Jackson Loze ’24
In a contract, a non-compete clause forbids employees from working for their employer’s competitors for a set amount of time after they leave. By blocking workers from pursuing better opportunities and preventing employers from hiring the best available talent, non-compete clauses unquestionably harm competition in the US. For context, Matt Marx, a professor at Cornell University’s economics and management school, claims that approximately 50 percent of people in high-skilled jobs have a non-compete clause in their contract.
Recently, the use of non-compete clauses has fallen out of favor with both parties. State legislatures in California and Oklahoma have already banned the use of non-compete clauses in their states. The Senate has also proposed bipartisan legislation banning non-compete clauses. Similarly, in President Biden’s 2021 pro-competition executive order, he asked the Federal Trade Commission (FTC) to use its authority to ban non-competes.
On January 5th, 2023, FTC Chair Lina Khan answered President Biden’s request when the organization proposed a rule that prohibited employers from using non-compete clauses. The agency contends its authority to issue the rule comes from section 5 of the FTC Act, which bans unfair methods of competition. The proposed rule comes just one day after the FTC announced it was taking legal action against three separate companies for their unfair use of non-compete clauses. For instance, the commission ordered two of the largest US glass container manufacturers to stop imposing non-competes on their workers because they obstruct competition by impeding new companies from hiring the talent needed to enter the market. After a 60-day public comment period, the FTC will make any necessary changes before issuing a final rule. If there’s no congressional disapproval, the rule will be finalized and its legality will likely be tested in court.
In opposition to the FTC’s resolution, the US Chamber of Commerce, which represents around 3 million businesses, argues that non-competes are necessary to protect an “employer’s special investment in, training of, and disclosure of sensitive information to its employees.” Additionally, Neil Bradley, executive vice president, chief policy officer, and head of strategic advocacy for the US Chamber of Commerce argues that banning non-compete agreements is “clearly authority that [the FTC doesn’t] have and no one has ever thought that they had.”
Despite these objections, restricting companies’ ability to enforce non-compete agreements would boost competition in three ways. First, due to the risk of litigation, signing a non-compete agreement makes it significantly harder for a worker with entrepreneurial aspirations to leave their employer to start a competing business. This may be why the share of entrepreneurs among US households declined by half between 1985 and 2014, from roughly 8% to 4%. Second, as demonstrated by the two domestic glass container manufacturers, non-competes can limit new firms from entering into industries by depriving them of a talent pool necessary to build and expand. Lastly, across all industries, non-compete agreements limit companies’ ability to compete for workers by offering higher wages and better working conditions. For these reasons, the FTC estimates the prospective rule could increase wages by $300 billion a year and expand career opportunities for about 30 million Americans, cementing the importance of its non-compete proposal for the overall longevity of American economic security.