Professor Orly Lobel delivered the twenty-fourth Frankel Lecture on Friday, October 25, 2019. Her lecture took place in downtown Houston, Texas, a conglomeration of glassy high-rise buildings that house the headquarters of many of the nation’s—and the globe’s—major corporations. The modern corporation is at once the dominant actor in the world economy and a legal construct that is the subject of ongoing academic analysis. The economic and legal dimensions combine in the contemporary understanding of the corporation as a nexus of contracts. According to this theory, articulated by Easterbrook and Fischel among others, the corporation is a legal person in the sense that it can sue and be sued and own property in its own name. It is also an economic actor that must act through individuals who contract on its behalf either with other corporate agents or with the corporation’s employees, suppliers, creditors, shareholders, and others.
This model of the corporation as a nexus of contracts is not just a legal metaphor. It also suggests an economic argument concerning corporations’ economic efficiency as well: Since contracts are executed by agents of corporations who will presumably act only in those entities’ best interest, the model predicts that through this series of private agreements, corporations will maximize their own economic well-being, and in turn maximize social welfare as well.
Professor Lobel’s argument provides a compelling descriptive case that calls into question central features of this leading model of the corporation. She takes as her subject the proliferation of restrictive agreements that corporations typically require employees to enter as a condition of employment. These include nondisclosure agreements, which prevent employees from discussing the subject of their work outside the employment setting; noncompete agreements, which bar employees from working in related industries after leaving the entity; and nondisparagement agreements, which preclude employees from saying anything negative about their employers. These agreements have found their way into the news in recent years as Harvey Weinstein and Donald Trump were shown to have sought to use such agreements to silence women from coming forward with salacious information about them.
These agreements have become part of the nexus of contracts that comprises the contemporary corporation. And it is easy to see how corporate actors may have the intuition that such agreements are in their interest. They prevent secrets from leaking, competitors from poaching talent, and dirty secrets from being aired. Professor Lobel, though, cites a growing body of empirical evidence showing that these agreements harm innovation and competition by restricting two key features by which employees can make workplaces both fairer to individuals and more innovative and creative: voice and exit. As the organizational theorist Albert Hirschman argued decades ago, dissatisfied employees have two means to critique and therefore improve the entities for which they work. One (voice) is to use their voice to stay employed and improve the company from within. The other is to vote with their feet (exit) and use their talents elsewhere.
Professor Lobel’s claims explore the potential the voice/exit dynamic has to spur innovation. Where employees feel more loyalty to their company, they will tend to use voice as a way to change, staying and improving from within. Where employees do not feel the same sense of fealty to their company, they will be more likely to use exit and work for or become a competitor. This dynamic leads to efficiency by disciplining corporations: Treat your employees well and they will become effective internal critics, making your company better; treat your employees poorly and they will become external threats, possibly harming your company by outcompeting it. In this respect, the interplay of voice and exit pushes companies to be better to employers and encourages the criticism and competition that is the lifeblood of healthy markets and innovation.
But as Professor Lobel warns, voice and exit can thrive only when employees are free to speak and to leave. And these freedoms are exactly what are undermined by restrictive workplace agreements. If an employee is subject to nondisclosure and noncompete agreements, they have no real option to exit. And if employees cannot leave, there goes a corporation’s incentive to take their voice seriously since there is no threat that internal critics will become external ones. In a very shortsighted way this may benefit corporations, but Professor Lobel shows that it actually makes them less innovative and competitive by squelching critical voices. And in turn, the dampening effect of restrictive workplace contracts on voice and exit decreases innovation as a whole not only by making companies less dynamic but also by preventing the kind of creative destruction that has long been understood to be at the core of real discovery and change in the business world.
Professor Lobel also identifies a particularly pernicious effect of restrictive employment agreements on the modern workplace: They inflict harm disproportionately on female employees. Professor Lobel provides a number of reasons for this disproportionate gender-based harm. To take just one as an illustration: A number of studies have shown that women already face increased difficulty in changing jobs due to geographical restrictions and the limitations of dual-career relationships. So a noncompete agreement that prevents exiting employees from working in a related industry within a 50-mile radius of the employer is more likely to hamstring a female employee’s than a male employee’s ability to exit. These and other gender effects make Professor Lobel’s critique of restrictive workplace agreements not just a matter of economic efficiency, but of social justice as well.
The picture Professor Lobel paints of this new trend in workplace contracting is not a flattering one: She makes a strong case that such agreements are harmful to workers and the economy, and that their harms are disproportionately experienced by female employees. I pause to add one note that further complicates the normative side of this story. What should we do in light of Professor Lobel’s conclusions? One easy answer is that states could pass laws rendering restrictive employment agreements unenforceable; indeed, several states have passed laws prohibiting confidentiality in settlement agreements pertaining to sexual harassment. But the effect of such laws is simply to render these agreements unenforceable by courts. They do nothing to stop an unscrupulous corporation from asking employees to sign restrictive agreements and then seeking to enforce them despite these laws. Uninformed employees may comply with such agreements even where unenforceable because they are at an information deficit compared to their employer. And even employees who seek to resist enforcement of state-barred agreements may find themselves having to engage in a costly, time-consuming lawsuit to vindicate their rights against a company much better situated to litigate. The private nature of these agreements thus makes rooting them out all the more challenging.
In a related vein, Professor Lisa Larrimore Ouellette addresses other problems with measures that promise to remediate the gender gap in the modern American workplace. While Professor Lobel’s approach was primarily theoretical, Professor Ouellette’s is empirical: She reviews evidence surrounding the topic of gender in the modern workplace both to dispel certain myths and to encourage further study on promising innovations. Professor Ouellette shows that there is a profusion of research analyzing women in the workplace, and in STEM professions in particular. Not all the news here is bad. There are actually similar rates of participation in science and engineering between the genders at grades K-12, and female representation has risen rapidly over the past two decades. The majority of the data are not as optimistic, however. Women in STEM earn 9% less than their male counterparts; they leave the STEM workforce at higher rates than men; and patents with female inventors are less likely to issue.
Professor Ouellette also explores several leading proposals to examine what can be done about this gender gap. Scholars have proposed a number of solutions with great intuitive promise. These include increasing workplace transparency; limiting the enforceability of restrictive workplace agreements; creating pipeline programs for women in STEM; and targeting prizes and grants at female innovators. In each of these cases, Professor Ouellette points out that there is more rhetoric and enthusiasm for these interventions than hard empirical support. She then pivots to suggesting that the best way to assess the relative efficacy of these proposals is policy experimentation, which could be carried out by federal, state, or private actors. Professor Ouellette concludes by pointing out that this presents a uniquely attractive space in which academics could partner with state or nonstate actors seeking to better understand which policy interventions have the most potential to ameliorate the gender gap in the American workplace.
In contrast to Professor Ouellette’s empirical critique of Professor Lobel’s argument, Professor Todd Rakoff analyzes her claims through a doctrinal lens. Professor Rakoff concedes that he agrees with Professor Lobel that restrictive employee contracts are a bad idea for the economy and likely also unfair to workers, but he proceeds to consider the question whether they are illegal as well. Professor Rakoff considers this issue from the perspective of antidiscrimination law. One basis for finding that private conduct amounts to illegal discrimination is that a discriminatory purpose was a motivating factor in the decision. Here, Professor Rakoff concludes that while the contracts Professor Lobel critiques undoubtedly have disparate gender impacts, there is no evidence that they were created with the specific intent to subordinate women in the workplace, so that a finding of discrimination on this theory is unlikely.
Professor Rakoff does not end there, though. He considers more nuanced theories of discrimination. One possibility is that actions that objectively carry a discriminatory social meaning may be understood as amounting to illegal discrimination. Another is that some neutral actions may become discriminatory when imposed on discriminatory backgrounds, for example where a policy of raises by seniority is implemented in a workplace where seniority decisions have historically been made to favor men. But even in light of these theories, too, Professor Rakoff thinks that it is hard to make the case that restrictive workplace agreements categorically amount to illegal discrimination, in part because employers can articulate gender-neutral, plausible business justifications for entering into them.
Legal theorists understand the modern corporation as a nexus of contracts, and this feeds the general belief in the economic efficiency of companies because those contracts presumably maximize the welfare of corporations and, in turn, all of us. In her Frankel Lecture, Orly Lobel provides a major counter to this dominant belief, showing that the trend toward restricting employee speech and mobility via contract is not only harmful and unfair to individual employees, but inflicts social costs in terms of reduced innovation and entrenched gender inequality. How to solve this problem is less clear in light of Professor Ouellette’s point that there is little evidence to recommend any particular ameliorative intervention, and Professor Rakoff’s argument that these contracts are likely not subject to legal challenge on an antidiscrimination theory. Still, by exposing the unappreciated downsides of these contracts, Professor Lobel has taken a major step forward in starting a crucial dialogue about making the modern workplace more just and the modern corporation more efficient.
See, e.g., Jonathan R. Macey, Corporate Governance: Promises Kept, Promises Broken 22 (2008) (“It has long been recognized . . . that the corporation . . . should be viewed as a ‘nexus of contracts’ or set of implicit and explicit contracts.”).
Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract, 89 Colum. L. Rev. 1416, 1426–33 (1989) (providing a leading exegesis of the “nexus of contracts” model of the corporation).
See id. at 1433, 1438 (arguing that the nexus of contracts metaphor can “increase the joint wealth of the participants”).
Ronan Farrow, Harvey Weinstein’s Secret Settlements, New Yorker (Nov. 21, 2017), https://www.newyorker.com/news/news-desk/harvey-weinsteins-secret-settlements [https://perma.cc/P2FN-BC5A]; Orly Lobel, Trump’s Extreme NDAs, Atlantic (Mar. 4, 2019), https://www.theatlantic.com/ideas/archive/2019/03/trumps-use-ndas-unprecedented/583984/ [https://perma.cc/Z5WF-TQCY].
See Orly Lobel, Exit, Voice & Innovation: How Human Capital Policy Impacts Equality (& How Inequality Hurts Growth), 57 Hous. L. Rev. 781, 789 (2020).
See Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States 21, 30, 80 (1970).
See Lobel, supra note 5, at 801 (citing Olav Sorenson & Michael S. Dahl, Geography, Joint Choices, and the Reproduction of Gender Inequality, 81 Am. Soc. Rev. 900, 901 (2016)).
Stacy Perman, #MeToo Law Restricts Use of Nondisclosure Agreements in Sexual Misconduct Cases, L.A. Times (Dec. 31, 2018, 3:00 AM), https://www.latimes.com/business/hollywood/la-fi-ct-nda-hollywood-20181231-story.html [https://perma.cc/7E6P-7VYY]; Mary Markos, Lawmakers Running out of Time to Vote on Bill to Ban NDAs, Bos. Herald (Jan. 25, 2020, 1:47 PM), https://www.bostonherald.com/2020/01/25/lawmakers-running-out-of-time-to-vote-on-bill-to-ban-ndas/ [https://perma.cc/6Z3P-NZQQ] (discussing pending legislation in the state of Massachusetts).
Amy C. Madl & Lisa Larrimore Ouellette, Commentary, Policy Experiments to Address Gender Inequality Among Innovators, 57 Hous. L. Rev. 813, 817 (2020) (citing Amy Burke, Nat’l Ctr. for Sci. & Eng’g Statistics, NSB-2019-8, Science & Engineering Indicators 2020: Science and Engineering Labor Force 9 (2019), https://ncses.nsf.gov/pubs/nsb20198/assets/nsb20198.pdf [https://perma.cc/XY2T-NMCS]).
See Burke, supra note 9, at 55; Jennifer L. Glass et al., What’s So Special About STEM? A Comparison of Women’s Retention in STEM and Professional Occupations, 92 Soc. Forces 723, 725 (2013); Kyle Jensen et al., Gender Differences in Obtaining and Maintaining Patent Rights, 36 Nature Biotechnology 307, 307, 308 fig.1 (2018).
Madl & Ouellette, supra note 9, at 826.
Arlington Heights v. Metro. Hous. Dev. Corp., 429 U.S. 252, 265–66 (1977).