Juelsgaard Intellectual Property and Innovation Clinic Students Seraj Desai, Tanner Kuenneth, and Julia Laurence submitted a Comment in support of the Federal Trade Commission’s proposed prohibition on non-compete clauses. The Clinic submitted the comment in support of Stanford Law School professor Mark A. Lemley as well as University of San Diego School of Law professor Orly Lobel who are distinguished scholars of intellectual, innovation and competition law.
Noncompetes are a problem for 30 million American workers. Noncompete agreements affect employees of all backgrounds, from C-suite executives and hairdressers to fast food workers. These agreements may prevent employees from working for a competitor, or even opening their own business in the same area. These restrictions can be in place for up to 10 years in some states.
In January, the Federal Trade Commission (FTC)–an agency tasked to create rules and regulations for addressing “unfair methods of competition”–proposed a new rule to ban noncompetes between employers and employees. The FTC, like other agencies must first publish a “Notice Proposed Rulemaking” which allows anyone submit their thoughts about the proposed rule. The Clinic joined forces with Professors Lemley & Lobel to submit an opinion in support of FTC’s noncompete ban. The Clinic’s comments argues that the FTC’s ban on noncompetes is a significant step towards addressing three harmful consequences of noncompetes, including reduced innovation, lower wages, and decreased equality in the workplace.
The first comment describes the way noncompetes limit entrepreneurship and innovation. Noncompetes prohibit an employee from working for a competitor, or launching their own startup within the same industry. In the 1970s, both the Bay Area (Boston) and Silicon Valley were positioned well to become Silicon Valley. However, the Bay Area was able to win out because California had banned noncompetes. Massachusetts did not. California’s ban on noncompetes has helped the state thrive. Google alumni have founded thousands of startups and raised billions of dollars in investment each year. This would not have been possible if California had enforced noncompetes.
The second comment describes how the FTC ban on noncompetes will raise wages. Professor Lobel’s study identifies four distinct mechanisms which can lead to higher salaries in the absence noncompetes. These are: 1) increased employee bargaining strength; 2) more retention structures with positive incentives; 3) increased employee productivity through better matching between employer and employee; and 4) increased employee talent due to more frequent knowledge spillovers. Each effect puts upward pressure on wages.
Third, the FTC ban on noncompetes promotes equality in the workplace, especially for women. Noncompetes are more likely to target women, and they also have a greater impact. This is because women cannot move as easily outside of the geographical reach of a noncompete. Noncompetes limit the types of employers that a worker may be able to seek next. This can lead to discriminatory workplaces for women and minorities.
The Clinic also argues in its comment that restrictive agreements with similar harmful effects, such as overbroad nondisclosure agreements and non-dealing or non-poaching contracts, should be included under the FTC proposed ban. Clinic comment explains why the FTC’s proposed rule will include “de facto noncompetes”.
The Clinic explains in its final comment why federal is needed to solve these problems. Only three states in the United States (California, Oklahoma, and North Dakota ) have banned noncompetes completely. The remaining 47 states use ambiguous “reasonableness tests”. Even within states that ban noncompetes, they each have their own exceptions. The patchwork of state laws is incompatible with the national economy and labor market, and has created a problem for collective action among states. The FTC’s uniform federal policy, however, would provide a national baseline for employers and employees in the United States.
The FTC has received national attention for its proposed action to prohibit noncompetes, especially among business and labor groups. The FTC’s proposed action to ban noncompetes has attracted national attention, particularly among labor and business groups.