Lina Khan was a controversial choice to head the Federal Trade Commission, and she’s shown that the controversy was justified. While the historical role of the FTC was to police the marketplace, she’s now taken the affirmative step, by a 3-2 vote of the commissioners, to ban essentially all non-compete clauses. There are two rationales for this action.
The easy prong of the ban for the F.T.C. to justify is the one that applies to nurses, hairdressers, truck drivers — actually, every kind of worker except for senior executives. For 99 percent of the American work force, the F.T.C. said, requiring workers to sign noncompete agreements as a condition of employment is “coercive and exploitative conduct.”The agency’s 570-page ruling cites articles in The Times and The Wall Street Journal in which workers came forward to say, in the F.T.C.’s words, that noncompete agreements “derailed their careers, destroyed their finances, and upended their lives.”
For the most part, this justification is hard to dispute. Then again, Peter Coy blithely includes nurses with hairdressers, when there may well be distinctions that should be considered. What, for example, about the nurse who has an opportunity to receive specialized training or a higher degree in that would enable him to do more or better on the employer’s dime, but the employer won’t invest in the nurse unless it knows that the nurse will remain long enough after getting the degree to make the investment worthwhile? The non-compete would accomplish this. Without a non-compete, will the employer be willing to put up the money?
While the vast majority of non-competes have no justification and are, as argued, “coercive and exploitative,” not all are, and not all are under all circumstances, even for people who aren’t “senior executives.” For people who are exceptionally good at their jobs and not easily replaced, it’s a bargaining chip that enables them to negotiate higher salaries and benefits. Freedom to contract, when it’s not coercive and exploitative, has its merit. Now, it’s no longer possible.
And then there are the “senior executives.”
But the “coercive and exploitative” rationale doesn’t work for senior executives, who aren’t so easy to coerce or exploit. They’re more likely to have lawyers look over contract offers. They typically have some power in the employment negotiation and know how to use it. Many won’t sign a noncompete agreement unless they get something in return, such as a sweetened pay package.
There are three issues that arise with this cohort of employee. First, they tend to have access to trade secrets, whether it’s the recipe for the Colonel’s chicken or manufacturing methods that enable a business to profitably produce its widget. Second, they develop relationships with customers, businesses and suppliers through their job that have value on the open market to other businesses who would very much like to take advantage of those relationships.
And third, they can be the face of a brand, at least within an industry, and leaving one company for another can be ruinous to the former as an indication that it’s failing and the rats are fleeing the sinking ship. So what’s Khan’s reasoning for banning non-competes for these folks?
This is a bit subtle. It requires you to think of the employer and the senior executive as being in cahoots rather than fighting each other. Together they cook up a noncompete that rewards the executive for agreeing to deprive other potential employers of her or his talents, and depriving the customers of those other companies of potentially better products and services. In economists’ terms, noncompete signatories are “maximizing their bilateral surplus” at the expense of others.
The logic is that the company that can’t hire the executive might have better growth prospects, so holding it back is bad for society as a whole. Or, after leaving the old employer, the executive has to be (wastefully) inactive for six months or so to wait out what finance people call the garden leave. Or the new employer has to pay a large sum to buy out the noncompete clause — again, socially wasteful.
If this seems a bit convoluted, Khan’s justification is that it’s better for society if senior execs can move about freely as they would enable their new employers to make better products and services. Wouldn’t Popeye’s chicken benefit from knowing the Colonel’s secret sauce, making it a tastier world for society?
The primary retort to any argument against the wholesale banning of non-competes is that California banned them long ago, and it hasn’t been a problem.
The strongest evidence against noncompete agreements is that Silicon Valley has thrived even though — or maybe even partly because — the state of California has long banned noncompete agreements in most circumstances, under a law passed in 1872. The prohibition does not seem to have discouraged companies from sharing valuable inside information with employees who might leave. And it has enabled the germination of ideas as people flit from company to company like pollinating honeybees.
This isn’t a bad argument, although it’s not as strong as it might at first appear. Would Silicon Valley have thrived far more with non-competes? We’ll never know. And not every business is tech, which has a somewhat unique culture that doesn’t necessarily translate well to other industries. What’s also missing is that while California banned non-competes, they’ve thrived elsewhere, to the point of having the counterkid at McDonald’s forced to agree to one.
The employer will argue that they put in time and money to train the kid to serve a Big Mac, and they don’t want to see him use those talents to serve a Whopper. It is coercive and exploitative, and just nonsensical. But there are legitimate uses and needs for non-competes that could well serve the interests of both employer and employee. A simplistic “ban ’em all” by the FTC, a power that even a dedicated progressive bureaucrat may not possess, deserves greater nuance than either Lina Khan or a Columbia university sophomore gives it.
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Orthogonal to your points, I’m just wondering how this is any of the FTC’s business. NLRB, maybe, but FTC?
But with that said, I think there’s some middle ground between the burger-flipper and the executive, and that’s the professional. I’m thinking mainly of doctors here; if my primary care leaves her current practice and moves across the street with a different one, I’d bet a lot of her patients follow her. A non-compete–limited in time and geographical scope, of course, as is well-established law–makes sense IMO in a case like this.
There’s a really simple solution for companies’ fears about losing money on training or execs fleeing with special knowledge: Treat. Your. Employees. Better. Companies can and should use NDAs for true corporate secrets such as secret recipes and internal processes, and client lists and relationships are necessarily difficult to protect. But if you are treating your workers well and paying them appropriately, you don’t have to worry about them jumping ship. The best protection for ALL of this is to treat your employees like you actually value them.
If that person you just gave the training to can be so easily poached by another company afterwards, then you weren’t paying them enough. If completing the training itself changed that employee’s value, then recognize it. Immediately.
If that salesperson has built up great relationships to the point that you are raking in money hand over fist, then recognize it and reward him. If he can lure your customers to his new gig with demonstrably lower prices, then maybe you are charging too much.
Implicit in all of these arguments is that companies should be able to demand loyalty from their employees without actually earning it. There is something fundamentally wrong when mere lateral transfers among companies can net you a 25-30% raise. Treat your employees well. Pay them their worth. Make it not suck to work for you. Then you don’t need a non-compete.
You’ve obviously neither owned nor managed a business. It’s only simple when you don’t know any better.
Nice ad hominem, but you did not explain why a single one of Bryan’s arguments was actually wrong. I owned and managed a business for 32 years. I paid above market wages to my staff and charged below market rates for my services. I generally had all the business I could handle, made a good living, and had extremely low staff turnover.
Oh, and I never asked an employee to sign a non-compete agreement.
First, that’s not an ad hominem. You should avoid using words when you don’t know what they mean. Second, your experience has nothing to do with other people’s experience. You are not the center of the universe, no matter what you think. I have no clue what business you’re in, but I’m painfully well aware of a great many others whose experience was very different from yours. It’s not all about you, no matter what the voices in your head tell you.
As part of the intersectional deal that bought Democrats the votes to elect Biden, a gaggle of ideologues have been granted fiefdoms within the administration. Each in their own way seeks to yoke (and expand) the power of the federal bureaucracy to force their piece of the new Utopia on society.
The FTC claim that “8,500 new startups that would be created a year once non-competes are banned” is meaningless. Taken at face value, it demonstrates extraordinarily small benefits from this latest round of regulation and infringement on the right to contract.
Around 669,200 small establishments open each year in the US. (from 2020 census, no link per rules). About 1/5 of those fail in the first year, and only about half last for 10 years. There is no way for the FTC to identify firms that have been established and grown because of outlawing non-compete clauses. The FTC will claim to do so nonetheless.
I’m member of that rarified group that started a successful business that lasted over 25 years. Non-compete clauses are very common in my industry. I turned down more than one contract because the plain language would have prevented me from earning a living after I stopped working for the particular firm.
The exponentially growing burden of government regulations concerned me far more. I chose to keep my firm very small in large part because that afforded some protection against regulations. Even so, my overhead payroll went from half a full-time equivalent (FTE) to 2.5 FTE over a decade where the number of revenue-producing employees stayed constant. I still had to do the unpaid paperwork to prove that I was exempt, but at least I didn’t have to demonstrate compliance, submit to audits, etc. from the army of enforcers for each of these regulatory regimes. Most if not all of my peer competitors went bankrupt when they tried to grow and found that their administrative costs grew much faster than their revenues.
Instead of adding yet another impediment to making and enforcing mutually beneficial contracts, the FTC could have rescinded 10,000 existing regulations. It wouldn’t make much of a dent, but it would be a good start, and it would produce far more than a measly 8,500 new ventures per year.
To your RN example: the companies I’ve worked for that pay for specialized training or immigration sponsorship don’t protect themselves with non-competes. Instead, they have a contractual clawback right, where the employee must reimburse the expenses if they leave for greener pastures during some defined period.
Since 1872 California has prohibited non-competition agreements. California modified it in 1941 and added to it in 2023. Under current law, Cal Bus and Prof Code Section 16600 renders unenforceable any agreement that restrains an employee’s ability to seek future lawful employment, whether or not the restraint is labeled as a “non-compete agreement.” There are exceptions in connection with the sale of a business and when an employee has substantial ownership in the business. California allows restraints when it comes to trade secrets. That makes sense. Looking at the companies that started and thrived and continue to do well in California is strong evidence that banning non-competition agreements is not bad for business.
Have you considered that nobody knows about the business for which this didn’t work out well, and either failed or left California. CA has a lot of laws that the rest of the country rejects. Maybe there’s a good reason why other states choose not to emulate California, and why people are fleeing the state.
Have you considered that if California were it’s own nation, it would have the 5th highest GDP in the world, ahead of India and the UK? Maybe there’s a good reason for that.
Silicon Valley covers a lot of evils.