Non-compete clauses (NCCs) are widely used and discussed, but often too narrowly. While conventional accounts focus on the benefits of NCCs to employers, Harrison Frye has proposed that they can also serve employees by acting as a clear, costly signal. I argue that both views rely on an overly narrow analysis. A wider view shows that NCCs cause market failures, undermining their utility as protective or signalling devices. Because of these negative effects, I extend Frye’s account to argue that NCCs should be used only as targeted interventions under exceptional conditions, if they are used at all.

Noncompete clauses (NCCs), or agreements by employees to not work for a competitor or start a competing business, have recently faced increased public scrutiny and criticism. This article provides a qualified defense of NCCs. I focus on the argument that NCCs should be banned because they unfairly restrict the options of employees. I argue that this argument fails because it neglects the economist Thomas Schelling’s insight that limiting exit options can be beneficial for a person. This employee-based defense of NCCs does not absolve all their uses, but it does give us a rough test for evaluating the permissibility of NCCs. With this test in hand, I turn to some of the more controversial uses of NCCs. For those who weigh heavily the interests of employees, the question is not whether NCCs, but when.