Powerhouse Points: The Federal Judicial Center Antitrust Monograph: Lessons on Employee Restrictive Covenants

Written by Partner Jeffery M. Cross for the Winter 2022 Edition of Powerhouse Points, A Quarterly Litigation Update.

Read the full issue here.

In the summer of 2016, the Federal Judicial Center approached me to write a monograph on Section 1 of the Sherman Act.  The Federal Judicial Center is the educational arm of the federal courts.  It asked me to write a basic primer on Section 1 for new judges or judges that did not have a great deal of antitrust experience. This past December, the FJC published an online version of the book which is entitled Antitrust Law: Section 1 of the Sherman Act.  It can be found at 

Although I have been litigating Section 1 cases for over 40 years, and have taught antitrust as an adjunct professor for 15 years, I found the preparation of a basic primer for federal judges both challenging and rewarding.

I have always felt strongly that it is important to carefully read footnotes and textual citations in Supreme Court decisions.  They often turn out to be very important in understanding the case. In preparing the FJC monograph, I not only carefully read the footnotes and textual citations, but also the cases and treatises cited by the Court.  Time and time again, doing so revealed valuable insights, which I was able to share with readers of the monograph. 

One of the most important of such insights is from the Supreme Court’s footnotes in the area of employer and employee restrictive covenants.  My careful review of those footnotes, and the authorities cited in them, allowed me to articulate a test for determining when Section 1 is implicated in such restrictive covenants.

“Agreement” is one of the two principal elements of Section 1.  (The other principal element, of course, is “restraint of trade.”)  The word “agreement” does not appear in the statute.  Only the words “contract, combination, or conspiracy” are found in the statute.  But these words have been held to mean “agreement.”  See, e.g., Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 637 F.2d 105, 113 (3d Cir. 1980).  Conversely, independent conduct is not proscribed by Section 1.

In a seminal decision, the Court in Copperweld Corp. v. Independence Tube Corp.,467 U.S. 752 (1984), held that, in order to implicate Section 1, an agreement must be between two independent centers of decision-making that previously had pursued their own economic interests separately.  In another important decision, American Needle, Inc. v. NFL, 560 U.S. 183 (2010), the Court noted that the language of Section 1, if read literally, could be understood to mean every conceivable agreement, whether it involved a group of competing firms fixing prices, or “a single firm’s chief executive telling her subordinate how to price their company’s product.”  560 U.S. at 189.  But the Court rejected a literal approach to the language of Section 1.  It also eschewed formalistic distinctions in favor of a functional approach considering “how the parties involved in the alleged anticompetitive conduct actually operate.” 580 U.S. at 191.

In support of this functional approach, the Court cited paragraph 1462b of the antitrust treatise by Phillip Areeda and Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application. Paragraph 1462b articulated a test reflective of the holdings in Copperweld and American Needle that helps determine whether there is an agreement that implicates Section 1. The test asks if it is necessary for two or more participants to agree to effectuate the challenged conduct. Let’s apply this test to the example given by the Court in American Needle of the chief executive officer of a company agreeing with one of her employees how to price the company’s products. The chief executive officer of a company generally has the authority to price the company’s products regardless of whether her employee agrees or not. In such a situation the “agreement” of the chief executive officer and her employee would not implicate Section 1 because there were not two independent economic actors who had previously pursed separate paths but came together in a concert of action.

Arguably consistent with the foregoing, the Court in Copperweld stated that “officers or employees of the same firm do not provide the plurality of actors imperative for a § 1 conspiracy.”  Copperweld, 467 U.S. at 769.  Some lower courts have applied this statement literally to restrictive covenants in employment agreements, finding that Section 1 of the Sherman Act is not implicated. See, e.g., Siren, Inc. v. Firstline Securities, Inc., No. Civ. 06-1109 PHX RCB, 2006 U.S. Dist. LEXIS 31903, at * 24-26 (D. Ariz. May 17, 2006); Lofton v. TLC Laser Eye Centers, Civ. No. CCB-00-1667, 2001 U.S. Dist. LEXIS 1476, at * 25-26 (D. Md. Feb. 8, 2001).  But the Supreme Court in American Needle suggested that Section 1 may be implicated in certain circumstances.  It stated that the conclusion that there are not two independent economic actors when officers or employees of a single corporation are involved is based on the presumption that “components of the firm will act to maximize the firm’s profits.” American Needle, 560 U.S. at 200.  However, the Court stated that “in rare cases, that presumption does not hold” when “the parties to the agreement act on interests separate from those of the firm itself.” Id.

Here is where the digging into the footnotes and textual cites to the Court’s opinion paid off for the monograph.  To drive home the point regarding the “rare instances” when the presumption of aligned interests does not apply, the Court placed a footnote at the end of this passage – Footnote 8.  The first citation in this footnote is to paragraph 1471 of the Areeda & Hovenkamp treatise.  But further digging revealed that this paragraph was part of a section beginning with paragraph 1470 entitled “Employees Generally and Unincorporated Divisions.”  Paragraph 1470 contains language that supports the proposition that employee restrictive covenants are subject to Section 1 of the Sherman Act.  This language notes that, when an  agreement between an employer and employee is initially entered into, the employee is acting for itself. For this reason, there is an agreement between two independent economic entities.  Application of the test referenced in an earlier cited paragraph from the Areeda & Hovenkamp treatise confirms this conclusion.  At the time of employment, the employer cannot effectuate the covenant not to compete on its own.  It needs the agreement of the prospective employee, at least at the time the employee is joining the company.  Consequently, such restrictive covenants are subject to the antitrust laws because there is, in fact, the type of agreement between two independent economic entities required to implicate Section 1.

Reading carefully all of the footnotes and textual citations in Supreme Court decisions obviously is time consuming.  However, attention to these footnotes and citations are warranted for a more complete and, at times, a more practicable understanding of the Supreme Court’s rulings. Such careful review of these decisions paid off in the making the monograph for federal judges more robust and meaningful.