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Stanford Online High School's student run news site

OHS Observer

Stanford Online High School's student run news site

OHS Observer

The FTC’s Oversized Non-Compete Ban

The Federal Trade Commision headquarters in Washington D.C. (Adobe Stock Images)
The Federal Trade Commision headquarters in Washington D.C. (Adobe Stock Images)

On April 23rd, the Federal Trade Commission introduced a ban on most existing and all future non-compete agreements. This development has sent shockwaves through the labor market, as employers look to restructure their now invalidated contracts and employees are given opportunities they previously lacked. These non-compete contracts, which restrict an employee from working for a competitor for a certain period of time after departing a company, have been a staple in the technology, finance, and healthcare industries, among others for years.

 

Non-competes currently cover 18% of all workers, or around 30 million people nationwide, with 37% of workers reporting having signed one at some point in their career. While they are slightly more common among higher educated and higher paid workers, they are surprisingly distributed evenly throughout the economy. Restrictions on their usage does exist but varies at the state level: California, Oklahoma, and North Dakota are among the few states with near total bans, while states like Virginia and Illinois enforce bans up to a certain income level.

 

The FTC frames non-compete agreements as unfairly “suppress[ing] wages” and “restrict[ing] the freedom of American workers”, as well as reducing competition and innovation by “stifl[ing] new businesses and new ideas.” They argue that non-competes prevent workers from taking on new jobs and opportunities, with new firm formation increasing by 2.7% under a ban. Additionally, they predict typical workers will make $524 more annually under a ban, and the number of patents created will grow by 17,000 – 29,000 a year, thus increasing innovation.

 

It’s certainly true that banning non-competes increases flow of information and therefore innovation, and Silicon Valley is a prime example of this phenomenon. Its origin came when eight employees of Shockey Semiconductor –– known as the Traitorous Eight –– left in 1957 to form the competing Fairchild Semiconductor, taking all of Shockley’s trade secrets and information with them. This move set a standard that would be emulated many a time throughout the decades and is a large reason Silicon Valley is the high-tech hub it is today.

 

In addition to stimulating innovation and increasing workers’ freedom, a non-compete ban would also curb the non-transparent ways employers often use such agreements. Workers often don’t know when they have signed a non-compete, that it’s negotiable or what it entails. Employers take advantage of this lack of knowledge by making employees sign non-competes that often aren’t even enforceable, depending on local regulation. For instance, 19% of California workers are under non-competes, a percentage slightly above the national average, despite the fact that almost all non-competes aren’t enforced in the state.

 

Although non-competes can negatively affect workers, they’re certainly not all bad. A U.S. Chamber of Commerce survey revealed that 78% of responding employers provide additional compensation to employers who sign a non-compete, showing that firms will invest more in workers they know can’t easily leave for a competitor. While a world without non-competes would lead to greater labor mobility, it would also lead to lower average compensation in many industries, hurting workers.

 

A non-compete ban would also have serious effects on an economy-wide level. The FTC claims that banning non-competes will create more startups and level the playing field for all companies, fostering innovation. This may be true for infant industries that don’t have already established large companies ready to poach talent, like was the case for Silicon Valley in the 60s and 70s. But for the Silicon Valley of today, and other industries like it, removing non-competes will only give more power and market share to multinational corporations, who can offer a much higher salary and benefits for startup talent to leave instantly. This seems to be in direct contrast to FTC Chair Lina Khan’s seeming focus on dismantling global behemoths like Amazon, Meta and Google.

 

The FTC argues that non-disclosure agreements (NDAs) can make up for the lack of non-competes in order to still protect a firm’s sensitive information in the case of an employee departure. This is theoretically true but won’t work in reality, only leading to a litany of lawsuits that will always favor the larger corporation with more resources to spend on defense. Orange County startup Masimo’s feud with Apple serves as a perfect example: Masimo alleges that Apple poached its executives in order to copy its pulse oximeter technology for its Apple Watch—and this is at a company-wide level. Employee level NDA disputes will come in droves with no end in sight and will also heavily favor the larger corporations.

 

The costs to both workers and the economy as a whole that come from a nationwide non-compete ban significantly outweigh its benefits. This is an issue that is best left to the states, as an economy of 160 million workers is far too complex to successfully address in a one-size-fits-all regulation of this kind.

 

Non-compete, bans in specific sectors and localities can be successful by avoiding the pitfalls of a nationwide ban. States like Virginia and Illinois administer non-compete bans up to a certain income level, thus addressing both the pros and cons of non-competes perfectly. They increase labor mobility at the lower end of income level, where employees are most often unaware of non-compete enforceability or meaning and therefore lose freedom to move between jobs freely. At the same time, they protect the important trade secrets that those at higher levels of the wage spectrum may possess, allowing startups to retain their talent and therefore fairly compete with large multinationals.

 

Regardless of whether non-competes are banned or not at the federal level, employers should never exploit employees’ lack of knowledge about non-competes to the extent that they are in the present moment. The fact that more California workers are under a non-compete than the national average represents an information crisis, and the FTC should be more worried about solving that than instituting a bloated blanket ban that will result in net negatives for both workers and the economy as a whole.

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