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Saturday, January 07, 2023

FTC announces a proposed rule to ban all noncompetes nation-wide

This week the FTC released a Notice of Proposed Rulemaking to prohibit employers from imposing noncompete clauses on workers: "True to their name, noncompetes block people from working for a competing employer, or starting a competing business, after their employment ends. Evidence shows that noncompete clauses bind about one in five American workers, approximately 30 million people. By preventing workers across the labor force from pursuing better opportunities that offer higher pay or better working conditions, and by preventing employers from hiring qualified workers bound by these contracts, noncompetes hurt workers and harm competition. Noncompete clauses significantly reduce workers’ wages. When employers use noncompete
clauses to restrict workers from moving freely, they have the power to suppress wages and avoid having to compete to attract workers. Based on existing evidence, noncompete clauses also
reduce the wages of workers who aren’t subject to noncompetes by preventing jobs from opening in their industry. According to FTC estimates, the proposed rule could increase workers’
earnings across industries and job levels by $250 billion to $296 billion per year. Researchers also find that banning noncompetes nationwide would close racial and gender wage gaps by 3.6-
9.1 percent. Noncompete clauses stifle new businesses and new ideas. Existing evidence shows that noncompete clauses hinder innovation in several ways—from preventing would-be entrepreneurs
from forming new businesses, to inhibiting workers from bringing innovative ideas to new companies. In markets with fewer new entrants and greater concentration, consumers face higher
prices—as seen in the health care sector. Noncompete clauses can exploit workers and hinder economic liberty. Workers often have less bargaining power than their employer. In many cases, noncompete clauses are take-it-or-leave-it contracts that exploit workers’ lack of bargaining power and coerce workers into staying in jobs they would rather leave. To varying degrees, each state restricts employers’ ability to enforce noncompete clauses due to concerns that they harm workers and threaten a person’s ability to practice their trade. Employers have other ways to protect trade secrets and other valuable investments that are significantly less harmful to workers and consumers. Employers often justify using noncompetes with their workers to protect confidential information and to get the most out of their investments in training and capital. But the record to date shows that in California, North Dakota and Oklahoma—three states in which employers can’t enforce noncompete clauses— industries that depend on trade secrets and other key investments have still flourished. This shows that employers have other ways of protecting these investments."

music to my ears! Exciting also that the definition of noncompetes in the proposed rule includes "de facto" noncompetes:

"The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. For example, the following types of contractual terms, among others, may be de facto non-compete clauses:

i. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.

ii. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker."

The notice and comment period will being soon. Do let me know if you'd like to join and submit a comment.


Posted by Orly Lobel on January 7, 2023 at 09:51 PM | Permalink


glad you asked Jen !
The thing about noncompetes is that they have multiple negative effects -- not simply in lowering wages and mobility, and being imposed largely as unilateral nonnegotiable restraints, but also negative effects on industry competition, regional innovation, job growth, entrepreneurship, talent pool enrichment, gender and racial pay gaps and more. That is why they should be banned not simply at the lower wage markets but also - and from some these aspects - even more so - on the high skilled market.
I have written alot about this including my books: Talent Wants to Be Free (Yale Press)
And You Don’t Own Me (Norton)
and among other articles:
• Banning Noncompete Agreements to Create Competitive Job Markets Day One Project Report, January 2021 (with Lemley, Mark)

• Non-Competes, Human Capital Policy & Regional Competition, JOURNAL OF CORPORATION LAW (2020).

• Exit, Voice & Innovation, HOUSTON LAW REVIEW, Annual Frankel Lecture (invited responses by Lisa Oullette and Todd Rakoff) (2020).

• Knowledge Pays: Reversing Information Flows and the Future of Pay Equity, COLUMBIA LAW REVIEW (2020).

• Gentlemen Prefer Bonds: How Employers Fix the Talent Market, New Directions in Antitrust Law Symposium, SANTA CLARA LAW REVIEW (2020). Jotwell review by Charles Sullivan
• The New Cognitive Property: Human Capital Law and the Reach of Intellectual Property, TEXAS LAW REVIEW 2015.
Boilerplate Collusion: Clause Aggregation, Antitrust Law & Contract Governance, Minnesota Law Review 2021

Posted by: Orly Lobel | Jan 11, 2023 10:44:19 PM

Hi, Orly. Do you have anything in mind for the comment? Although California simply bans all NC’s, I think there’s some room for paid non-competes for high income people employees. Massachusetts went in this direction, which aligns with a decent number of foreign jurisdictions. Happy to chat more.

Jen Kreder, NKU-Chase, [email protected]

Posted by: Jen Kreder | Jan 11, 2023 10:14:51 PM

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