U.S. moves to bar noncompete agreements in labor contracts

I had quite a bit of discussion about this for my current project. It had two non-competes; one for the client and one for the intermediary, and the important one, the one by the client, sounded very broad and vague, and I wanted explicit and in writing how broad they meant it. (Turned out to be only about a handful of their direct competitors.)

Make them sleep in the bed they make!

I'm curious, was there any actual legal action or was it just the threat? I'm not dismissing the fact that a threat can create enough risk to make someone change their behavior, but I've also heard these NDAs are tough to legally enforce. Of course, nobody wants to be the one calling their bluff only to find out it wasn't an idle threat.

I showed up to a meetup at some tech company's offices. After putting in my name, I was shown a contract on a small tablet and was expected to click next and sign with my finger. I have normal vision and couldn't read it without putting it right in front of my eyeball. I don't sign anything without reading. I asked if they had a printed copy so I wasn't holding up the entire line.

Their response? "Oh, that's just all standard legal stuff, don't worry about it."

Easy to say when your lawyers wrote it. It turned out to include both a non-disclosure and non-disparagement agreement. I did not attend that meetup.

[0] https://www.employmentlawwatch.com/2021/10/articles/employme...

The thing you have to realize about commercial contracts is that the law doesn't enforce itself, people who violate them usually don't get caught, etc.

Note also there are other inputs to NDAs. I worked for a firm that did a project for a big accounting firm that itself had confidentiality requirements to its customers so it is natural as an employee of the first firm I help the second firm keep its commitments.

I'd say there are two threads in NDAs: one of them is threats against those who violate confidentiality, another is a description of the procedures that are supposed to be used to protect confidential information. The last time I was doing a lot of consulting I had an NDA that had no threats but lots of guidelines.

I don't have the business or economic bonafides to back this up, but it seems likely to me that such an incentive structure would not serve the benefits of society as a whole, and might become quite damaging were it to become widespread. My own sense is that, with the possible exception of the "you can't take your client sheet with you" style of noncompete that sometimes gets applied to salespeople and hairstylists, non-competes are simply anti-capitalist. Not in some sort of ideological sense, just in a very practical, "This is nothing but a tool for retarding GDP by further concentrating wealth in the pockets of the already-wealthy," sort of way.

The general rules that most states use for deciding when non-competes are enforceable aren't that bad. E.g. if you work at a bakery, you're not going to be allowed to open your own bakery two blocks away within a year, but it's fine if you do it a couple towns over. That doesn't seem especially crazy to me.

I too can see the reasons that non-competes exist, but I see more reasons why they shouldn't exist. And even if a company thinks it's worth it to pay someone's salary for a year or two to enforce a non-compete, is this really what's best for the economy overall? Motivated, highly skilled people excluded from the job market?

That's no argument. Parasites work as organism taxon, doesn't mean all life can become so.

Non-competes limit where your staff can go to. Without proper compensation for the time period in which they apply for, they're a very one sided (and in some cases illegal [NCs are legal in IL unless they assert an economic hardship]) way to prevent employees leaving. The claims for them is "training cost is expensive and it's to limit staff from training at one company and leaving" (which as we know.. companies generally don't do training in house)

Eg. If you move from one big tech co to another, you may be technically moving to a competitor, but the subject matter of your work could be unrelated.

This is probably true of other industries too.

Trademarks don’t really help with this. The bigger issue is trade secrets. You can’t make someone forget how your as-yet unreleased prototype is designed, and proving that their subsequent work for a competitor draws on that knowledge is expensive and time consuming. Not to say that non competes are a good idea, just saying trademarks are irrelevant to the conversation, and trade secrets are a more complicated issue than patents.

If there were another US state where noncompete agreements were "essentially legal" whose economy "worked" what would that show.

Are there any other factors one should consider that affect whether a state's economy "works".

Is it possible to work for a competitor of one's former employer without violating the former employer's intellectual property rights.

(NB. I am in favour of regulating non-competes.)

Might be worth 3 years of pay to keep someone silent and idle for 2 years in some exceptional cases, but 7 years for 3 years would be exceedingly rare and 15 for 4 would be unheard of.

I'd be happy to sink all my time in my hobbies for 200% APR exponentially growing pay as long as anyone would like.

Maybe it's overreach by federal agencies when they create their own law.

There is a distinction between authorizing an agency to figure out how to get something done and letting one make new law.

Dramatically limiting the power of agencies to make up their own new laws seems like a good thing.

More likely, in the short term it will be challenged in individual arbitration and we'll never hear about it.

I don’t think this would ever be implemented here.

If you don't want me to work for a competitor, pay me some amount of money we negotiate like a salary. It's up to you if you think it's worth enough to pay me not to work, and me to be paid enough not to advance my career how I choose during that time.

In contrast, it is extremely easy to detect a person’s employer.

I’m not saying this is a valid or correct argument, I’m saying this is one of the arguments.

Another argument (that I know less about) is that there is knowledge that is valuable and proprietary, but does not actually qualify as “trade secrets” under those laws.

They forgot to have me and several other very senior engineers sign the noncompete, which was extremely hilarious to me when I went to another company in roughly the same industry and my old boss asked me about it...

For a lot of companies, the "sauce" is a personal relationship that isn't trade secret. If you hire a salesman, and give them access to Mr. Big, you create an incentive for the employee to trade the relationship for your competitor's money.

Penalizing the change in employer is not the only way to deal with it, of course. Without a non-compete, you might have to buy/keep the salesman's loyalty. Which may or may not be an economic deadweight.

1. I have a relative who is an MD. He was recruited cross-country at great expense. (Average cost to recruit an MD can be about $250K). So, if his comp was $200K/year and it cost $250K to recruit, a neighboring practice could monitor for new incoming docs, and make an offer of $220K/year in salary to the newly hired doc. If that happened, it would be in the best interest of the doc to switch jobs, but the original practice would be out $250K in recruitment costs.

2. In the case of an acqui-hire, the team is often the special sauce. You embed a bit of non-compete in the form of stock options that vest on a particular schedule, but it may be tricky to structure the deal in an attractive way without a non-compete and non-poach agreement.

3. Trade secrets are often hard to cover in NDA's. Your trade secrets may become embedded in the employee's mind in a manner that they cannot extricate. So, if your employee receives training that includes your trade secrets, those trade secrets will be implicitly used at the next job.

So, I think the argument basically boils down to there being a vast upfront cost to the employer for getting a new employee. If the employee switches to another company, the value of that upfront cost transfers to the new company with no compensation to the old company. It seems a new, more pernicious workaround to non-competes is where employers are charging their employees for training if they leave early. That seems even more hostile than a non-compete.

(As a side note, I think non-competes can be quite damaging. In the case of the MD relative, he was fired, essentially without cause, and his non-compete forced him to be unemployed for a year before he was finally able to convince the former employer to waive the non-compete. So, there should be very hard parameters around non-competes. One thing I think should be mandatory is a written buyout amount for any non-compete that has some basis in reality. For example, if my MD relative was recruited at a cost of $250K with a 2-year non-compete, then he could buy himself out at $250K, minus about $20K for each month of service he completed. Obviously, I haven't fleshed this idea out all the way.)

If your target goal is something like "maximization of worker pay",for example (really, i'm not suggesting that's what you want, it's just a convenient example), then no, there will never be a compelling argument for non-competes, because they always stand in the way of that particular goal.

This is because costs by employers can always be expressed without non-competes somehow to within some reason, and not get in the way of that goal (but may harm others).

For example - there are fields where large amounts of on-the-job training is paid for by employers. Certainly they don't get nothing out of it in the end, but they have upfront costs too. It is more frontloaded cost wise, such that if the employee leaves immediately after training, the employer would lose money.

The literal training cost can simply be expressed as an actual penalty for leaving rather than a non-compete. But the loss of time and need to train someone else (IE the time during which you would have made more money on the person who just left) is harder to value as a penalty (since it depends on what your profit would have been, which is probably variable, and lots of other things). So that is often expressed as a non-compete. But that would still stand in the way of "worker pay maximization", so that particular difficulty is not compelling for that goal (IE you could just assign a value to it and deal)

Similarly, there are fields where there are not enough people, and great upfront cost may be spend in acquiring people (doctors in rural areas, etc). Normally they would non-compete them and give a significant hiring bonus. You can also express this as a penalty, but it still puts you out a doctor for the time it takes to recruit someone else, etc, which is bad for the community. But not for worker pay!

If you go for worker pay maximization, them taking a 250k bonus to go work in that area, then leaving a year later (or whatever), maximizes their pay. It also likely forces the community to pay more to the next person to have that not happen!

So again, if your target goal is maximization of worker pay, no, I think there is no compelling arguments for non-competes.

If you switch your goal to say something like "maximization of production of useful things", maybe you could get to more compelling argument, because constant job hopping by everyone, while maximizing worker pay, probably interferes with maximizing the production of useful things.

Or if you introduce some balance of goals, maybe.

I started out at a tiny company that didn't think their app idea would make it as far as it did. It mostly has. Now I am looking at the terms of my employment and finding myself approximately as encumbered as a McDonalds employee on their first day.

Some of the things I know could be leveraged to turn our biggest competitor into an unstoppable explosion in very little time. I'd never actually do this (there are always higher-order effects w/ betrayal), but I do think I could use this concern as part of my salary re-negotiation this year.

Equity and other forms of compensation serve as a very powerful carrot to abate this temptation. Carrots don't always work though. You usually need some kind of stick at some level.

There are obvious scenarios in competitive industries where losing key people to competitors creates risks for everyone involved (not just the losing employer). The problem is when employers expect the individual employee to absorb the costs to mitigate that risk. Or where the non-competes are applied overbroadly. Rather than ban non-competes, it would be better to require compensation for the term of the non-compete. This prevents frivolous applications of non-competes, which is the actual problem.

You have NDAs already. It's not like you're working for Lockheed with secret stealth aircraft knowledge where a non-compete might be a national security protection. It's a representation of the inequality of bargaining power. If I didn't take the job I would've been out another job for possibly months to reach my payscale (Staff). They are a representation of the scourge of the neo-liberal variety of capitalism. It's not true capitalism, it's actually neo-feudalism, and it's not the only symptom of it.

You will never get anyone in power to agree to make non-competes force payment of a stipend while you're under one. The powers that be have paid off congress. The fact the FTC even wants to look into this after decades of this abuse just demonstrates that fact further.

And this is about the only way they hold up in court, otherwise the non-compete would be a one-sided contract.

IANAL, but I was once sued by a former employer over a non-compete (an entry level IT job). The judge basically swept the floor with it.

Also, it made me understand why severance packages exist, it is usually a salary compensation for the non-compete duration. Now when you hear outrage over some bank exec getting a million dollar severance, know that this can be because of a non-compete.

I know somebody that happened to. Company opened a branch office and one of the senior staff rented an office around the corner, took half the staff and patients. Stuck them with multi year lease agreements, after the business already bore the entire startup cost of paying people while building up a patient load, marketing, etc.

I understand the opposition to draconian non-competes but there’s a flip side of this to protect an investment that is very valid.

I know one person who worked in sales and was banned from selling in an entire region of the country. She was completely open about this when being recruited by another employer. That new employer appeared completely willing to work around the non-compete clause to bring her onboard.

That was, until she was actually hired and she was almost immediately pressured to sell throughout the forbidden area. When she said she was willing to, but only if the new employer would sign an agreement to cover any of her associated legal fees, they eventually backed off on the demands.

These situations always seem to push the risk to the employee to the benefit of the employer.

If I work at a bank as a developer then I can go straight to the next one, if the previous employer doesn't keep paying me a compensation for not working at the next bank.

Not being able to 'in sales' as sibling commenter says here is just insane, and should not hold in court anywhere.

In your example, non competes seem to be optimal for the hedge fund investors, but I fail to see how it was optimal for everyone.

California has been pumping out quite a stream of “interesting jobs” and interesting businesses in a world of no non competes.

It's pretty standard now for employers to spring on you a previously-unmentioned non-compete clause at the time that you're onboarding. I've learned to ask for it before accepting an offer but I don't think most employees know to do that.

I'm a capitalist and I think non-competes have a very valid purpose in a limited set of circumstances. But the ubiquitous use right now is to make it harder for employees to leave.

Think about sota deep learning models. Much better that everyone knows about hot chat gpt works.

> A non compete without having to pay is having your cake and eating it to so to speak.

Agreed. Noncompetes and NDAs have become standard boilerplate in job contracts despite being inappropriate in the vast majority of cases. In my opinion, it's an intimidation used by employers against employees: "we don't actually enforce this, unless you do things like leave us a negative review on GlassDoor".

Despite being unenforceable where I live, I know several people who have been threatened by their ex-employers. Even if such legal action is frivolous, most people don't have the time or money to spare fight it off, and employers know this. This relates back to the bargening inequality mentioned in another thread.

And as an employee, I prefer that noncompete has no effect. Even if I were paid during noncompete period, I would be outcompeted by other people who are working rather than being idle. It would set my career back.

Do we think it would apply to non-solicitation clauses?

Ending non-competes would be good for GDP growth and the US economy writ large. But it's not necessarily for any particular company. See: all the businesses killed off by silicon valley.

Similar to how rent collection is a massive drag on economic productivity but fixing the housing crisis would be terrible for certain rent extractors in particular.

Isn’t it?

Property comes in many forms. There's real estate, and movable property, in the most basic sense of property. But there is also intangible property. You can own a licence for use of part of the radio spectrum in a region. This is a valuable thing and you can sell it or buy it from another licensee. Radio regulation is basically all created by government legislation, and it could probably be changed at any moment, too. There are also financial assets, such as shares or bonds. Corporations themselves are legal fictions, and might be modified by legislation, with associated impacts on the property.

I strictly avoid the term "intellectual property" myself. Because conflating all these senses of property is highly confusing. A car is not a steel mill, which is not a patent, which is not a taxi licence, which is not a share in a corporation, which is not land. We need to carefully distinguish these, in most cases. But in a political science sense, they are property: legally recognized rights, usually transferrable, that claim exclusivity to something, tangible or intangible.

So without the employee the firm can't compete? If that's really true, then that employee should be able to extract as much blood as they want. They are literally the keystone of the business.

The good news is that the FTC rule would allow the firm to enforce a non-compete by giving the employee a 25% equity stake. That seems like a fair trade in exchange for with-holding such incredibly valuable specialized knowledge from the market.

Not being in that industry, to me it seems like the easiest part is coming up with a new trading idea. The hardest part would seem to be actually implementing it without bugs. Therefore, I'm not sure if noncompete clauses really provide a super-significant amount of value. Even if you left a firm with a super good trading strategy today and wanted to implement it elsewhere, you're still going to have to perfectly re-build it, which is probably not trivial.

While non-competes on our side are paid, they're a pain in the ass to navigate if one is a visa worker (my case). So, I am praying for this to pass. If it does, I am starting interviewing with competitors the very next day.

Burned a bridge, of course, but it took them about 20 minutes to decide I wasn't worth the hassle.

This is not theoretical. A few years back, my wife, who is in ad sales, had very deep relationships with certain companies. These people had become her friends, we vacationed with them. She took a job at AOL, which at the time held many properties like Engadget, Joystiq- there was a whole host of sites that no one had realized on the surface were owned by them, but they had a decent sized media empire at the time. She had to sign a non-compete saying that she couldn't call on anyone she called on at AOL for a period of 2 years. She joins, and smashes her goal. However, about 3 months in, there was a re-org, she was let go, probably for making too much, and got some paltry severance.

She asked to be released from the non-compete. They said no. We lawyered up. He said straight out that he had represented AOL employees before, and they fight these things tooth and nail. He said we would probably win, but it would cost tens of thousands of dollars, and be a cloud over our head for at least the next year or two. He was just being brutally honest with us. We ended up not going that route.

It took her several years to recover. She had to take some jobs at kind of shitty companies because no one wanted to touch her with a non-compete like that, and most of her value was in the relationships she brought to the table. AOL essentially got a book of new business for the cost of a few months salary and commission. Its absurd.

My last company also tried to put an onerous non-compete on me- they only wanted to pay me my base salary which was a fraction of my total comp. They wouldn't even define who their competitors were. I fought against it hard. I was then labeled "difficult" by HR and what had been a bit of a rocket ship of a ride up there all of a sudden came to a stop- I stayed for another 2 years there, but it became clear there was a glass ceiling above me.

Non-competes in any form need to go away. This is restraining the US economy from achieving its potential by reducing labor mobility.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.

[0] https://www.ftc.gov/news-events/news/press-releases/2023/01/...

Better than nothing I guess. And it does put some skin in the game for the employer.

But while that might look like a good deal for some people who are in a position to just travel, start a project of some sort, etc. it isn't for everyone. Someone with a mortgage, kids in college, or other financial obligations might not think that dropping to half their base pay--to say nothing of just taking a year off mid-career--is so great.

And, depending upon how specialized they are, there may not be a role open to them which is a good match with their experience and skills.

I go back and forth on that. It seems like the free market ideal would be to allow them and if people didn't like them they wouldn't sign them. No one telling anyone what to do.

It certainly hasn't panned out that way though.

I'm not saying these things are necessarily good or bad. Just saying that most laws around income, taxes, and land have their roots in feudalism. And of course the ruling class still make themselves well to do off of the hard work of their subjects, just not to the same degree as kings. And yes, I know, people today have "choices" via voting. Even if those choices are between a shit sandwich and a shit sandwich without the bread.

I dunno, they seem pretty spot on for the US.

In the US, "free market" generally means one of two things... 1 - a fictional market with no externalities and perfect information symmetry. Ayn Rand fans think it's real, but it only exists in an ECON-101 textbook.

2 - code for "rules for thee, not for me" as said by the billionaire class. Or, really anything that keeps them rich and the rest of us beholden to them for basic life necessities.

Edit - I prefer a phrase like "functioning market" to "free markets". Or maybe "fair market"? Not sure. The current labor market in the US is dysfunctional, at least when considering the share of increased productivity seen by the working classes (vs business owners).

Edit2 - changed "perfect information asymmetry" to "perfect information symmetry"

I've long been a proponent that capitalism is not just about the economy but is instead a larger force more akin to feudalism.

If the lawmakers take issue with the ruling they can issue a mandate to roll it back, no?

[1] https://www.federalreserve.gov/boarddocs/supmanual/cch/20080...

student debt was another one. whether or not you agree with forgiving it, it's deeply disturbing for the president to knowingly do something unconstitutional and do an endrun around congress' power of the purse. With the hope that no one has standing to challenge it

The FTC claims non competes undermine competition, which is within their mandate, and honestly not that tough of an argument to make.

And if you think the primary purpose of non-competes is to prevent or mitigate corporate espionage, I've got a bridge to sell you.

And do what? There's not a robust social safety net in the US, if every company in your industry has a boilerplate non-compete you can't just choose not to sign any of them.

> employers offer better incentive to not leave for roles at risk to poaching e.g. RSUs.

Why would they do that when they can just put non-competes in their contracts? Or to put it another way, it's extremely hard to quantify how many people didn't sign an employment contract due to a non-compete (and even harder to quantify the value of that potential employee), it's extremely easy to quantify the cost of an RSU program. Which solution do you think an entity optimized for profit maximization will choose most frequently?

They’re just not useful and themselves an arbitrary restriction of employment that has no place in a a free market.

I once took a job at a design service company. Asked about any non-competes and invention stuff. Said there wasn't any verbally. I get there and they have this draconian non-compete that you can't work for any other design services, start your own design service, or work for any of their clients for five years.