Restrictive Covenants, Employee Training, and the Limits of Transaction-Cost Analysis

Restrictive covenants are an increasingly common feature of employment, used across a wide range of industries, occupations, and employees. In its most common form, a restrictive covenant prohibits an employee from competing with the employer within a certain geographic area fora specified period of time after departure, usually one or two years. Sometimes these clauses are drawn more narrowly, proscribing specific activities such as continued dealings with former customers. Regardless of scope, the typical remedy when an employee breaches such a covenant is injunctive relief. A substantial literature within law and economics debates the merits of restrictive covenants from an efficiency perspective. A core theme of this literature is that the central task for legal rules is to mediate competing incentives for opportunism by both firm and employee. This focus on the concept of opportunism to explain parties\u27 behavior and assist in the design of legal rules is not unique to the literature on postemployment competition. It has become commonplace for scholars analyzing contracts and organizational structures to adopt the rhetoric and framework of Williamson\u27s transaction cost model. Indeed, Williamson\u27s classic treatises on transaction – cost economics – Markets and Hierarchies and The Economic Institutions of Capitalism – have each surpassed Marx\u27s Capital to become the most frequently cited books in the social sciences. In spite of this popularity, I argue in this Article that the concept of opportunism, while an intuitively attractive heuristic for analyzing certain principal-agent relations, is also plagued by significant indeterininacies that can limit its utility as a legal-policy device. The law of restrictive covenants is one area in which some of the most telling obscurities of the model float to the surface