business news in context, analysis with attitude

by Kevin Coupe

I've been interested to read a couple of pieces lately regarding an issue about which I reported less than two weeks ago - a move by the Federal Trade Commission (FTC) to ban non-compete agreements between companies and individuals.

The key arguments against non-competes are two - one is that they depress wages, and the other is that they depress innovation.  Neither is good for the American economy.  And I don't think I p[aid enough attention to the subject in my original commentary.

Axios writes that non-compete clauses, usually characterized as "a tool created to retain top talent," has over time "evolved into an abusive mechanism that covers around one in five American workers, including some that earn minimum wage.  Its proposed ban would exempt any seller with at least a 25% ownership stake in the acquired asset, and also would be retroactive."

Evan Starr, an economist at the University of Maryland who has studied the impact of non-compete clauses, tells The New Yorker that the clauses "are found in all corners of the labor market. They tend to cluster in high-skilled, high-wage jobs. Executives are the most likely to sign them - at a rate of like sixty to eighty per cent, depending on the studies. But they also cover a ton of low-wage workers. One survey that I ran in 2014 found that the modal worker bound by a non-compete agreement is actually an hourly-paid worker who makes a median wage of fourteen dollars an hour. And that’s because hourly-paid workers actually comprise about two-thirds of the U.S. workforce. So, even though you might hear about these more frequently in executive non-compete cases, they’re actually most commonly found among average, middle-class Americans."

Scott Galloway, the media personality/business professor/serial entrepreneur-investor, writes that "noncompete clauses are what firms use to sequester your human capital from competitors. When a new employee signs a noncompete with, say, Johnson & Johnson, they agree that when their employment ends, they won’t work at another pharmaceutical company for a designated period — usually one to two years. If you’re familiar with noncompetes, you likely associate them with technology jobs, where employers want to protect valuable intellectual property. And that’s the defense most often offered for the restrictions."

Galloway goes on:  "The irony of noncompetes is they only serve to dampen growth. One of the few places where they’re banned is also home to the world’s most innovative tech economy: California. Job-hopping and seeding new acorns have been part of Silicon Valley since the beginning. In 1994 a Berkeley economist theorized that California’s ban on noncompetes was one of the main reasons Silicon Valley existed at all, and in 2005, economists at the Federal Reserve put forward statistical evidence supporting the theory. Apple, Disney, Google, Intel, Meta, Netflix, Oracle, and Tesla were able to succeed without limiting the options of their employees."

Galloway writes that "the FTC estimates that noncompetes reduce employment opportunities for 30 million people and suppress wages by $300 billion per year. That’s far more than the total value of property stolen outright every year. Multiple studies also show that noncompetes reduce entrepreneurship and business formation. Which makes sense — it’s difficult to start a business when talent pools are not accessible or allocated to their best use. Downstream, the lack of competition leads to entrenchment, which eventually results in higher prices for consumers — as one study found has occurred in health care. Everybody loses. Except, of course, the incumbent’s shareholders."

Starr goes on:  "Non-compete agreements are such a blunt tool to use when more narrowly tailored tools can suffice. For example, firms have nondisclosure agreements, which can prohibit workers from sharing information. They have trade-secret laws. The non-compete agreement is the most blunt of all of these, because it protects things by prohibiting mobility in the first place. It's also why firms might value them, because they do protect in such a blunt way."

I found these arguments to be Eye-Openers, illuminating the issue in a way that I did not understand when I first read the stories about the FTC's moves.

Full disclosure - I once was threatened with a lawsuit over a non-compete agreement.  I got lucky - I actually had been laid off by the company that was suing me, and that company had gone out of business.  My lawyer simply explained to them that they couldn't have it both ways - they couldn't end my employment at an entity that didn't exist anymore and then say I couldn't start up my own business.  (I'm glad it worked out that way - it was 21+ years ago, and the business I started was MorningNewsBeat.)

I can understand that in certain cases, some protections are needed for companies.  But non-disclosure agreements ought to be enough in the vast majority of cases.  There is absolutely no reason for the vast majority of non-compete agreements to exist or be enforced … and it makes sense to me for the FTC to try to ban them.