treatment of covenants not to compete under the law of contracts developed from the recognition that employees do not truly have freedom of contract, (262) allowing an industry custom to result in the de facto enforcement of restrictive covenants merits concern in the application of equitable defenses. (263) The invocation of the doctrines of equity may also depend upon the availability of other devices, such as the judicial admissions doctrine, to impeach the credibility of the party asserting the inconsistent positions. (264)
The extent to which courts expand upon the legacy of UZ Engineered Products Co. will turn on the degree to which they view their roles in this area as protecting employees (265) or protecting the proprietary interests of employers. (266) A court's pro-employee or pro-employer propensity, however, seems less important in the competitor-versus-competitor scenario. One court framed the concern as covenants may be used "as a shield to protect the employer from the unfair competition by the former employee, but ... [not] as a sword to defeat the efficient competitor." (267)
Even in those jurisdictions with a tradition of judicial intervention on behalf of protecting employees, (268) the changing American economy provides the impetus for a more liberal use of equity to deter unethical business behavior. (269)
The use of equitable doctrines in this area should also be judged by their ability to provide greater predictability and consistency in the common law's reasonableness analysis. (270) The certainty of enforcement or nonenforcement of restrictive covenants will facilitate strategic planning and encourage the efficient settlement of disputes. (271) Consequently, while the historic common law tension between the regimes of law and equity has often been characterized as a choice between the certainty of law and equity's ad hoc rendering of justice, banning inconsistent positions concerning restrictive covenants provides an example where equity can be used to make law more predictable and consistent.
A more common use of equitable preclusion may additionally force companies to narrow the restrictions in their covenants to increase their chances of defending them against such claims. The incentive to avoid the denial of challenging a competitor's restrictive covenant would result in less onerous postemployment conditions and, correspondingly, a more competitive labor environment.
Meanwhile, without prescience and based on imperfect knowledge, (272) courts have the delicate task of deciding when a challenge to the validity of a restrictive covenant should yield to equity. (273) Because judges are the persons who must confront the gap between the rules of law and the values of society, (274) the equitable powers historically granted to the judiciary provide the means to bridge this gap in individual cases. (275) The rule of reason itself encourages courts to embrace paradox and to integrate conflicting policies by looking critically to the circumstances of each case in the exercise of the court's judgment. (276) While the foregoing considerations may not satisfy notions of tidiness and symmetry in the consideration of equity in noncompetition cases, (277) it is the common law's characteristic inductive methods of analysis that allows the rules of law to be exposed and apply justly in real-world disputes. (278)
VI. CONCLUSION
The use of equitable doctrines to prevent a challenge to the legality of a noncompetition agreement reflects the inherent tension that underlies the American advocacy system. Despite the adversarial nature of the process, the judicial proceeding is a quest for truth and justice. To be effective, however, it depends on the integrity and honesty of its participants. Equitable doctrines developed to deter a litigant's chameleonic arguments advanced at the expense of judicial integrity and the rights of other litigants. (279) By applying equitable canons, such as unclean hands, implied waiver, and estoppel, courts have shown an unwillingness to "countenance the devolution of the judicial system into a forum of 'mere gamesmanship.'" (280)
While the case of UZ Engineered Products Co. underscores the growing judicial sensitivity to employer claims in evaluating the enforceability of restrictive covenants, it is also important in that it reminds us of the often forgotten role of equity in maintaining the integrity of law. Despite uncertainty over the role of ethical values in the current legal landscape, courts will and should continue to employ equitable principles to prevent hypocrisy in our courts and controdictions in our case law. Cases like UZ Engineered Products Co. illustrate how reliance on equitable principles to prevent inconsistent positions supports the view that ethics should play an important role in legal and business decisions.
(1) WILLIAM SHAKESPEARE, THE WINTER'S TALE act 4, sc. 4.
(2) Typically subject to time and space limitations, these contracts prohibit employees from competing with their former employers after leaving their employment. See discussion infra Part II.
(3) See discussion infra Part II.A (tracing restrictive employment covenants to the medieval guild system).
(4) As will be discussed in Part II.B-C, the modern rule of validity has been traced to an eighteenth-century English decision. See Harlan M. Blake, Employee Agreements Not To Compete, 73 HARV. L. REV. 625, 629-31 (1960) (citing Mitchel v. Reynolds, 24 Eng. Rep. 347,348 (Q.B. 1711)).
(5) See discussion infra Part II.C.
(6) See discussion infra Part II.D.
(7) See PETER CAPPELLI, THE NEW DEAL AT WORK: MANAGING THE MARKET-DRIVEN WORKFORCE 182-87 (1999) (describing widely publicized examples of employee raiding at well known companies); 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, 1204 n.138 (2001) (listing headline cases of mass defection such as Microsoft's "brain drain" resulting from teams of employees that formed spin-off companies and Intel's loss of four employees to a competitor); see also Rebecca Buckman, New Web Software Start-up Draws Microsoft Workers--and Its he, WALL ST. J., Sept. 11, 2000, at B1 (reporting antipoaching agreement between two competitors in the software industry).
(8) The most commonly asserted claim against a competitor under these circumstances is tortious interference with contract and/or business relations. See, e.g., Jarrett v. Hamilton, 346 S.E.2d 875 (Ga. Ct. App. 1986); Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452 (Tex. Ct. App. 2004); see also Park Lloyd, Enjoining Third Parties From Assisting a Covenantor in Violating a Convenant Not To Compete, 1993 UTAH L. REV. 214 (1993) (discussing "overwhelming" authority allowing a court to enjoin a stranger to a covenant from assisting covenantor in violating his or her restrictive covenant). Claims of unfair competition are frequently found in the same complaint. See, e.g., United Rentals (North America), Inc. v. Keizer, 355 F.3d 399 (6th Cir: 2004) (applying Michigan law); Vais Arms, Inc. v. Vais, 383 F.3d 287 (5th Cir. 2004) (applying Texas law).
(9) See discussion infra Part II.C-D.
(10) While subject to countervailing considerations concerning worker protection, the economic incentives for companies to use noncompetition agreements appear unchallenged in legal literature or popular media. See, e.g., Blake, supra note 4, at 652 ("Unless some enforceable commitment or effective deterrent is possible, employers will not be justified in making the optimum outlay in employee training programs."); 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, 627-29 (1999).
(11) These types of covenants have traditionally been regarded by the common law as "restraints of trade." See discussion infra Part II.A.
(12) There has always been a steady stream of cases evaluating the enforceability of covenants not to compete. See generally Blake, supra note 4, at 626, 629-51 (discussing controversial nature of noncompete cases during the Middle Ages and beyond); see also Charles A. Sullivan, Revisiting the "Neglected Stepchild" Antitrust Treatment of Postemployment Restraints of Trade, 1977 U. ILL. L.J. 621, 622-23 (1977) ("the number of decisions reported constitutes only the proverbial iceberg's tip"). A case of" first impression in New Jersey determined that employers who terminate employees for refusing to sign noncompete agreements cannot be subject to lawsuits alleging wrongful termination in violation of public policy. See Maw v. Advanced Clinical Communications, Inc., 846 A.2d 604 (N.J. 2004). Another case of first impression from the Supreme Court of Ohio decided that continued employment constitutes sufficient consideration to enforce covenants entered into after commencement of the employment relationship. See Lake Land Emp. Group of Akron, LLC v. Columber; 804 N.E.2d 27, 32 (Ohio 2004). Other recent decisions involving restrictive covenants concern their assignability through stock buyouts or mergers involving corporate employers. Compare Corporate Express Office Prods., Inc. v. Phillips, 847 So.2d 406 (Fla. 2003) (ruling that it is not necessary for noncompete agreements signed prior to 1996 to include an assignment clause in order for the new corporation to enforce them) with Christine Flood, Massachusetts Court Holds Employee's Non-Compete Agreement Cannot Be Assigned to Successor Corporation, MONDAQ BUS. BRIEF, Dec. 10, 2003 (discussing case holding that company cannot assign a restrictive covenant without employee consent). See generally Pennsylvania Supreme Court Holds That Covenants Not To Compete Are Not Assignable By Default and Are Not Enforceable To Protect Financial Interests Alone Hess v. Gebhard & Co., 808 A.2d 912 (Pa. 2002), 116 HARV. L. REV. 2238 (2003).
(13) The covenant not to compete is often accompanied by an agreement not to solicit customers or fellow employees. A nonsolicitation agreement does not otherwise restrict the ability to secure gainful employment and, as a result, is less controversial than a covenant prohibiting competition. See Frederick E. Hines, Employees' Covenants Not To Solicit Former Patrons, 20 CAL. L. REV. 607 (1932). A nonsolicitation contract, however, does not offer an employer the broad protection of the covenant not to compete because it fails to prevent clients or employees from voluntarily moving to a competitor so long as they are not improperly solicited. Other kinds of employment restrictions may include a restriction against disclosing proprietary information and a restriction against using an invention conceived during employment. See 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, 1000 (1997).
(14) 770 N.E.2d 1068 (Ohio Ct. App. 2001), appeal not allowed, 766 N.E.2d 1002 (Ohio 2002).
(15) These common law doctrines prohibiting inconsistent conduct or conflicting allegations derive from the ancient Latin maxim allegans contraria non est audiendus. See HERBERT BROOM, A SELECTION OF LEGAL MAXIMS 119 (2d ed. 1850) ("He who alleges contradictory things is not to be heard.").
(16) The increasing amount of disputes involving restrictive employment covenants and competitor-versus-competitor litigation has not gone unnoticed by the legal academy. See Arnow-Richman, supra note 7, at 1164 n.3 (listing a plethora of recent articles); Katherine V. W. Stone, Human Capital and Employee Mobility: A Rejoinder, 34 CONN. L. REV. 1233 (2002) (suggesting that scholars should consider the appropriateness of postemployment restraints); see also Samuel C. Damren, The Theory of "Involuntary" Contracts: The Judicial Rewriting of Unreasonable Covenants Not To Compete, 6 TEX. WESLEYAN L. REV. 71 (1999) (analyzing cases involving judicial revision); Jay L. Koh, From Hoops to Hard Drives." An Accession Law Approach to the Inevitable Misappropriation of Trade Secrets, 48 AM. U. L. REV. 271, 281-84 (1998) (describing growth of the controversial doctrine of inevitable disclosure where employees are restricted from working for competitors under circumstances which may lead to the disclosure of confidential information even in the absence of a noncompetition agreement); Suellen Lowry, Inevitable Disclosure Trade Secret Dispules: Dissolutions of Concurrent Property Interests, 40 STAN. L. REV. 519, 519 (1988) (same); Kenneth J. Vanko, "You're Fired! And Don't Forget Your Non-Compete ...": The Enforceability of Restrictive Covenants in Involuntary Discharge Cases, 1 DEPAUL BUS. & COM. L.J. 1 (2002) (summarizing enforceability issues depending on the nature of the termination of employment).
(17) Blake, supra note 4, at 631-32. This article will not attempt to duplicate the scholarship of Professor Blake, which contains an extensive summation of early English and American cases regarding restrictive employment covenants, other than to highlight the conception and construction of the law in relation to its social and economic background.
(18) Id. at 632 (citing 2 W. J. ASHLEY, ENGLISH ECONOMIC HISTORY 66-189 (4th ed. 1906); EDWARD CHEYNEY, INDUSTRIAL AND SOCIAL HISTORY OF ENGLAND 116-52 (rev. ed. 1920); and 1 E. LIPSON, ECONOMIC HISTORY OF ENGLAND 238-390 (5th ed. 1929)). The kinds of commercial activities that required workers to earn their living only after completing an apprenticeship included those individuals practicing a dyer's craft, blacksmiths, and haberdashers. See Charles E. Carpenter, Validity of Contracts Not To Compete, 76 U. PA. L. REV. 244, 244 (1928) (citing Anonymous, Y.B. 2 Hen. V, pl. 26 (1415), The Blacksmith's Case, 2 Leo. 210, 3 Leo. 217 (1587), and Colgate v. Bacheler, Cro. Eliz., 872 (1596)).
(19) Id. (quoting LIPSON, supra note 18, at 296).
(20) Blake, supra note 4, at 633.
(21) The typical time frame of servitude was seven years. Id. Eventually, the time period was codified in the Statute of Apprentices. Id. (citing 5 Eliz. 1, ch. 4 (1563)).
(22) Blake, supra note 4, at 633.
(23) Id.
(24) Id. at 633-34.
(25) Id.
(26) Id. at 633 (citing LIPSON, supra note 18, at 285). Journeymen were subjected to difficult entrance examinations and exorbitant entrance tees. Id.
(27) Blake, supra note 4, at 634-37 (summarizing early recorded decisions). Early legislative enactments also declared it illegal for masters to prohibit apprentices or journeymen from engaging in their chosen trade. Id. at 634 n.26 (citing "Act for Avoiding of Exactions Taken Upon Apprentices," 28 Hen. 8, ch. 5 (1536)). Additionally, restrictive covenant agreements may have been considered to violate the Statute of Laborers that was passed after the Great Plague and required all persons under sixty years old to work. See Carpenter, supra note 18, at 244-45 (citing 23 Edw. III (1349)).
(28) Blake, supra note 4, at 637-38.
(29) See, e.g., CHARLES GROSS, THE GILD MERCHANT (1890); STELLA KRAMER, THE ENGLISH CRAFT GILDS (1927); GEORGIE UNWIN, THE GILDS AND COMPANIES OF LONDON (3d. ed. 1930), cited in Blake, supra note 4, at 632 n.22; see also id. at 634-37 ("indicating that the decay of the guilds was well advanced" by the sixteenth century and that the transition was completed by the late eighteenth and nineteenth centuries).
(30) Blake, supra note 4, at 633 n.22 (listing the source for a collection of municipal regulations and documents of indenture).
(31) Id. at 638.
(32) Id.
(33) Id.
(34) Id.
(35) See Mitchel v. Reynolds, 24 Eng. Rep. 347, 349-50 (Q.B. 1711) (identifying competing public policy considerations to the employer, the employee, and society in evaluating the validity of a restrictive covenant). While Mitchel dealt with a restriction incident to the transfer of property, courts would not distinguish between the various kinds of competitive restrictions until the next century. See Blake, supra note 4, at 631 n. 18 (citing William L. Letwin, The English Common Law Concerning Monopolies, 21 U. CHI. L. REV 355, 356 (1954)). Currently, the limits on competition in contracts concerning the sale of a business are generally viewed more favorably than those contained in employment contracts. Accord Albert M. Kales, Contracts To Refrain From Doing Business or From Entering or Carrying On an Occupation, 31 HARV. L. REV 193 (1917) (comparing evolution of negative restraint rules in the sale of a business with rules after the termination of employment); see also Arnow-Richman, supra note 7, at 1172 n.27.
(36) See Mitchel, 24 Eng. Rep. at 350. While the Mitchel court and its progeny presumed such contractual restraints were invalid, the presumption shift evidenced in the modern approach to the reasonableness inquiry began with Rousillon v. Rousillon, 14 Ch. D. 351 (1880). See Blake, supra note 4, at 641.
(37) See Blake, supra note 4, at 637-43; see generally Carpenter, supra note 18.
(38) See Davies v. Davies, 36 Ch. D. 359 (C.A. 1887) (discussing English development of the "rule of reason"); cf. Standard Oil Co. v. United States, 221 U.S. 1 (1911) (formulating the "rule of reason" in interpreting the Sherman Antitrust Act).
(39) See Kales, supra note 35, at 193-94 (concluding that the societal interest in an individual being able to choose his or her employment was still operative in the early twentieth century, but that the prior objections to restrictive employment covenants, such as the "loss of livelihood," "the tendency toward a monopoly," or the "mischief to the public" were no longer a concern).
(40) The concept of sanctity of contract in England prevailed during the latter part of the nineteenth century through the early twentieth century. See Blake, supra note 4, at 640; see also Stewart E. Sterk, Restraints on the Alienation of Human Capital, 79 VA. L. REV. 383, 411 (1993) (discussing the modern "rule of reason" application and the potential undesirable restriction on an individual's freedom to contract about the future use of his or her own human capital).
(41) Professor Blake reports that "virtually all" restrictive covenants were upheld in the courts during that time. Blake, supra note 4, at 640.
(42) The initial case evaluating a restraint of trade occurred within a decade of the Civil War. See Lawrence v. Kidder, 10 Barb. 641 (N.Y. Sup. Cr. 1851). "[W]ithin fifty years alter the first American restraint-of-trade case, the 'reasonableness' criterion was firmly established...." Blake, supra note 4, at 644.
(43) The free market economic theory led to an emphasis on the bargaining process, rather than on the substantive Fairness of contract terms as part of the general principles of contract. See PATRICK ATIYAH, THE RISE AND FALL OF FREEDOM OF CONTRACT 398-405 (1979); cf. Marks v. Grates, 154 F. 481, 483 (9th Cir. 1907) (recognizing equitable unconscionability despite the rise of Legal formalism). Public law was also influenced by the "freedom of contract" phenomenon. As the United States underwent the same cultural and economic transformation as its mother country under the influence of economist Adam Smith and social Darwinist Herbert Spencer, it would enter what is termed the "Lochner Era" where economic liberty became enshrined as a constitutional right. See Lochner v. New York, 198 U.S. 45 (1905); see also Robert G. McGloskey, Economic Due Process and the Supreme Court: An Exhumation and Reburial, 1962 SUP. CT. REV. 34, 38. See generally Cass R. Sunstein, Lochner's Legacy, 87 COLUM. L. REV. 873 (1987).
(44) Blake, supra note 4, at 643. While courts did not depart from the "rule of reason" in favor of a pure contractual analysis, it is not entirely clear that the reasonableness analysis was devoid of economic influence. One court identified the interests of the employee in the following opinion:
The loss to society of a valuable member is as great a public injury now as it ever was, and as great here as anywhere. I hope, indeed, that the market value of a human being is higher now than it was in England at the beginning of the eighteenth century, when the case of Mitchel v. Reynolds was decided. The capacity of an individual to produce [using that word in its largest sense] constitutes his value to the public.
Kellogg v. Larkin, 3 Pinn. 123 (Wis. 1851), quoted in Kales, supra note 35, at 194 n.2.
(45) Blake, supra note 4, at 643-44 (explaining that courts in the United States play a more active role than their English counterparts in protecting employees from undue burdens associated with restrictive covenants).
(46) See, e.g., Carpenter, supra note 18; Kales, supra note 35.
(47) See Katherine V.W. Stone, The New Psychological Contract: Implications of the Changing Workplace for Labor and Employment Law, 48 UCLA L. REV. 519, 527 (2001) [hereinafter The New Psychological Contract] (describing the U.S. craft unions as akin to the medieval European craft guilds and explaining that "[t]he ability of the nineteenth-century skilled workers to control their wages and working conditions was a result of both their skills and their unions").
(48) While the case involved a restraint ancillary to the sale of a business, the court in Anchor Elec. Co. v. Hawkes espoused the public policy of the times:
The changes in the methods of doing business, and the increased freedom of communication which have come in recent years, have very materially modified the view to be taken of particular contracts in reference to trade. The comparative ease with which one engages in business can turn his energies to a new occupation if he contracts to give up his old one makes the hardship of such a contract much less for the individual than formerly, and the commercial opportunities which open the markets of the world to the merchants of every country leave little danger to the community from an agreement of an individual to cease to work in a particular field.
50 N.E. 509 (Mass. 1898); accord Herreshoff v. Boutineau, 19 Atl. 712 (R.I. 1890).
(49) See, e.g., Social Security Act of 1935, ch. 531, Title IV, Part A (1935) (providing for old age assistance and unemployment compensation) (current version at 42 U.S.C. [section] 602 (2000)). The enactment of The Sherman Antitrust Act of 1890, prohibiting unfair restraints of trade and monopolistic business practices, may have minimized the danger that restraints against competition would result in monopolization. See 15 U.S.C. [section] 1 et seq (2000).
(50) See Kales, supra note 35, at 194 ("cases upholding contracts not to compete [we]re legion"); see also Becker College of Business Administration v. Gross, 183 N.E. 765 (Mass. 1933) (upholding a covenant not to compete against a college business professor). But see Carpenter, supra note 18, at 270-71 (listing cases in the early twentieth century refusing enforcement of negative employment covenants).
(51) Professor Corwin, a leading commentator on the era and its impact on U.S. constitutional theory, discusses these economic and social developments. EDWARD CORWIN, LIBERTY AGAINST GOVERNMENT 114 (1948).
(52) PETER DRUCKER, MANAGING IN A TIME OF GREAT CHANGE 65-66 (1995) (explaining that more than eighty percent of the workforce worked in small family businesses in 1913, but that by mid-century, workers in the United States and other developed countries had become employees of large companies).
(53) Professor Stone explains that employer efforts to raise productivity as a result of international trade led to confrontations between skilled labor and management that culminated in the lockout at the Carnegie Steel Corporation's Homestead Works in 1892. The New Psychological Contract, supra note 47, at 526-28. Management's success at Homestead Works in arresting authority over production and productivity in the steel industry eventually led to the demise of skilled labor unions in other industries as well. Id. (citing DAVID MONTGOMERY, WORKER'S CONTROL. IN AMERICA: STUDIES IN THE HISTORY OF WORK, TECHNOLOGY, AND LABOR STRUGGLES 9-31 (1979)).
(54) See Carpenter, supra note 18.
(55) See, e.g., Love v. Miami Laundry Co., 160 So. 32 (Fla. 1935) (denying enforcement of a restrictive covenant against the driver of a laundry business because the employer had no property right in its customers); see also John Dwight Ingrain, Covenants Not To Compete, 36 AKRON L. REV. 49, 50 (2002) (discussing court hostility to restrictive covenants).
(56) See generally SAMUEL HABER, EFFICIENCY AND UPLIFT: SCIENTIFIC MANAGEMENT IN THE PROGRESSIVE ERA, 1890-1920 (1964). For a comprehensive analysis of the two scientific management systems of "Taylorism" and "Fordism," see The New Psychological Contract, supra note 47, at 529-35. See also id. at 532 (explaining that these organizational systems existed in both blue-collar and white-collar workplaces by the 1960s) (citing HARRY BRAVERMAN, LABOR AND MONOPOLY CAPITAL: THE DEGRADATION OF WORK IN THE TWENTIETH CENTURY 335, 340 (1974)).
(57) The New Psychological Contract, supra note 47, at 531 (citing RUTH MILKMAN, FAREWELL TO THE FACTORY: AUTO WORKERS IN THE LATE TWENTIETH CENTURY 23-24 (1997)). It would remain the predominant organizational theory until the final decades of the twentieth century, hi.
(58) See, e.g., Arthur Murray Dance Studios of Cleveland, Inc. v. Witter, 105 N.E.2d 685, 703 (Ohio Ct. Com. PI. 1952) (pointing out that the difficulty of deciding noncompetition cases is not that there is too little authority, but that there is too much).
(59) See, e.g., Welcome Wagon, Inc. v. Morris, 224 F.2d 693 (4th Cir. 1955) (denying noncompetition contract sought against a Welcome Wagon hostess because the employer had no identifiable interest in information or clientele and because the time and area restrictions were too broad); Bennett v. Storz Broad. Co., 134 N.W.2d 892, 898 (Minn. 1965) (refusing to enforce a restrictive covenant and noting that courts look on them with disfavor).
(60) See generally Arnow-Richman, supra note 7, at 1173-75 (discussing the evolution of the duel-pronged approach). The reasonableness approach in assessing the validity of restrictive employment covenants can be considered analogous to the "ends" and "means" analysis which is now commonplace in U.S. constitutional theory for measuring the sufficiency of the policy analysis supporting the law.
(61) But see Gary P. Kohn, Comment, A Fresh Look: Lowering the Mortality Rate of Covenants Not to Compete Ancillary to Employment Contracts and to Sale of Business Contracts in Georgia, 31 EMORY L.J. 635, 646 (1982) (noting that Georgia courts would disregard the threshold requirement when the terms appeared reasonable under the last requirement); Edward M. Shulman, An Economic Analysis of Employee Noncompetition Agreements, 69 DENV. U. L. REV. 97, 98 (1992) (discussing court focus on the second criterion).
(62) See Carpenter, supra note 18, at 270 ("If the restraint is no more than is reasonably necessary to protect the employer against the deflection of customers or misuse of trade secrets by the employee through the opportunity which his employment has given him, the courts uniformly uphold the covenants and give relief either at law or in equity."). There is a question as to whether a court will allow evidence extraneous to the contract itself(i.e., family considerations) in weighing the burden on the employee in enforcing a restrictive covenant. See Blake, supra note 4, at 686 (concluding that such a consideration would be inappropriate).
(63) Carpenter, supra note 18, at 256. In addition to the emerging issues discussed above at note 12, a current dilemma facing courts is the extent to which training may justify employer protection. See Edmund W. Kitch, The Law & Economics of Rights in Valuable Information, 9 J. LECAL STUD. 683, 684 (1980); Gillian Lester, Restrictive Covenants, Employee Training, and the Limits of Transaction-Cost Analysis, 76 IND. L.J. 49, 56 (2001).
(64) See generally Blake, supra note 4, at 653-67 (discussing public policy rationales to justify protection of customers); Ingram, supra note 55, at 51-52 (noting courts often borrow the term customer "goodwill" from the restraint cases ancillary to the sale of a business). For recent cases upholding restrictive covenants due to customer contact, see, for example, Mertz v. Pharmacists Mut. Ins. Co., 625 N.W.2d 197, 204 (Neb. 2001) and BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1225 (N.Y. 1999). A frequently litigated issue is whether the employer's interest is only in existing customers, or whether it extends to prospective customers as well. Compare Advantage Digital Systems, Inc. v. Digital, 870 So.2d 111 (Fla. Ct. App. Dec. 3, 2003) (denying enforcement) with UZ Engineered Prods. Co. v. Midwest Motor Supply Co., 770 N.E.2d 1068 (Ohio Ct. App. 2001) (upholding covenant).
(65) See Arnow-Richman, supra note 7, at 1176 n.40 (citing cases); Blake, supra note 4, at 658-62; see also Kelite Prods. v. Brandt, 294 P.2d 320 (1956) (noting that an employee in a "highly competitive" business of selling industrial cleaning and maintenance compounds testified on cross examination that "if a man has a good product [customers] are pretty apt to follow the man").
(66) See Arnow-Richman, supra note 7, at 1182 (stating that restrictive covenant protection of confidential information is "most common amongst modern non-compete cases"). The debate over the protection of trade secrets and other business information has been particularly vigorous. See, e.g., Victoria A. Cunduff, Maximum Security: How to Prevent Departing Employees from Putting your Trade Secrets to Work for Your Competitor; 8 CONTEMP. & HIGH TECH. L.J. 301, 309 (1992); Michael J. Hutter, Drafting Enforceable Employee Non-Competition Agreement to Protect Confidential Business Information: A Lawyer's Practical Approach to the Case Lazy, 45 ALB. L. REV. 311, 320 (1981); Alan Hyde, Employment Law After the Death of Employment, 1 U. PA. J. LAB. & EMP. L. 99, 114 (1998); Paul H. Rubin & Peter Shedd, Human Capital and Covenants Not to Compete, 10 J. LEGAL STUD. 93, 98 (1981); Robert Unikel, Bridging the "Trade Secret" Gap: Protecting "Confidential Information" Not Rising to the Level of Trade Secrets, 29 LOY. U. CHI. L.J. 841, 867-75 (1998).
(67) See, e.g., Milton Handler & Daniel E. Lazoroff, Restraint of Trade and the Restatement (Second) of Contracts, 57 N.Y.U. L. REV. 669, 713-16 (1982).
(68) By the mid-twentieth century, more workers were employed in service industries than in goods and manufacturing. See STEPHEN A. HERZENBERG ET AL., NEW RULES FOR A NEW ECONOMY: EMPLOYMENT AND OPPORTUNITY IN POSTINDUSTRIAL AMERICA 2-3 (1998). Since that time, service sector jobs have grown by 36 million to constitute roughly fifty percent of the gross national product. See Anthony Carnevale & Donna Desrochers, Training in the Dilbert Economy, 53 TRAINING & DEV. 32-33 (1999).
(69) HERZENBERG, supra note 68.
(70) See THOMAS A. DAVENPORT, HUMAN CAPITAL: WHAT IT IS AND WHY PEOPLE INVEST IT 26 (1999); see also RICHARD FLORIDA, THE RISE OF THE CREATIVE CLASS xiii (2002) (discussing how the Industrial Revolution replaced raw materials for land). Dividing the economy into three sectors manufacturing, services, and creative--the author estimates that one-third of the workforce is in the creative sector', which accounts for one-half of the total wage and salary income. See id. at xiv.
(71) The New Psychological Contract, supra note 47, at 554-55, 561-62 (citing Edward E. Lawler III, From Job-Based to Competence-Based Organizations, 15 J. ORGANIZATIONAL BEHAV. 3, 5-6 (1994) (noting that bureaucratic organizations that were dominant throughout most of the twentieth century no longer work with the rise in world trade and pace of technological change) and Anne S. Miner & David E Robinson, Organizational and Population Level Learning as Engines for Career Transitions, 15 J. ORGANIZATIONAL BEHAV. 345, 347 (1994) (commenting that recent research indicates that career paths have changed from employees moving up along fixed lattices on organizational flowcharts to organizational fluidity)).
(72) See DRUCKER, supra note 52, at 71 ("[T]here is no such thing as 'lifetime employment' anymore--such as was the rule in big U.S. or European companies only a few years ago."); ROSABETH KANTOR, ON THE FRONTIERS OF MANAGEMENT 190 (1997) (commenting on modern management theories in relationship to the "job insecurity reality"); MILKMAN, supra note 57, at 23-24 (1997).
(73) The idea of "competency-based organizations" was created by Edward E. Lawler of the University of California while the concept of "total quality management" was invented by an American accountant, W. Edwards Deming, who consulted with the Japanese after World War II to assist the country in achieving industrial success. See The New Psychological Contract, supra note 47, at 560-68. See generally ERIC E. ANSHCUTZ, TQM AMERICA: HOW AMERICA'S MOST SUCCESSFUL COMPANIES PROFIT FROM TOTAL QUALITY MANAGEMENT 16-17, 48-49 (1995); Edward E. Lawler III, supra note 71, at 5-6.
(74) The New Psychological Contract, supra note 47, at 549. Corporations are undergoing large-scale downsizing and decentralization. See CHARLES HECKSCHER, DEFINING THE POST-BUREAUCRATIC TYPE IN THE POST-BUREAUCRATIC ORGANIZATION: NEW PERCEPTIVES ON ORGANIZATIONAL CHANGE 14, 27 (Charles Heckscher & Anne Donnellon eds., 1994) (discussing the mass layoffs of management personnel in the 1980s); Neil Anderson & Rene Schalk, The Psychological Contract in Retrospect and Prospect, 19 J. ORGANIZATIONAL BEHAV. 637, 638 (1998). Work practices have adjusted to ever-changing production requirements by relying on temporary work and outsourcing. See The New Psychological Contract, supra note 47, at 539-49 (refuting the view by some economists that job tenure and .job loss data did not evidence a decline in long-term employment). But see Henry Farber, Are Lifetime Jobs Disappearing? Job Duration in the United States: 1973-1993, at 25 (Nat'l Bureau of Econ. Research, Working Paper No. 5014, 1995).
(75) Arnow-Richman, supra note 7, at 1196.
(76) See FLORIDA, supra note 70, at 160 (noting the prevalence of career shifts based on personal interviews); RICHARD SENNETT, THE CORROSION OF CHARACTER 22 (1998) ("Today, a young American with at least two years of college can expect to change jobs at least eleven times in the course of working, and change his or her skill base at least three times during those forty years of labor.").
(77) See Michael B. Arthur, A Boundaryless Career: A New Perspective for Organizational Inquiry, 15 J. ORGANIZATIONAL BEHAV. 295 (1994) (attributing to the musings of General Electric's Jack Welch in the early 1990s the development of the concept of a "boundaryless career" where workers will rely on the industry or the market rather than a particular company fox" lifelong employment); Philip H. Mirvis & Douglas T. Hall, Psychological Success and the Boundaryless Career, 15 J. ORGANIZATIONAL BEHAV. 365 (1994).
(78) See The New Psychological Contract, supra note 47, at 548 ("Industrial sociologists, management consultants, organizational theorists, and corporate executives report with near unanimity that there is a fundamental change in the implicit psychological contract under which most Americans are now employed."); see also Arnow-Richman, supra note 7, at 1198 n. 117 (recognizing the "recent changes in the implicit understandings between workers and employers have received attention from a variety of academic disciplines"); Robert W. Gordon, Macaulay, Macneil, and the Discovery of Solidarity' and Power in Contract Law, 1985 WIS. L. REV. 565, 570 (1985).
(79) See The New Psychological Contract, supra note 47, at 548.
(80) Id.
(81) See Neil Anderson & Rene Schalk, The Psychological Contract in Retrospect and Prospect, 19 J. ORGANIZATIONAL. BEHAV. 637, 641 (1998); Marcie A. Cavanaugh & Raymond A. Noe, Antecedents and Consequences of Relational Components of the New Psychological Contract, 20 J. ORGNIZATIONAL BEHAV. 323, 324 (1999); Denise M. Rousseau & Snehal A. Tijoriwala, Assessing Psychological Contracts: Issues, Alternatives and Measures, 19 J. ORGANIZATIONAL BEHAV. 679, 683 (1998). While there is agreement on the existence of a change in the employment relationship, there is disagreement on the new terms or, for that matter; whether the transformation is complete. See Hendrik Hartog, Stone's Transitions, 34 CONN. L. REV. 821. 827-28 (2002).
(82) See Ingrain, supra note 55, at 65; see also Maureen B. Callahan, Post-Employment Restraint Agreements: A Reassessment, 52 U. CHI. L. REV. 703, 709 (1985) (noting that the English rule of enforceability stemming from the case of Mitchel v. Reynolds "has survived virtually unchanged to the present day").
(83) See, e.g., The New Psychological Contract, supra note 47, at 594 (criticizing the current trends in enforcing postemployment restraints and contending that "the law is clearly out of step with social practice"): see also Eileen Silverstein, Bringing Forth a New World From the Ashes of the Old, 34 CONN. L. REV. 803 (2002). The employee-oriented approach argues that it is unfair to enforce restraints on individual workers without the tacit promise of job security or the prospect for promotion. See generally The New Psychological Contract, supra note 47.
(84) E.g., Callahan, supra note 82, at 725-27 (rejecting the independent determination of reasonableness for restrictive covenants and advocating a return to classical contract analysis). For early economic contributions to federal law and the public domain of restraint of trade, see Derek C. Bok, Section 7 of the Clayton Act and the Merging of Law and Economics, 74 HARV. L. REV. 226, 228 (1960); Richard A. Posner, The Chicago School of Anti-Trust Analysis, 127 U. PA. L. REV. 925 (1979). Other commentators take an opposing view by stressing the social and moral aspects of postemployment restraints. Professor Arnow-Richman suggests that employers have a legitimate interest to retain workers under certain circumstances and proposes a process-based test of enforceability similar to that undertaken with premarital contracts where the court would enforce the agreement unless it was not executed voluntarily or it was unreasonable at the time the parties entered the contract. Arnow-Richman, supra note 7, at 1222-43; see also Blake, supra note 4, at 641 (noting that U.S. courts assess reasonableness at the time of breach and not at the time of contracting). Professor Silverstein also proposes that employers be made to pay former employees during the term of the covenant. Silverstein, supra note 83, at 817.
(85) While there is no survey data on the number of noncompete agreements extant, practicing attorneys and legal scholars alike agree that the number is soaring. See, e.g., Arnow-Richman, supra note 7, at 1163 ("Both the use and enforcement of noncompete agreements appear to be on the rise ..."); Blake, supra note 4, at 627 n.4 (noting an increase in the use of employee restraints in the mid-twentieth century); Kenneth Bredemeier, In a Bind Over Noncompete Clauses: More Workers Caught in Grip of Required Agreements, WASH. POST, Mar. 18, 2000, at E1 (interviewing legal counsel discussing the increased frequency of use of noncompete agreements); Dan Seligman, The Case For Servitude; Noncompete Agreements Are Good, FORBES, Mar. 1, 2004, at 70; Tracy L. Staidl, The Enforceability of Noncompetition Agreements When Employment is At-Will: Reformulating the Analysis, 2 EMPLOYEE RTS. & EMP. POL'Y J. 95, 118 (1998) (noting an increase in postemployment restraint agreements and litigation to enforce them); The New Psychological Contract, supra note 47, at 577 n.239 (2001) (noting an even greater increases between the early 1970s and the late 1990s); Peter J. Whitmore, A Statistical Analysis of Noncompetititon Clauses in Employment Contracts, 15 J. CORP. L. 483, 484 n.2 (1990) (determining that the number of appellate decisions involving noncompetition claims more than doubled between 1966 and 1988).
(86) An Alaska court explained its view that enforcing restrictive covenants benefits both parties and increases competition: "The law upholds these agreements because they allow the parties to work together to expand output and competition. If one party can trust the other with confidential information and secrets, then both parties are better positioned to compete with the rest of the world." KW Plastics v. United States Can Co., Nos. Civ. A. 99-D-286-N and 99-D-878-N, 2001 WL 135722 (M.D. Ala. Feb. 2, 2001) (quotations omitted); accord Polk Bros., Inc. v. Forest City Enter., Inc., 776 F.2d 185, 189 (7th Cir. 1985). Notably, what is considered an "employer-oriented" view of restrictive covenants may simply be part of the new conceptions of commercial morality in the field of contract law. See, e.g., Sidney W. Delong, Placid, Clear-seeming Words: Some Realism About the New Formalism (With Particular Reference to Promissory Estoppel), 38 SAN DIEGO L. REV. 13, 14-15 (2001); Robert A. Hillman, The "New Conservatism" in Contract Law and the Process of Legal Change, 40 B.C. L. REV. 879, 882 (1999); Ralph James Mooney, The New Conceptualism in Contract Law, 74 OR. L. REV. 1131, 1133-35 (1995); Richard E. Speidel, Afterword: The Shifting Domain of Contract, 90 NW. U. L. REV. 254, 254 (1995).
(87) UZ Engineered Prods. Co. v. Midwest Motor Supply Co., 770 N.E.2d 1068 (Ohio Ct. App. 2001), appeal not allowed, 766 N.E.2d 1002 (Ohio 2002).
(88) Id. at 1073; Transcript of Proceedings at 99, 157, 215, UZ Engineered Prods. Co. v. Midwest Motor Supply Co., No. 99CVH 11-9731 (Ohio Ct. C.P. Jan. 24, 2001) (transcript on file with author).
(89) Transcript of Proceedings at 61, 82-83, 99, 101-03, 157, 215, 433.
(90) See UZ Engineered Prods. Co., 770 N.E.2d at 1073; Transcript of Proceedings at 73-74; Defendant's Proposed Finding of Fact and Conclusions of Law in Support of its Rule 41 (B)(2) Motion to Dismiss and its Rule 50(A)(1) Motion for Directed Verdict at 5.
(91) UZ Engineered Prods. Co., 770 N.E.2d at 1080; Transcript of Proceedings at 68-69, 85, 104-05.
(92) UZ Engineered Prods. Co., 770 N.E.2d at 1073.
(93) Id. at 1074; Transcript of Proceedings at 61-67, 93-95, 105, 628-29, 643-47.
(94) UZ Engineered Prods. Co., 770 N.E.2d at 1072.
(95) Id. at 1074.
(96) Id.
(97) Id.; Transcript of Proceedings at 96, 103, 118-21, 146-47, 159-71, 232-34, 556-61, 772, 881, 947, 1011-13.
(98) UZ Engineered Prods. Co., 770 N.E.9d at 1074; Transcript of Proceedings at 90.
(99) UZ Engineered Prods. Co., 770 N.E.2d at 1074; Transcript of Proceedings at 90-93.
(100) UZ Engineered Prods. Co., 770 N.E.2d at 1074; Transcript of Proceedings at 96, 103, 118-21, 146-47, 139-71, 205-09, 224-33, 356-61, 772, 881, 947, 1011-13.
(101) UZ Engineered Prods. Co., 770 N.E.2d at 1074; Transcript of Proceedings at 90-91, 149-55, 213.
(102) UZ Engineered Prods. Co., 770 N.E.2d at 1074; Transcript of Proceedings at 91, 149, 154-55, 213.
(103) UZ Engineered Prods. Co., 770 N.E.2d at 1074; Transcript of Proceedings at 106-14, 116-47, 205-09, 224-33, 234-54, 256-76, 159-71, 172-99.
(104) UZ Engineered Prods. Co., 770 N.E.2d at 1074; Transcript of Proceedings at 443-46, 540, 568-69, 571.
(105) UZ Engineered Prods. Co., 770 N.E.2d at 1074. In addition, UZ originally requested injunctive relief in order to prevent further violations.
(106) UZ Engineered Prods. Co., 770 N.E.2d at 1074.
(107) Id.; Answer of Defendants to Plaintiff's Second Amended Complaint and Defendants' Counter-Claims. Because the former employees were originally named as defendants, Kimbell-Midwest and its new employees jointly answered the complaint. Prior to submission of the case to the court and jury for decision, UZ withdrew all of the claims pending against its former employees. See UZ Engineered Prods. Co., 770 N.E.2d at 1075.
(108) UZ Engineered Prods. Co., 770 N.E.2d at 1074-75. In the alternative, Kimbell-Midwest alleged that the restrictive covenants contained UZ's employment contracts were over-broad and should be reformed, hi.
(109) Id. at 1079-80; Plaintiff's Reply to Counterclaims of Defendants Midwest Motor Supply, Moore and Grady.
(110) Brief of Appellee UZ Engineered Prods. Co. at 21, UZ Engineered Prods. Co. v. Midwest Motor Supply Co., 770 N.E.2d 1068 (Ohio Cr. App. 2001) (No. 01 AP-551); Transcript of Proceedings at 68-69.
(111) UZ Engineered Prods. Co., 770 N.E.2d at 1079. For fifteen years, Kimbell-Midwest had mandated all of its 330 sales employees to sign contracts not to compete containing exactly the same restrictions as UZ. See Transcript of Proceedings at 644-47, 652-54.
(112) UZ Engineered Prods. Co., 770 N.E.2d at 1079.
(113) Id.; Transcript of Proceedings at 608, 908; Findings of Fact and Conclusions of Law on Defendants' Counterclaims, No. 99CVH 11-9731 (Ohio Ct. C.P. Jan. 24, 2001).
(114) UZ Engineered Prods. Co., 770 N.E.2d at 1079.
(115) Id.
(116) Id.
(117) Id.
(118) Id.
(119) Id. at 1075. To establish the liability of the defendants, UZ presented evidence through the testimony of its former employees on cross-examination and by the introduction of Kimbell-Midwest's sales records and reports. See Brief of Appellee UZ Engineered Prods. Co. at 7, UZ Engineered Prods. Co. (No. 01 AP-551). UZ produced evidence of its damages by exhibits of the financial statements of the company. See UZ Engineered Prods. Co., 770 N.E.2d at 1083-84.
(120) UZ Engineered Prods. Co., 770 N.E.2d at 1075; Judgment Entry No. 99CVH 11-9731 (Ohio Ct. C.P. Jan. 24, 2001).
(121) See generally UZ Engineered Prods. Co., 770 N.E.2d 1068. Kimbell-Midwest also asserted that the trial court erred by admitting into evidence testimony and exhibits pertaining to employment agreements other than those of UZ, by determining the validity of the restrictive covenants that were a matter for the jury, and by refusing to submit proposed jury interrogatories separately detailing damages caused by each of the three employees. Id. at 1075.
(122) See generally id.; Brief of Appellee UZ Engineered Prods. Co. at 24.
(123) UZ Engineered Prods. Co., 770 N.E.2d at 1079; Brief of Appellee UZ Engineered Prods. Co. at 24.
(124) UZ Engineered Prods. Co., 770 N.E.2d at 1079. While UZ asserted that any or all of the three doctrines of equity barred Kimbell-Midwest from seeking to void the restrictive covenants in UZ's contracts, see Brief of Appellee UZ Engineered Prods. Co. at 24, the appellate court decision rested solely on the doctrine of estoppel. See UZ Engineered Prods. Co., 770 N.E.2d at 1079-80.
(125) UZ Engineered Prods. Co., 770 N.E.2d at 1079-80. Kimbell-Midwest disputed the admission of its own contract conditions as well as that of the other company with which it had reached a settlement because it argued that only the employment agreements of UZ were in question during the trial. Id. at 1076-77.
(126) Id. at 1085. The appellate court also upheld the trial court determination that the restrictive covenants were reasonable and enforceable. See id.
(127) The principles known as "equity" resulted from the power delegated by the English kings to their chancellors sitting in separate courts of chancery. See ROSCOE POUND, THE SPIRIT OF THE COMMON LAW 27 (1921). The courts and their resulting maxims were created in response to the arcane and inflexible rules of the common law courts, Id.; see also USH Ventures v. Global Telesystems Group, Inc., 796 A.2d 7, 17 (Del. Super. Ct. 2000) ("The separation of law and equity arose originally from the blind conservatism of common law Judges who stubbornly resisted any change in the spirit or form of the law that had been established by precedent.") (citing WILLIAM Q. DEFUNIAK, HANDBOOK OF MODERN EQUITY 5 (2d ed. 1950)). Judges in the United States still retain broad equitable powers to prevent the assertion of a legal right. See Charles E. Clark & James W. M. Moore, The New Federal Civil Procedure, 44 YALE L.J. 387 (1935).
(128) See, e.g., Farmers High Line Canal and Reservoir Co. v. City of Golden, 975 P.2d 189, 202 (Colo. 1999) (raising equitable theories of judicial estoppel and collateral estoppel in the same case); cf. Maryland Casualty Co. v. City of Cincinnati, 291 F. 825, 832 (S.D. Ohio 1923) ("Laches is not merely delay, but delay that works a disadvantage."); State ex rel. Commt. For the Referendum of Lorain Ordinance No. 77-01 v. Lorain County. Bd. of Elections, 774 N.E.2d 239, 247 (Ohio 2002) (discussing the doctrine of laches). Compare Logan Gas Co. v. Keith, 158 N.E. 184,186 (Ohio 1927) (applying the unclean hands maxim to bar inconsistency as to the validity of a lease contract) with Hamilton v. Frothingham, 40 N.W. 15, 26 (Mich. 1888) (estopping the party from asserting different versions of the contract under doctrine of judicial estoppel) and Philadelphia, Wilmington & Baltimore R.R. v. Howard, 54 U.S. (13 How.) 307, 337 (1851) (same).
(129) See Douglas W. Henkin, Comment, Judicial Estoppel: Beating Shields into Swords & Back Again, 139 U. PA. L. REV. 1711, 1712 (1991) (noting the ability of judicial estoppel to be used as a shield and a sword); see also Hoag v. McBride & Son Inv. Co., Inc., 967 S.W.2d 157 (Mo. Ct. App. 1998) (explaining that equitable estoppel is an affirmative defense or an affirmative avoidance in response to an affirmative defense). Typically, equitable doctrines are invoked as affirmative defenses by the defendant. See, e.g., ABC, Inc. v. Primetime 24, Joint Venture, 17 F. Supp. 2d 478, 483-86 (M.D.N.C. 1998), aff'd in part, vacated on other grounds in part, 184 F.3d 348, 1451 (4th Cir. 1999) (defendant asserting the defenses of estoppel, waiver, and unclean hands). Under certain circumstances, however, the maxims will be asserted by the plaintiff. See Atari Gaines Corp. v. Nintendo of America, Inc., 975 F.2d 832, 846 (Fed. Cir. 1992) (unclean hands prevented competitor from asserting an equitable copyright misuse defense).
(130) See, e.g., Keesee v. Fetzek, 723 P.2d 904, 905 (Idaho Ct. App. 1986) (describing quasi-estoppel as a "broadly remedial doctrine, often applied ad hoc to specific tact patterns"); Straup v. Times Herald, 423 A.2d 713, 720 (Pa. Super. Ct. 1980) (describing equitable estoppel as a flexible doctrine subject to a balancing of the equities between the parties).
(131) See Union Oil of California v. State, 804 P.2d 62 (Alaska 1990) (discussing the doctrine of "judicial quasi-estoppel"); see also Rand G. Boyers, Comment, Precluding Inconsistent Statements." The Doctrine of Judicial Estoppel, 80 NW. U. L. REV. 1244, 1248 (1986) ("courts have blurred the distinction by occasionally mislabeling as 'judicial estoppel' that which is really equitable estoppel"); Henkin, supra note 129, at 1728 (concluding that courts "have mistaken equitable estoppel for judicial estoppel").
(132)