Contingent Loyalty and Restricted Exit: Commentary on the Restatement of Employment Law

Chapter 8 of the American Law Institute’s Restatement of Employment Law proposes bad law in every sense of the word when it restricts job mobility of current and former employees by imposing a general duty of loyalty and providing for enforcement of non-compete agreements. Its rules are vague and confusing on crucial issues where clarity and precision are needed. In allowing employers to prevent current and former employees from engaging in competitive employment, Chapter 8 is out of sync with the assumptions underlying the at will rule articulated in Chapter 2 of the Restatement, which insists that employment is an at will relationship that either side can terminate in order to pursue more lucrative opportunities with other contracting partners. It is also out of sync with the norms of many contemporary employment relationships in which employees are expected to bring their knowledge and skills to every job and to depart, perhaps after a relatively short-term period of employment, with enhanced knowledge and skills. The only legitimate interests employers have in restraining competition by current or former employees are protected by the law of misappropriation of trade secrets, by the torts of interference with contract and interference with prospective business advantage, and by the corporate opportunity doctrine for managerial employees who owe a fiduciary duty to the firm. The duty of loyalty, as stated in the Restatement and as applied by courts, adds no legitimate protection to employers and is simply anticompetitive. More important, in allowing employers to resort to contract and tort liability to restrict labor market mobility, the Restatement ignores a substantial body of empirical research showing that legal restrictions on mobility are bad for employees, bad for firms, and bad for the economy as a whole. Courts should approach provisions of Chapter 8 skeptically. If they do, the Restatement may fail in its aspirations to shape the law, but at least it will not fail in the ALI’s goal of improving the law.