From this article Full Stack Economicsnewsletter on economics, technology and public policy.
When I saw the news on Thursday that the Federal Trade Commission wanted to ban most non-compete agreements, I thought of a friend I’ll call Eric who had a stressful experience with these agreements almost a decade ago.
Eric had recently earned his MBA and was working for a small consulting firm in the Midwest. He wanted to change jobs, but his employer had signed a broad non-compete agreement that prohibited him from working for a competing company anywhere in North America for two years.
Unfortunately, the contract does not specify which companies are considered competitors. Eventually, Eric got a job at a software company that helped clients solve some of the same problems as his old consulting firm. He hoped that software was different enough from consulting that he wouldn’t get into legal trouble.
But a few months after changing jobs, Eric received a cease and desist letter from his old firm.
Eric was fortunate enough to receive some pro bono legal advice through a family connection. The lawyer told him he would probably win at trial, but the contract was so vaguely worded that it was impossible to be sure. Although a lawyer was willing to help him negotiate a settlement, Eric would have to pay huge legal fees if the case went to court.
For months, Eric worked at his new company with the threat of a career-destroying lawsuit hanging over his head. With a mortgage and a young daughter, she couldn’t afford to lose her job. But he couldn’t really solve this case in court.
“It was the worst time of my life,” Eric told me. “I was always worried.” Eric said he struggled with depression, lost friends and “wasn’t a great spouse during this time.” Eric eventually worked out a deal. His terms were confidential and prohibited him from disparaging his former employer, which is one reason I am not using his real name in this article. He says he took a three-month break from his new job “to fix the problem.”
Eric’s story is far from the worst abuse of non-compete agreements I’ve heard. In 2021, I wrote about three nurses in Wyoming who were ordered to cease practicing. One was forced to take a new job across the state line that paid less and required a two-hour commute; She burned through her savings paying for extra childcare. Another woman nearing retirement age was forced to take a grueling job as a mobile nurse.
None of this would happen in California, where courts have not enforced non-compete agreements since 1872. Now the FTC wants to make the entire country run like California.
“I wholeheartedly support it,” Eric told me.
Silicon Valley’s Secret Weapon
Advocates of non-competes argue that these agreements are necessary for businesses to feel comfortable investing in their employees. One of them is Alden Abbott, the FTC’s general counsel during the Trump years and now a scholar at the Mercatus Center.
“Companies can say we’re not going to invest in specialized training or pass on trade secrets to employees because they can just go and use it against us,” Abbott told me. Abbott is concerned that banning non-competes could lead to companies investing too little in developing their employees’ skills.
While this concern may seem reasonable in theory, it is difficult to agree with the existence of Silicon Valley. California’s refusal to enforce non-compete agreements has actually fostered a culture of layoffs in the state’s tech sector. But it seems that this has not seriously hindered the development of Silicon Valley or its ability to innovate – quite the contrary.
In a famous 1999 article, law professor Ronald Gilson argued that California’s lack of noncompete enforcement was an important factor in Silicon Valley’s success in the late 20th century.c century Building on earlier research by UC-Berkeley’s AnnaLee Saxenian, Gilson compared Silicon Valley to the tech corridor along Route 128 outside Boston. By the 1970s, both of these regions were major centers for the fledgling computer industry.
But in the 1980s, Silicon Valley moved on. And Gilson and Saxenian argued that Silicon Valley’s shirking culture was a major factor.
Because Massachusetts law allows businesses to restrict employee mobility, many engineers spend their careers at one company. In contrast, California law gave engineers the freedom to spend several years at one technology company before moving on to another. This job drain has certainly frustrated Bay Area employers, but it’s also helped ideas spread quickly from one firm to another.
California’s approach has also been a boon for startups. One of Silicon Valley’s first big successes was Intel, a company founded by veterans of another semiconductor pioneer, Fairchild Semiconductor. Fairchild, in turn, was founded by a group of engineers who left the company founded by industry pioneer William Shockley.
This tradition continues to this day, with people regularly leaving their jobs at Google, Facebook or Apple to start new companies that can compete with their old employers. Startups are free to poach talented engineers from tech giants, allowing startups to grow quickly if they have promising ideas.
Still, it’s certainly frustrating for industry executives who are constantly losing talented engineers—indeed, several tech giants have faced legal challenges to keep their poaching contracts with each other. Some economists have theoretical models that suggest that easy job switching hurts innovation by discouraging companies from investing in new technologies or employee training. But given the spectacular success of Silicon Valley, it’s hard to take these models too seriously.
Indeed, I suspect these models are lagging behind: the rest of the country is holding back on enforcing non-compete agreements. If this is true, it would be good for the US economy if workers outside of California were as free to jump from job to job as California workers, taking their skills and knowledge (but not their employers’ trade secrets).
Uphill Battle in the Courts
The most important question about the FTC proposal is whether it will hold up in court. Federal law prohibits “unfair methods of competition” and gives the FTC the authority to enforce this prohibition. To a layman like me, it seems plausible that a non-compete agreement could be a method of unfair competition. But Abbott, a lawyer for the FTC under Trump, is skeptical.
To understand this debate, it is helpful to know a little history. In the 1980s, an intellectual revolution took place that narrowed the scope of antitrust law. Scholars such as Robert Bork have argued that some business arrangements that may superficially appear anticompetitive may be beneficial in practice and should therefore be permitted under antitrust law. These arguments were accepted by the Reagan administration and the Supreme Court, and eventually became the law of the land for the past 30 to 40 years.
The FTC’s new noncompete rule is part of a broader effort by the Biden administration to reverse the Bork revolution. Biden laid out his vision for competition policy in his 2021 executive order, and he simultaneously appointed antitrust activist Lina Khan to chair the FTC. Last November, Khan’s FTC issued a new policy statement outlining its expanded vision for Section 5 of the Federal Trade Commission Act, which lays the legal basis for Thursday’s new rule on non-compete agreements.
Defenders of the antitrust status quo don’t like the direction Biden and Khan are taking antitrust law, and the debate over the noncompetitive bid is best understood as a front in that larger war.
Opponents’ main argument is that the FTC has no history of regulating non-compete agreements and that it is inappropriate for the agency to begin regulating them without express authorization from Congress. Republican FTC member Christine Wilson wrote in her dissent that the FTC proposal is a “radical departure from hundreds of years of legal precedent.”
Wilson also cited a landmark Supreme Court decision West Virginia v. EPA This year, he noted that Obama’s Clean Power Plan oversteps the EPA’s authority under environmental laws. The high court said regulatory agencies need express authorization from Congress before they can tackle major new policy issues.
Wilson and Abbott argue that similar reasoning applies to the FTC’s new noncompete proposal. They say the FTC has no history of regulating non-compete agreements and therefore would need express approval from Congress.
But advocates argue that Congress intentionally gave the FTC broad powers to identify and regulate anticompetitive conduct. The law prohibits “unfair methods of competition” without defining the term in any detail. Presumably, Congress wanted to give the FTC some authority to deal with new issues.
In our phone conversation, I asked Abbott about the story of Wyoming nurses who had to leave their jobs and move out of state to find work. Didn’t this seem like it might be an unfair method of competition?
Abbott didn’t think so. The nurses’ noncompete agreement “affects and hurts nurses, but may not affect competition in the marketplace,” Abbott told me.
I noted that the term “non-compete agreement” literally means “non-compete”. That should be a clue that it’s affecting the competition, right? Abbott didn’t buy it.
“The antitrust laws don’t even define competition,” Abbott told me. “Antitrust laws talk about the relevant market, the competition between two steel companies or two utility companies or whatever.” Antitrust laws did not apply to the relationship between a nurse and an employer because it was a “vertical relationship.”
Admittedly, it didn’t make much sense to me. But I think Abbott’s opinion has a good chance of prevailing in court. While there is plenty of domestic interest on both the left and the right for more aggressive enforcement of antitrust laws, there is little sign that the Supreme Court’s six-justice conservative majority is willing to revisit the ruling antitrust laws. Orthodoxy.