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The business case for a nationwide ban on noncompetes

Washington, UNITED STATES: The US Federal Trade Commission (FTC) building is seen 19 September 2006 in Washington, DC.
Paul J. Richards/AFP via Getty Images
The U.S. Federal Trade Commission (FTC) building in Washington is seen in this 2006 file photo.

The Federal Trade Commission’s proposed ban on noncompetes should be welcome news to the business community. Noncompete agreements stifle economic development, limit firms’ ability to hire and depress innovation and growth. A nationwide ban will fuel economic expansion and support competitive markets.

Noncompetes are contracts that limit workers’ ability to work for a competitor after leaving their employer. They are extremely common. Research shows that 1 in 5 workers in the United States is currently subject to a noncompete — approximately 30 million workers. Noncompetes are especially prevalent among high-level employees, like executives, and in certain industry sectors, like technology. But they are also found in contracts with low-wage workers and those without a college degree.

Surprisingly, such agreements are permissible under most states’ laws. This is because companies and lawmakers once thought noncompete contracts were good for business. The reasoning was that companies would invest in their workforce only if they could feel confident that their workers would not take their knowledge and skill to a competitor. 

But a decade of empirical research has shown that the opposite is true. Noncompetes are associated not only with suppressed wages and exacerbated racial and gender pay gaps, but also reduced entrepreneurship, job growth, firm entry and innovation. This is because economic growth, particularly in sophisticated industries, is due in part to “knowledge spillovers.” These occur when talented workers leave one company and bring their skills and experience to new settings — either new employers or new ventures. Non-compete contracts prevent those moves from happening. Workers are more likely to stay in their jobs, even when they are unhappy or their talent would be better used and valued elsewhere. They are also less likely to launch new ventures. This harmful effect on entrepreneurship and start-up culture is even stronger for women

Consider the country’s most robust high-tech economy: Silicon Valley, known for its innovative companies, flourishing start-up community and highly mobile workforce. Part of what differentiates Silicon Valley from wanna-be tech regions is its location. California is the only major economy in the country that bans noncompete agreements altogether. Talent mobility contributed to the creation of the Bay Area’s dense, creative community of professionals, who can freely interact and engage with one another, switch jobs and pursue new ideas at will. 

A nationwide ban on noncompetes will also eliminate a significant obstacle to recruitment and hiring, especially now when companies are struggling to find skilled workers to fill their ranks on the heels of the “Great Resignation” and facing lower-than-expected unemployment rates. Noncompetes deter workers from seeking and accepting new opportunities, limiting companies’ ability to hire the talent that best meets their needs and dynamically and flexibly employ skilled and experienced employees. For example, doctors and other health care professionals should not be locked into their current jobs at a time when the health care industry is suffering grave shortages.    

Already courts are hostile to noncompetes and many states limit them by statute. But these laws don’t go far enough. Judges still enforce noncompete contracts, preventing companies from bringing in new talent and employees from capitalizing on new opportunities. State laws also vary immensely — over a dozen jurisdictions have amended or introduced new laws in the last decade — and decisions applying these laws are highly fact-specific. This makes hiring fraught with uncertainty and legal risk for employers, especially large national companies operating across jurisdictions. 

Debates about workplace regulation are too often viewed through the distorting lens of labor versus business. Predictably, some in right-leaning media have already falsely branded the FTC rule as a labor initiative. But everyone stands to gain from a nationwide ban on noncompetes. Workers will enjoy greater mobility within their profession and freedom from the artificial wage-suppressing effects of these restrictive agreements. Businesses will gain access to a broader, more diverse labor pool and the economy as a whole will benefit from a more robustly competitive market for goods and services. Meanwhile, companies will retain the right to protect their proprietary information through intellectual property laws, including trade secrecy, copyright and patent law. 

These collective advantages are why several recent congressional bills seeking to limit or ban noncompetes were introduced with bipartisan support and why recently, a conservative government in Ontario, Canada, introduced a ban on all noncompetes

Without a national policy, individual firms will continue to prevent their employees from moving to competitors even while they seek to hire from other companies. A full-on nationwide ban is the only means of solving this collective action problem and achieving a more optimal equilibrium, in which fair competition to attract talent is the golden rule. The FTC’s proposed ban represents just such a strategy, one that will ensure a robust, competitive and enduring market for the talent all companies need. 

Rachel Arnow-Richman is a professor of law and Gerald A. Rosenthal Chair in Labor & Employment Law at the University of Florida Levin College of Law. She is the director of CONVERGE for Impact: A Collaborative Community for Workplace Law Scholars & Practitioners and the author of “The New Enforcement Regime: Revisiting the Law of Employee Competition with 2020 Vision.” 

Orly Lobel is the Warren Distinguished Professor and director of the Center for Employment and Labor Policy (CELP) at the University of San Diego and author of “Talent Wants to be Free: Why We Should Learn to Love Leaks, Raids and Free-Riding,” “You Don’t Own Me” (Norton), and “The Equality Machine: Harnessing Digital Technology for a Brighter, More Inclusive Future” (PublicAffairs).

Tags Entrepreneurship Federal Trade Commission Income inequality in the United States Non-compete clause Politics of the United States Silicon Valley

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