FTC Proposes Banning Non-Competes, Which Would Unleash Innovation
from the let-the-innovation-flow dept
For years, I’ve been highlighting the overwhelming evidence that non-compete agreements are horrible for innovation. There are multiple studies on this, which show how much of Silicon Valley’s success can be attributed to an almost accidental interpretation of the California business code that outlawed non-compete agreements, while other studies have strongly suggested that a big part of the collapse of the Detroit auto industry could be pinned on Michigan switching from not allowing non-competes to allowing them.
About a decade ago, I got into a weird sort of circuit, giving presentations to (mostly) European policymakers and execs, trying to explain to them the “secret” to Silicon Valley’s success, and much of the presentation was about the non-compete story. But, of course, the underlying thinking behind it is more important (and more nuanced) than just “non-competes are bad.”
Instead, it goes back to much of what this site has always been about: the importance of knowledge and information sharing, rather than hoarding. What the details of various studies have shown is that innovation occurs through a combination of idea sharing among people all working on big breakthroughs. The combination of different viewpoints, and different perspectives, often is what leads to the big breakthrough (at which point various competitors can innovate on top of the big new thing). The lack of non-competes is just an enabling tool in making that happen, because it allows the cross pollination of these ideas as people switch companies.
Non-compete agreements, however, not only stifle that sharing of information, but they contribute to company stagnation. It limits the important flow of workers from one company to another and generally makes it more difficult to bring in necessary new ideas and perspectives. As I’ve said, they’re the DRM of human capital: trying to lock up information because of a very narrow, scared, protectionist view of the world.
That’s why I was excited a year and a half ago when the Biden Administration released an executive order tasking the FTC to explore banning or limiting non-competes. I was concerned about whether or not the FTC actually has the authority to do this (rather than Congress), but the underlying policy idea is a fantastic one for actual innovation.
So, it’s exciting to see that the FTC has now proposed a rule to ban non-competes. I still think this is something that would be much better if it were done by Congress, but the underlying policy is good:
The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
I’m less concerned about the wage increases (not saying it’s a bad thing, but it seems secondary to me) as compared to the innovative breakthrough this could lead to instead.
Of course, now it has to go through a comment period, and I’ve already seen some traditionally corporate think tanks claiming this will make companies invest less in workers, but that’s hogwash. Again, California (and some other states) have banned non-competes for ages, and California has been home to so much innovation over the past half century… and that frequently includes worker training. I know of no tech companies that freak out over worker training out of fear that an employee might take that to a competitor.
Instead, it’s often the opposite. Companies know that because employees can go elsewhere, they have to up their game in providing the kinds of tools and services that support their employees’ career growth over time to keep them. In other words, the lack of non-competes can actually create more incentives to invest in worker training as part of a larger effort on retaining employees (I’ll note that my very first job in Silicon Valley was… creating a worker training program to help a large tech company better retain employees through facilitating a clearer career growth path).
Either way, I imagine someone will challenge this rule should it go into effect, and I do fear that the courts today would toss this rule out and say it’s beyond the FTC’s authority. And, relatedly, I do worry that if the FTC thinks it has the authority do promulgate rules like this one, even if for a good reason, it could start to roll out many other such rules, perhaps in support of more problematic policy goals. But, really, that’s even more reason for Congress to act and make this the law of the land, and enable much greater innovation.
Filed Under: congress, ftc, information sharing, innovation, non-competes
Comments on “FTC Proposes Banning Non-Competes, Which Would Unleash Innovation”
Just outsource it and let the antiquated innovation tell a stupid story about nothing. Gosh.. Get with the times.
This needs to be a law, not a regulation
Seriously, this is the administrative state in action. It doesn’t matter if the outcome is desirable, they don’t have the power to do it.
But the problem is, they’re gonna try anyway. And we tip ever further away from actually being an democracy.
Re:
you are 100% correct on the corrupt regulations-as-laws fraud in all America government
but bigger legal and ethical problem is that the Federal government has no Constitutional authority whatsoever to ban any consensual private contract terms, unless demonstrable fraud or criminality is involved.
Non-Compete clauses are certainly unattractive to some employees, but many jobs have some unattractive conditions which many employees willingly agree to anyway as reasonable tradeoffs in an overall favorable employment offer.
In a free society, citizens choose their own terms of employment, not FTC bureaucrats.
Re: Re: Public Good
Contract law clearly has Unconscionability since the 60s. This includes anything that shocks the conscience or is contrary to public policy.
Clearly using Non-Competes in the US results in lack of income to the individual, harming the public in general by reducing tax revenue. The harm to the employer is often neglectable in an employment context. This alone has reduced non-competes usage since they get applied to people with no access to corporate secrets like fry cooks.
As for why is this an issue? Its Abuse of the term. Contract terms have always required consideration and benefit to both sides. Many states see this term being used in places where its causing public harm, and courts see the term abused. When McDonalds demands this term for fry cooks and order taker, primarily to lock staff up away from Burger King and Tacobell, you know something is wrong.
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… Contract Law and judicial activism do not supersede the US Constitution. No where in that document is the government is the government granted legal authority to interfere with normal private contracts.
the “Contracts Clause” in Article I expressly prohibits such contract intervention.
“Consideration” does not require some rigid line by line quid pro quo statement in a fair and legitimate contract.
if an employer offers you 8 paid sick-days in the contract terms, there’s never a statement of what exactly you will give him in ‘consideration’ of his extra payroll cost.
Employment agrrements are give and take negotiatns with some terms favoring employers and others favor employees.
Many employees with in-demand skils have superior negotiating power over underdog emploers.
Re: Re: Re:2
In order to be a valid contract, it needs to be understood and agreed to by both parties. In addition, not valid if under duress.
iamnotalawyer
Re: Re: Re:2
…at the state level, which is not what we’re talking about. According to Wikipedia:
Re: Re: Re:3
yes, that clause was directed at the states due to huge problem with legislative corruption versus private contracts.
it was unthinkable that the Federal government had any such power over contracts, so it was not addressed at the Constitutional Convention.
Enumerated Powers are basis of the Federal government — none exist over private contract interventions.
Re: Re: Re:4
By that logic, wouldn’t they also lack the power to enforce contracts?
Re: Re: Re:5
BINGO —-> contract enforcement is purely a state function
Re: Re: Re:2
You might want to read up on the caselaw surrounding these clauses, especially those courts that have declared them illegal.
This type of clause is nothing like a “normal” contract. It’s incredibly one sided very strongly in favor of the employer. The fact that it’s ok to have some give and take doesn’t make any give or take ok. These clauses represent a literally insane amount of take with no clear benefit for doing so and nothing even remotely similar in the give category back to the employee.
Re: Re: Re:3
Not necessarily. It could be a non-compete in exchange for more vacation days, or stock options, or some other specific benefit.
Re: Re:
“many employees willingly agree to anyway as reasonable tradeoffs in an overall favorable employment offer.”
What heaping pile .. the stench is too much.
Do you really think you have a valid argument here?
It’s bad enough some employers refuse to pay a living wage, but they also want to stop you from moving on. They think they are entitled to slave labor.
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It’s valid, inasmuch as the factual claim that many employees would not mind agreeing to a non-compete clause in exchange for some kind of consideration is true. I have done so in the past, because I’m a software developer so I can work in any industry. A non-compete is pretty meaningless to me even if it’s enforceable. Others at the company didn’t take the deal, because their skills were specific to the industry.
However, that doesn’t mean allowing non-compete agreements is good for society.
Re: Re: O RLY?
COTUS, Article I, §8, para 3 says otherwise.
See also:
Re:
Are you saying that the rat race didn’t make babies that don’t know any better?
With the mix of H1-B’s, they can threaten to replace employees with offshore types and threaten to deport the H1-B’s if they have an opinion.
The non-compete clauses will be replaced with some other dead-end employment jargon. Now just write the software and/or make the product so we can replace you with cheap labor after you complete the job…. And no competing…. That would be unfair /s
Re:
It’s a good thing we were never a democracy in the first place then, isn’t it? Which is good considering what our founding fathers knew about why pure democracies fall apart and are actually a terrible form of government.
And to be clear they do have the power to do this. It falls very much within interstate trade which puts it very well into their wheelhouse. And yes this is a good thing.
“Training repayment agreements” might qualify, and have been called “the new non-compete”.
“Nearly 10% of American workers surveyed in 2020 were covered by a training repayment agreement…. training repayment demands were “particularly egregious” in commercial trucking.”
“Tech companies” is a vague term, but trucks and trucking/logistics should certainly count as technologies.
Re:
I have actually known of such companies, in the sense that I took various certification exams early in my career that came with some kind of “the company will pay but you have to pay back if you leave within 2 years” clause. Fortunately, the companies were bad enough and the benefits of the new company were good enough that it didn’t matter.
I don’t know of any company that was good to work for that insisted on such a clause, but I’ve worked for some that would deny a basic inflation payrise then try to tie you into a contract for basic training.
Re: Re:
Interestingly enough, the FTC’s proposed rule treats that as a type of non-compete in certain cases:
But costs that are “reasonably related” could still act as an allowable type of non-compete. Not everyone’s able to avoid the companies that are bad to work for.
sounds to me very much what these ridiculously long copyright ‘agreements’ do, just as ‘you haven’t bought something, you’ve only rented it for an unspecified length of time’. you dont have ‘the right to repair’ it when it fails because you’ve only ‘rented it’, just as you cant always sell an item you thought you owned, only to find you have to tell the manufacturer/original seller and get their permission!! it’s all a crock of shit, designed to ensure certain people get to become and remain rich and in control and us meer mortals, us pathetic 3rd class citizens, good for only giving our money to those above, basically have fuck all, from rights through to control!!
How often are these actually enforced?
I was required to sign a non-compete with a computer company. They eventually went bankrupt; closed their stores, let the employees go. When I got another job, the remains of my former employer tried to enforce the non-compete. It was laughed out of court, but I still had to pay a lawyer and appear in court.
Re:
It’s not strictly a matter of whether they’re actually enforced. The mere threat of your employer having to go to court to defend itself can be enough to convince them to just not hire anyone subject to a non-compete. And if you don’t have the money to defend yourself in court, your former employer may win by default and now you’re out of a job and on the hook for damages.
Non-competes weren’t too bad when they were applied only to a relatively few of the most skilled and highly-paid employees, like for instance the top chef at a 5-star restaurant or the top salesman whose contacts can make or break the company. These days though they’re applied to everyone down to fast-food counter help and the skills they purport to protect aren’t anything special, just the normal skills anyone in that job will acquire throughout their career. That makes non-competes simply another way to prevent employees from seeking better jobs, which falls squarely under the “contrary to public policy” part of contract law.
Re: Re:
“It’s not strictly a matter of whether they’re actually enforced. The mere threat of your employer having to go to court to defend itself can be enough to convince them to just not hire anyone subject to a non-compete”
I think that’s important for these things. The contracts might not be enforceable in reality, but the impression that they are, especially among lower level staff who can’t necessarily afford a lawyer to double check, might keep people from moving. You don’t need facts to keep powerless staff from rebelling, just make them think they have no power…
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The FTC was smart, then, to require notice be given: