Non-Compete Clause Rule

Federal RegisterJan 19, 2023

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FEDERAL TRADE COMMISSION

16 CFR Part 910

RIN 3084-AB74

Non-Compete Clause Rule

AGENCY:

Federal Trade Commission.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

Pursuant to Sections 5 and 6(g) of the Federal Trade Commission Act, the Federal Trade Commission (“Commission”) is proposing the Non-Compete Clause Rule. The proposed rule would, among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.

DATES:

Comments must be received on or before March 20, 2023.

ADDRESSES:

Interested parties may file a comment online or on paper by following the instructions in the Request for Comment part of the

SUPPLEMENTARY INFORMATION

section below. Write “Non-Compete Clause Rulemaking, Matter No. P201200” on your comment, and file your comment online at

https://www.regulations.gov,

by following the instructions on the web-based form. If you prefer to file your comment on paper, mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Shannon Lane (202-876-5651), Attorney, Office of Policy Planning, Federal Trade Commission.

SUPPLEMENTARY INFORMATION:

I. Overview of the Proposed Rule

A non-compete clause is a contractual term between an employer and a worker that typically blocks the worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker's employment ends. Non-compete clauses limit competition by their express terms. As a result, non-compete clauses have always been considered proper subjects for scrutiny under the nation's antitrust laws.

In addition, non-compete clauses between employers and workers are traditionally subject to more exacting review under state common law than other contractual terms, due, in part, to concerns about unequal bargaining power between employers and workers and the fact that non-compete clauses limit a worker's ability to practice their trade.

See, e.g., U.S.

Am. Tobacco Co.,

221 U.S. 106, 181-83 (1911) (holding several tobacco companies violated Sections 1 and 2 of the Sherman Act due to the collective effect of six of the companies' practices, one of which was the “constantly recurring” use of non-compete clauses);

Newburger, Loeb & Co., Inc.

Gross,

563 F.2d 1057, 1082 (2d Cir. 1977) (“Although such issues have not often been raised in the federal courts, employee agreements not to compete are proper subjects for scrutiny under section 1 of the Sherman Act. When a company interferes with free competition for one of its former employee's services, the market's ability to achieve the most economically efficient allocation of labor is impaired. Moreover, employee-noncompetition clauses can tie up industry expertise and experience and thereby forestall new entry.”) (internal citation omitted).

See infra

Part II.C.

In recent decades, important research has shed light on how the use of non-compete clauses by employers affects competition. Changes in state laws governing non-compete clauses have provided several natural experiments that have allowed researchers to study the impact of non-compete clauses on competition. This research has shown the use of non-compete clauses by employers has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force—including workers not bound by non-compete clauses.

This research has also shown that, by suppressing labor mobility, non-compete clauses have negatively affected competition in product and service markets in several ways.

See infra

Part II.B.1.

See infra

Part II.B.2.

In this rulemaking, the Commission seeks to ensure competition policy is aligned with the current economic evidence about the consequences of non-compete clauses. In the Commission's view, the existing legal frameworks governing non-compete clauses—formed decades ago, without the benefit of this evidence—allow serious anticompetitive harm to labor, product, and service markets to go unchecked.

Section 5 of the Federal Trade Commission Act (“FTC Act”) declares “unfair methods of competition” to be unlawful.

Section 5 further directs the Commission “to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce.”

Section 6(g) of the FTC Act authorizes the Commission to “make rules and regulations for the purpose of carrying out the provisions of” the FTC Act, including the Act's prohibition of unfair methods of competition.

15 U.S.C. 45(a)(1).

15 U.S.C. 45(a)(2).

15 U.S.C. 46(g).

Pursuant to Sections 5 and 6(g) of the FTC Act, the Commission proposes the Non-Compete Clause Rule. The proposed rule would provide it is an unfair method of competition—and therefore a violation of Section 5—for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or, under certain circumstances, represent to a worker that the worker is subject to a non-compete clause.

See

proposed § 910.2(a). For ease of reference, this NPRM employs the term “use of non-compete clauses” as a shorthand to refer to the conduct that the proposed rule would provide is an unfair method of competition.

The proposed rule would define the term “non-compete clause” as a contractual term between an employer and a worker that prevents 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.

The proposed rule would also clarify that whether a contractual provision is a non-compete clause would depend not on what the provision is called, but how the provision functions. As the Commission explains below, the definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements—because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker's employment with the employer. However, under the proposed definition of “non-compete clause,” such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.

See

proposed § 910.1(b)(1).

See infra

Part V (in the section-by-section analysis for proposed § 910.1(b)).

The proposed rule would define “employer” as a person—as the term “person” is defined in 15 U.S.C. 57b-1(a)(6)—that hires or contracts with a worker to work for the person.

The proposed rule would define “worker” as a natural person who works, whether paid or unpaid, for an employer. The proposed rule would clarify that the term “worker” includes an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who

provides a service to a client or customer.

See

proposed § 910.1(c).

See

proposed § 910.1(f).

In addition to prohibiting employers from entering into non-compete clauses with workers starting on the rule's compliance date, the proposed rule would require employers to rescind existing non-compete clauses no later than the rule's compliance date.

The proposed rule would also require an employer rescinding a non-compete clause to provide notice to the worker that the worker's non-compete clause is no longer in effect.

To facilitate compliance, the proposed rule would (1) include model language that would satisfy this notice requirement

and (2) establish a safe harbor whereby an employer would satisfy the rule's requirement to rescind existing non-compete clauses where it provides the worker with a notice that complies with this notice requirement.

See

proposed § 910.2(b)(1).

See

proposed § 910.2(b)(2)(A).

See

proposed § 910.2(b)(2)(C).

See

proposed § 910.2(b)(3).

The proposed rule would include a limited exception for non-compete clauses between the seller and buyer of a business.

This exception would only be available where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest in a business entity.

The proposed regulatory text would clarify that non-compete clauses covered by this exception would remain subject to federal antitrust law as well as all other applicable law.

See

proposed § 910.3.

See

proposed §§ 910.3 and 910.1(e).

The proposed rule would establish an effective date of 60 days, and a compliance date of 180 days, after publication of a final rule in the

Federal Register

See

proposed § 910.5.

In this notice of proposed rulemaking (“NPRM”), the Commission describes and seeks comment on several alternatives to the proposed rule, including whether non-compete clauses between employers and senior executives should be subject to a different standard than non-compete clauses with other workers.

The Commission also assesses the benefits and costs of the proposed rule, the impact of the proposed rule on small businesses, and compliance costs related to the proposed rule's notice requirement.

See infra

Part VI.

See infra

Parts VII-IX.

The Commission seeks comment on all aspects of this NPRM. Comments must be received on or before March 20, 2023.

Pursuant to Section 22(d)(4) of the FTC Act, 15 U.S.C. 57b-3(d)(4), this NPRM was not included in the Commission's Spring 2022 Regulatory Agenda because the Commission first considered it after the publication deadline for the Regulatory Agenda.

II. Factual Background

A. What are non-compete clauses?

A non-compete clause is a contractual term between an employer and a worker that prevents 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.

A typical non-compete clause blocks the worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after their employment ends. A non-compete clause may be part of the worker's employment contract or may be contained in a standalone contract. Employers and workers may enter into non-compete clauses at the start of, during, or at the end of a worker's employment.

See

proposed § 910.1(b). The term “non-compete clause” has also been used describe agreements between one or more business not to compete against one another,

see, e.g., Lumber Liquidators, Inc.

Cabinets To Go, LLC,

415 F. Supp. 3d 703, 709 (E.D. Va. 2009), as well as certain kinds of moonlighting during a worker's employment,

see, e.g., In the Matter of the Investigation by Barbara D. Underwood, Att'y Gen. of the State of N.Y. of WeWork Companies, Inc.,

Assurance of Discontinuance No. 18-101 (Sept. 18, 2018) at Exhibit B. As underscored above, however, this proposed rule focuses only on post-employment restraints that employers impose on workers.

If a worker violates a non-compete clause, the employer may sue the worker for breach of contract. An employer may be able to obtain a preliminary injunction ordering the worker, for the duration of the lawsuit, to stop the conduct that allegedly violates the non-compete clause. If the employer wins the lawsuit, the employer may be able to obtain a permanent injunction ordering the worker to stop the conduct that violates the non-compete clause; a payment of monetary damages from the worker; or both.

Where workers are subject to arbitration clauses,

the employer may seek to enforce the non-compete clause through arbitration.

Donald J. Aspelund & Joan E. Beckner, Employee Noncompetition Law § 8:2, § 8:22 (Aug. 2021).

See, e.g.,

Alexander J.S. Colvin, Econ. Pol'y Inst., Report,

The Growing Use of Mandatory Arbitration

(Apr. 6, 2018).

The below examples of non-compete clauses from recent news reports, legal settlements, and court opinions are illustrative.

• A contractual term between a security guard firm and its security guards requiring that, for two years following the conclusion of the security guards' employment with the firm, the security guard may not “[a]ccept employment with or be employed by” a competing business “within a one hundred (100) mile radius” of the security guard's primary jobsite with the firm and stating that the security guards may not “[a]ssist, aid or in any manner whatsoever help any firm, corporation, partnership or other business to compete with” the firm. The non-compete clause also contains a “liquidated damages” clause requiring the security guard to pay the firm $100,000 as a penalty for any conduct that contravenes the agreement.

Fed. Trade Comm'n, Complaint,

In re Prudential Sec., Inc. et al.,

Matter No. 221 0026 at ¶ 12-¶ 13 (December 28, 2022).

• A contractual term between a glass container manufacturing company and its workers typically requiring that, for two years following the conclusion of the worker's employment with the company, the worker may not directly or indirectly “perform or provide the same or substantially similar services” to those the worker performed for the company to any business in the U.S., Canada, or Mexico that is “involved with or that supports the sale, design, development, manufacture, or production of glass containers” in competition with the company.

Fed. Trade Comm'n, Complaint,

In re Ardagh Group S.A. et al.,

Matter No. 211 0182 at ¶ 9 (December 28, 2022).

• A contractual term between a sandwich shop chain and its workers stating that, for two years after the worker leaves their job, the worker may not perform services for “any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” located within three miles of any of the chain's more than 2,000 locations in the United States.

Dave Jamieson,

Jimmy John's Makes Low-Wage Workers Sign `Oppressive' Noncompete Agreements,

HuffPost (Oct. 13, 2014). The company agreed to remove the non-compete clause in 2016 as part of a settlement. Office of the Att'y Gen. of the State of N.Y., Press Release,

A.G. Schneiderman Announces Settlement With Jimmy John's To Stop Including Non-Compete Agreements In Hiring Packets

(June 22, 2016).

• A contractual term between a steelmaker and one of its executives prohibiting the executive from working for “any business engaged directly or indirectly in competition with” the steelmaker anywhere in the world for

one year following the termination of the executive's employment.

AK Steel Corp.

ArcelorMittal USA, LLC,

55 N.E.3d 1152, 1156 (Ohio Ct. App. 2016).

• A contractual term between an office supply company and one of its sales representatives stating that, for two years after the sales representative's last day of employment, the sales representative is prohibited from “engag[ing] directly or indirectly, either personally or as an employee, associate, partner, or otherwise, or by means of any corporation or other legal entity, or otherwise, in any business in competition with Employer,” within a 100-mile radius of the sales representative's employment location.

Osborne

Brown & Saenger, Inc.,

904 N.W.2d 34, 36 (N.D. 2017).

• A contractual term between a nationwide payday lender and its workers stating that, for one year after the worker leaves their job, they are prohibited from performing any “consumer lending services or money transmission services” for any entity that provides such services, or to “sell products or services that are competitive with or similar to the products or services of the Company,” within a 15-mile radius of any of the payday lender's 1,000 locations in the United States.

People of the State of Ill.

Check Into Cash of Ill.,

LLC, Complaint, 2017-CH-14224 (Ill. Circuit Ct. Oct. 25, 2017), ¶ 29, ¶ 70,

https://illinoisattorneygeneral.gov/pressroom/2017_10/Check_Into_Cash-Complaint.pdf.

• A contractual term between an online retailer and its warehouse workers prohibiting the workers, for 18 months after leaving their job, from “directly or indirectly . . . engag[ing] or support[ing] the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by” the retailer—or that is “intended to be sold, offered, or otherwise provided by [the retailer] in the future”—that the worker “worked on or supported” or about which the worker obtained or received confidential information.

Spencer Woodman, Exclusive:

Amazon makes even temporary warehouse workers sign 18-month non-compete clauses,

The Verge (Mar. 26, 2015). The company removed the non-compete clause following the media coverage. Josh Lowensohn,

Amazon does an about-face on controversial warehouse worker non-compete contracts,

The Verge (Mar. 27, 2015).

• A contractual term between a medical services firm and an ophthalmologist stating that, for two years after the termination of the ophthalmologist's employment with the firm, the ophthalmologist shall not engage in the practice of medicine in two Idaho counties unless the ophthalmologist pays the firm a “practice fee” of either $250,000 or $500,000, depending on when the ophthalmologist's employment ends.

Intermountain Eye & Laser Ctrs. P.L.L.C.

Miller,

127 P.3d 121, 123 (Idaho 2005).

In addition to non-compete clauses, other types of contractual provisions restrict what a worker may do after they leave their job. These other types of provisions include, among others:

• Non-disclosure agreements (NDAs)—also known as “confidentiality agreements”—which prohibit the worker from disclosing or using certain information;

• Client or customer non-solicitation agreements, which prohibit the worker from soliciting former clients or customers of the employer (referred to in this NPRM as “non-solicitation agreements”);

The term “non-solicitation agreement” can also refer to a type of agreement between employers not to solicit one another's employees. In this NPRM, however, the term refers only to contractual provisions between employers and workers prohibiting the worker from soliciting clients or customers of the employer.

• No-business agreements, which prohibit the worker from doing business with former clients or customers of the employer, whether or not solicited by the worker;

• No-recruit agreements, which prohibit the worker from recruiting or hiring the employer's workers;

• Liquidated damages provisions, which require the worker to pay the employer a sum of money if the worker engages in certain conduct; and

• Training-repayment agreements (TRAs), a type of liquidated damages provision in which the worker agrees to pay the employer for the employer's training expenses if the worker leaves their job before a certain date.

See, e.g.,

Norman D. Bishara, Kenneth J. Martin, and Randall S. Thomas,

An Empirical Analysis of Non-Competition Clauses and Other Restrictive Post-Employment Covenants,

68 Vand. L. Rev. 1, 13 (2015); Uniform Law Comm'n,

Uniform Restrictive Employment Agreement Act,

Draft For Approval (2021) at § 2.

These other types of restrictive employment covenants can sometimes be so broad in scope that they serve as

de facto

non-compete clauses.

See, e.g., Wegmann

London,

648 F.2d 1072, 1073 (5th Cir. 1981);

Brown

TGS Mgmt. Co., LLC,

57 Cal. App. 5th 303, 306, 319 (Cal. Ct. App. 2020).

In addition to restricting what workers may do after they leave their jobs, employers have also entered into agreements with other employers in which they agree not to compete for one another's workers. These include no-poach agreements, in which employers agree not to solicit or hire one another's workers, and wage-fixing agreements, in which employers agree to limit wages or salaries (or other terms of compensation).

Fed. Trade Comm'n & U.S. Dep't of Justice Antitrust Division, Antitrust Guidance for Human Resource Professionals (Oct. 2016) at 3.

The Commission seeks comment on its description in this Part II.A of non-compete clauses. The Commission also encourages workers, employers, and other members of the public to submit comments describing their experiences with non-compete clauses.

B. Evidence Relating to the Effects of Non-Compete Clauses on Competition

Non-compete clauses have presented challenging legal issues for centuries.

But only in the last two decades has empirical evidence emerged to help regulators and the general public understand how non-compete clauses affect competition in labor markets and product and service markets.

See infra

Part II.C.

In the early 2000s, researchers began to shed new light on the impacts of non-compete clauses on innovation and productivity. As this new body of research was evolving, news reports revealed non-compete clauses were being imposed even on low-wage workers.

These reports surprised many observers, who had assumed only highly skilled workers were subject to non-compete clauses.

Researchers responded by applying the tools of economic research to better understand how employers were using non-compete clauses and how they were affecting competition.

See, e.g.,

Jamieson,

supra

note 28.

See, e.g.,

Alan B. Kreuger & Eric A. Posner, The Hamilton Project, Policy Proposal 2018-05,

A Proposal for Protecting Low-Income Workers from Monopsony and Collusion

(February 2018) at 7.

1. Labor Markets

The empirical research on how non-compete clauses affect competition shows that the use of non-compete clauses in the aggregate is interfering with competitive conditions in labor markets.

Labor markets function by matching workers and employers. Workers offer their skills and time to employers. In return, employers offer pay, benefits, and job satisfaction.

In a well-functioning labor market, a worker who is seeking a better job—more pay, better hours, better working conditions, more enjoyable work, or whatever the worker may be seeking—can enter the labor market by looking for work. Employers who have positions available compete for the worker's services. The worker's

current employer may also compete with these prospective employers by seeking to retain the worker—for example, by offering to raise the worker's pay or promote the worker. Ultimately, the worker chooses the job that best meets their objectives. In general, the more jobs available—

i.e.,

the more options the worker has—the stronger the match the worker will find.

See, e.g.,

Dep't of the Treasury, Report,

The State of Labor Market Competition

(March 7, 2022) at 3.

Just as employers compete for workers in a well-functioning labor market, workers compete for jobs. An employer who needs a worker will make it known that the employer has a position available. Workers who learn of the opening will apply for the job. From among the workers who apply, the employer will choose the worker that best meets the employer's needs—in general, the worker most likely to be the most productive. In general, the more workers who are available—

i.e.,

the more options the employer has—the stronger the match the employer will find.

Through these processes—employers competing for workers, workers competing for jobs, and employers and workers matching with one another—competition in the labor market leads to higher earnings for workers, greater productivity for employers, and better economic conditions.

In a perfectly competitive labor market, if a job that a worker would prefer more—for example, because it has higher pay or is in a better location—were to become available, the worker could switch to it quickly and easily. Due to this ease of switching, in a perfectly competitive labor market, workers would easily match to the optimal job for them. If a worker were to find themselves in a job where the combination of their happiness and productivity is less than in some other job, they would simply switch jobs, making themselves better off.

However, this perfectly competitive labor market exists only in theory. In practice, labor markets deviate substantially from perfect competition. Non-compete clauses, in particular, impair competition in labor markets by restricting a worker's ability to change jobs. If a worker is bound by a non-compete clause, and the worker wants a better job, the non-compete clause will prevent the worker from accepting a new job that is within the scope of the non-compete clause. These are often the most natural alternative employment options for a worker: jobs in the same geographic area and in the worker's field of expertise. For example, a non-compete clause might prevent a nurse in Cleveland from working in the health care field in Northeast Ohio, or a software engineer in Orlando from working for another technology company in Central Florida. The result is less competition among employers for the worker's services and less competition among workers for available jobs. Since the worker is prevented from taking these jobs, the worker may decide not to enter the labor market at all. Or the worker may enter the labor market but take a job in which they are less productive, such as a job outside their field.

Non-compete clauses affect competition in labor markets through their use in the aggregate. The effect of an individual worker's non-compete clause on competition in a particular labor market may be marginal or may be impossible to discern statistically. However, the use of a large number of non-compete clauses across a labor market markedly affects the opportunities of all workers in that market, not just those with non-compete clauses. By making it more difficult for many workers in a labor market to switch to new jobs, non-compete clauses inhibit optimal matches from being made between employers and workers across the labor force. As a result, where non-compete clauses are prevalent in a market, workers are more likely to remain in jobs that are less optimal with respect to the worker's ability to maximize their productive capacity. This materially reduces wages for workers—not only for workers who are subject to non-compete clauses, but for other workers in a labor market as well, since jobs that would otherwise be better matches for an unconstrained worker are filled by workers subject to non-compete clauses.

a. Estimates of Non-Compete Clause Use

Based on the available evidence, the Commission estimates that approximately one in five American workers—or approximately 30 million workers—is bound by a non-compete clause.

A 2014 survey of workers by Evan Starr, JJ Prescott, and Norman Bishara, which resulted in 11,505 responses, found 18% of respondents work under a non-compete clause and 38% of respondents have worked under one at some point in their lives.

Among the studies of non-compete clause use discussed here, this study has the broadest and likely the most representative coverage of the U.S. labor force.

Starr, Prescott, and Bishara also found that, among workers without a bachelor's degree, 14% of respondents reported working under a non-compete clause at the time surveyed and 35% reported having worked under one at some point in their lives.

For workers earning less than $40,000 per year, 13% of respondents work under a non-compete clause and 33% worked under one at some point in their lives.

Furthermore, this survey shows 53% of workers who are covered by non-compete clauses are hourly workers.

Evan P. Starr, James J. Prescott, & Norman D. Bishara,

Noncompete Agreements in the U.S. Labor Force,

64 J.L. & Econ. 53, 53 (2021). A survey of workers conducted in 2017 by

Payscale.com

reached similar results. This survey estimated that 24.2% of workers are subject to a non-compete clause. Natarajan Balasubramanian, Evan Starr, & Shotaro Yamaguchi,

Bundling Employment Restrictions and Value Appropriation from Employees

35 (2022),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403.

This survey also found that non-compete clauses are often used together with other restrictive employment covenants, including non-disclosure, non-recruitment, and non-solicitation covenants.

Id.

at 17 (reporting that respondents that had a non-compete clause reported having all three of the other restrictive employment covenants 74.7% of the time). However, a key limitation of the

Payscale.com

survey is that it is a convenience sample of individuals who visited

Payscale.com

during the time period of the survey and is therefore unlikely to be fully representative of the U.S. working population.

Id.

at 13. While weighting based on demographics helps, it does not fully mitigate this concern.

The final survey sample contained 11,505 responses, representing individuals from nearly every demographic in the labor force.

Id.

at 58.

Id.

at 63.

Id.

Michael Lipsitz & Evan Starr,

Low-Wage Workers and the Enforceability of Noncompete Agreements,

68 Mgmt. Sci. 143, 144 (2021) (analyzing data from the Starr, Prescott, & Bishara survey).

Starr, Prescott, and Bishara also found, in states where non-compete clauses are unenforceable, workers are covered by non-compete clauses at approximately the same rate as workers in other states.

This suggests employers maintain non-compete clauses even where they likely cannot enforce them.

Starr, Prescott, & Bishara,

supra

note 42 at 81.

Other estimates of non-compete clause use cover subsets of the U.S. labor force. One study, a 2021 study by Rothstein and Starr, is based on National Longitudinal Survey of Youth (NLSY) data.

The NLSY consists of a nationally representative sample of 8,984 men and women born from 1980-84 and living in the United States at the time of the initial survey in 1997.

The survey is an often-used labor survey conducted by the Bureau of Labor Statistics, rather than a one-off survey

directed solely at calculating the prevalence of non-compete clauses. Using this data, Rothstein and Starr estimate the prevalence of non-compete clauses to be 18%, which is comparable to the number estimated by Starr, Prescott, and Bishara.

Donna S. Rothstein & Evan Starr,

Mobility Restrictions, Bargaining, and Wages: Evidence from the National Longitudinal Survey of Youth 1997

(2021),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3974897.

U.S. Bureau of Labor Statistics,

NLSY97 Data Overview, https://www.bls.gov/nls/nlsy97.htm.

Rothstein & Starr,

supra

note 48 at 7.

Finally, four occupations have been studied individually: executives, physicians, hair stylists, and electrical and electronics engineers. Both Shi (2021) and Kini et al. (2021) estimate prevalence of non-compete clauses for executives. Shi (2021) finds the proportion of executives working under a non-compete clause rose from “57% in the early 1990s to 67% in the mid-2010s.”

Kini et al. (2021) find that 62% of CEOs worked under a non-compete clause between 1992 and 2014.

Lavetti et al. (2020) find 45% of physicians worked under a non-compete clause in 2007.

In a survey of independent hair salon owners, Johnson and Lipsitz (2021) find 30% of hair stylists worked under a non-compete clause in 2015.

Finally, in a survey of electrical and electronic engineers, Marx (2011) finds that 43% of respondents signed a non-compete clause.

Liyan Shi,

Optimal Regulation of Noncompete Contracts

27 (2022),

https://static1.squarespace.com/static/59e19b282278e7ca5b9ff84f/t/626658ffb73adb2959bd4371/1650874624095/noncompete_shi.pdf.

Omesh Kini, Ryan Williams, & Sirui Yin,

CEO Noncompete Agreements, Job Risk, and Compensation,

34 Rev. Fin. Stud. 4701, 4707 (2021).

Kurt Lavetti, Carol Simon, & William D. White,

The Impacts of Restricting Mobility of Skilled Service Workers Evidence from Physicians,

55 J. Hum. Res. 1025, 1042 (2020).

Matthew S. Johnson & Michael Lipsitz,

Why Are Low-Wage Workers Signing Noncompete Agreements?,

57 J. Hum. Res. 689, 700 (2022).

Matt Marx,

The Firm Strikes Back: Non-Compete Agreements and the Mobility of Technical Professionals,

76Am. Socio. Rev. 695, 702 (2011). Calculated as 92.60% who signed a non-compete clause of the 46.80% who were asked to sign a non-compete clause.

Some observers have stated that the use of non-compete clauses by employers appears to have increased over time.

However, there is no consistent data available on the prevalence of non-compete clauses over time.

See, e.g.,

Rachel Arnow-Richman,

Cubewrap Contracts and Worker Mobility: The Dilution of Employee Bargaining Power via Standard Form Noncompetes,

2006 Mich. St. L. Rev. 963, 981 n.59; John W. Lettieri, American Enterprise Institute, Policy Brief,

A Better Bargain: How Noncompete Reform Can Benefit Workers and Boost Economic Dynamism

(December 2020) at 2.

While many workers are bound by non-compete clauses, many workers do not know whether their non-compete clause is legally enforceable or not. As part of their 2014 survey, Starr et al. asked surveyed individuals “Are noncompetes enforceable in your state?” Of the respondents, 37% indicated that they did not know whether or not their non-compete clause was enforceable.

Additionally, 11% of individuals were misinformed: they believed that non-compete clauses were enforceable in their state when they were not, or they believed that non-compete clauses were not enforceable when they were.

J.J. Prescott & Evan Starr,

Subjective Beliefs About Contract Enforceability

10 (2022),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3873638.

Id.

at 11.

Starr et al. also find that only 10.1% of workers with non-compete clauses report bargaining over it.

Additionally, only 7.9% report consulting a lawyer, and only 11.4% of respondents thought that they still would have been hired if they had refused to sign the non-compete clause.

Marx finds that only 30.5% of electrical engineers who signed non-compete clauses were asked to sign prior to accepting their job offer, and 47% of non-compete clause signers were asked to sign on or after their first day of work.

Starr, Prescott, & Bishara,

supra

note 42, at 72.

Id.

Marx (2011),

supra

note 55 at 706. Forty-seven percent is calculated as the sum of 24.43% and 22.86%, the respective percentage of requests that were made on the first day or after the first day at the company.

b. Earnings—Effects on Workers Across the Labor Force

By inhibiting optimal matches from being made between employers and workers across the labor force, non-compete clauses reduce the earnings of workers. Several studies have found that increased enforceability of non-compete clauses reduces workers' earnings across the labor market generally and for specific types of workers.

Each of the studies described below analyzes the effects of non-compete clause enforceability on earnings. While different studies have defined enforceability of non-compete clauses in slightly different ways, each uses enforceability as a proxy for the chance that a given non-compete clause will be enforced.

All the studies described below rely on twelve concepts of enforceability based on Malsberger's “Non-Compete Clauses: A State-by-State Survey” and Kini et al. supplemented with data from Beck, Reed, and Riden LLP's state-by-state survey of non-compete clauses.

These studies use “natural experiments” resulting from changes in state law to assess how changes in the enforceability of non-compete clauses affect workers' earnings. The use of a natural experiment allows for the inference of causal effects, since the likelihood that other variables are driving the outcomes is minimal.

First, a study conducted by Matthew Johnson, Kurt Lavetti, and Michael Lipsitz finds that decreasing non-compete clause enforceability from the approximate enforceability level of the fifth-strictest state to that of the fifth-most-lax state would increase workers' earnings by 3-4%.

Johnson, Lavetti, and Lipsitz also estimate that a nationwide ban on non-compete clauses would increase average earnings by 3.3-13.9%.

The authors also find that non-compete clauses limit the ability of workers to leverage favorable labor markets to receive greater pay: when non-compete clauses are more enforceable, workers' earnings are less responsive to low unemployment rates (which workers may typically leverage to negotiate pay raises).

Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz,

The Labor Market Effects of Legal Restrictions on Worker Mobility

2 (2020),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381.

Id.

at 36.

The second study of the effects of non-compete clause enforceability on earnings, conducted by Evan Starr, estimates that if a state that does not enforce non-compete clauses shifted its policy to that of the state with an average level of enforceability, earnings would fall by about 4%.

Unlike many of the other studies described here, this study does not use a change in enforceability of non-compete clauses to analyze the impact of enforceability. Rather, it examines the differential impact of enforceability on workers in occupations which use non-compete clauses at a high rate versus workers in occupations which use non-compete clauses at a low rate. While the Commission believes that this research design may be less informative with respect to the proposed rule than designs which examine changes in enforceability, the study's estimated effects are in line with the rest of the literature.

Evan Starr,

Consider This: Training, Wages, and the Enforceability of Non-Compete Clauses,

72 I.L.R. Rev. 783, 799 (2019).

The third study, conducted by Michael Lipsitz and Evan Starr, estimates that when Oregon stopped enforcing non-compete clauses for workers who are paid hourly, their wages increased by 2-3%, relative to workers in states which did not experience legal changes. The study also found a greater effect (4.6%) on workers

in occupations that used non-compete clauses at a relatively high rate.

Lipsitz & Starr,

supra

note 46 at 143.

The fourth study, conducted by Natarajan Balasubramanian, Jin Woo Chang, Mariko Sakakibara, Jagadeesh Sivadasan, and Evan Starr, found that when Hawaii stopped enforcing non-compete clauses for high-tech workers, earnings of new hires increased by about 4%.

Natarajan Balasubramanian, Jin Woo Chang, Mariko Sakakibara, Jagadeesh Sivadasan, & Evan Starr,

Locked In? The Enforceability of Non-Compete Clauses and the Careers of High-Tech Workers,

57 J. Hum. Res. S349, S349 (2022).

The fifth and sixth studies both show that enforceable non-compete clauses reduce earnings for executives. One study, by Mark Garmaise, finds that decreased enforceability of non-compete clauses increases executives' earnings by 12.7%.

Another study, by Omesh Kini, Ryan Williams, and David Yin, finds that decreased enforceability of non-compete clauses led to lower earnings for CEOs when use of non-compete clauses is held constant. However, the study also finds use of non-compete clauses decreases when non-compete clause enforceability decreases. When that relationship is taken into account, decreased enforceability results in greater earnings for CEOs. For example, if the state which enforces non-compete clauses most strictly (Florida) hypothetically moved to a policy of non-enforcement, then a CEO who had a non-compete clause prior to the policy change would experience an estimated 11.4% increase in their earnings, assuming their non-compete clause was dropped.

Mark J. Garmaise,

Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment,

27 J.L., Econ., & Org. 376, 403 (2011). The reduction in earnings is calculated as e

−1.3575*0.1

−1, where −1.3575 is taken from Table 4.

Kini, Williams, & Yin,

supra

note 52 at 4731. The 11.4% increase is calculated as e

−1, where X is calculated as 9 times the coefficient on CEO Noncompete × HQ Enforce (0.047), where 9 is the enforceability index in Florida, plus the coefficient on CEO Noncompete (−0.144), plus 9 times the coefficient on HQ Enforce (−0.043).

Among the studies listed above, Johnson, Lavetti, and Lipsitz likely has the broadest coverage. The study spans the years 1991 to 2014, examines workers across the labor force, and uses all known common law and statutory changes in non-compete clause enforceability to arrive at its estimates. The study by Starr also covers the entire labor force, from 1996 to 2008. However, the Starr study is only able to compare effects for occupations that use non-compete clauses at a high rate to those that use them at a low rate. The next two studies cover just one legal change, and only a subset of the labor force: hourly workers in Oregon, in the case of Lipsitz and Starr, and high-tech workers in Hawaii, in the case of Balasubramanian et al. Finally, while the studies conducted by Garmaise and Kini et al. examine multiple legal changes, they focus solely on executives.

One limitation of studies of enforceability alone—

i.e.,

studies which do not consider the use of non-compete clauses—is that it is difficult to disentangle the effects of increased enforceability on workers who are subject to non-compete clauses and workers who are not subject to non-compete clauses. In other words, since effects are observed across the labor force (or some subset of it), they include both effects on workers with and without non-compete clauses. However, due to the research cited in the next subsection—indicating non-compete clauses reduce earnings for workers who are

not

subject to non-compete clauses—the Commission believes it is reasonable to conclude based on contextual evidence that the labor-force-wide effects described in the studies above include effects on both workers with and without non-compete clauses.

Three additional studies examine the association between non-compete clause use—rather than enforceability—and earnings. Using the 2014 survey described in Part II.B.1.a, Starr et al. find that the use of non-compete clauses is associated with 6.6% higher earnings in the model including the most control variables among those they observe.

Using the

Payscale.com

data, Balasubramanian et al. find that while non-compete clause use is associated with 2.1-8.2% greater earnings (compared with individuals with no post-contractual restrictions), this positive association is due to non-compete clauses often being bundled with non-disclosure agreements. Compared with individuals only using non-disclosure agreements, use of non-compete clauses is associated with a 3.0-7.3%

decrease

in earnings, though the authors do not disentangle this effect from the effects of use of non-solicitation and non-recruitment provisions.

Finally, Lavetti et al. find that use of non-compete clauses among physicians is associated with greater earnings (by 14%) and greater earnings growth.

(The Commission notes, however, this study does not consider how changes in non-compete clause enforceability affect physicians' earnings. As described below in the cost-benefit analysis for the proposed rule, the Commission estimates the proposed rule may increase physicians' earnings, though the study does not allow for a precise calculation.

)

Starr, Prescott, & Bishara,

supra

note 42 at 75.

Balasubramanian, Starr, & Yamaguchi,

supra

note 42 at 40. The percentage range is calculated as e

−0.030

−1 and e

−0.076

−1, respectively.

Lavetti, Simon, & White,

supra

note 53 at 1051. The increase in earnings is calculated as e

0.131

−1.

See infra

Part VII.B.1.a.ii.

However, the Commission does not believe that studies examining the association between non-compete clause use—rather than enforceability—and earnings are sufficiently probative of the effects of non-compete clauses on earnings. The Commission's concern is that non-compete clause use and earnings may both be determined by one or more confounding factors. It may be the case, for example, that employers who rely most on trade secrets both pay more and use non-compete clauses at a high rate (which would not necessarily be captured by the control variables observed in studies of non-compete clause use). This means these studies do not necessarily inform how restricting the use of non-compete clauses through a rule would impact earnings. This methodological limitation contrasts with studies examining enforceability of non-compete clauses, in which changes in enforceability are “natural experiments” that allow for the inference of causal effects, since the likelihood that other variables are driving the outcomes is minimal. A “natural experiment” refers to some kind of change in the real world that allows researchers to study the impact of the change on an outcome. In a natural experiment, the change is effectively random, uninfluenced by other factors which could have simultaneously affected the outcome. In such situations, it is therefore most likely the change itself caused any impact that is observed on the outcomes.

The belief that studies of non-compete clause use do not reflect causal estimates is shared by the authors of at least one of the studies of non-compete clause use. As noted in Starr et al., “Our analysis of the relationships between noncompete use and labor market outcomes . . . is best taken as descriptive and should not be interpreted causally.”

As a result, the Commission gives these studies minimal weight. The study of physicians conducted by Lavetti et al. partially mitigates this concern by comparing earnings effects in high- versus low-enforceability states, though this analysis compares only California and Illinois, meaning that it is

impossible to disentangle underlying differences in those two states from the effects of non-compete clause enforceability.

Starr, Prescott, & Bishara,

supra

note 42 at 73.

c. Earnings—Effects on Workers Not Covered by Non-Compete Clauses

As described above, non-compete clauses negatively affect competition in labor markets, thereby inhibiting optimal matches from being made between employers and workers across the labor force. As a result, non-compete clauses reduce earnings not only for workers who are subject to non-compete clauses, but also for workers who are not subject to non-compete clauses.

Two studies show non-compete clauses reduce earnings for workers who are not subject to non-compete clauses. The first study, a 2019 study of the external effects of non-compete clauses conducted by Evan Starr, Justin Frake, and Rajshree Agarwal, analyzed workers without non-compete clauses who worked in states and industries in which non-compete clauses were used at a high rate.

They find that, when the use of non-compete clauses in a given state and industry combination increases by 10%, the earnings of workers who do not have non-compete clauses, but who work in that same state and industry, go down by about 6.12% more when that state has an average enforceability level, compared with a state which does not enforce non-compete clauses.

In effect, this study finds when the use of non-compete clauses by employers increases, that drives down wages for workers who do not have non-compete clauses but who work in the same state and industry. This study also finds this effect is stronger where non-compete clauses are more enforceable.

Evan Starr, Justin Frake, & Rajshree Agarwal,

Mobility Constraint Externalities,

30 Org. Sci. 961, 6 (2019).

Id.

at 11.

The Commission notes that, similar to some of the studies described above, this study relies on use of non-compete clauses, as well as cross-sectional differences in enforceability of non-compete clauses, to arrive at their conclusions. While this approach calls into question the causal relationship outlined in the study, the authors employ tests to increase confidence in the causal interpretation; however, the tests rely on what data the authors have available, and therefore cannot rule out explanations outside of the scope of their data. This study also analyzes the effect of non-compete clause use for certain workers on workers in a different firm, meaning that factors simultaneously driving non-compete clause use and outcomes within a certain firm will not break the causal chain identified in the study.

Starr, Frake, and Agarwal show the reduction in earnings (and mobility, discussed below) is due to a reduction in the rate of the arrival of job offers. Individuals in state/industry combinations which use non-compete clauses at a high rate do not receive job offers as frequently as individuals in state/industry combinations where non-compete clauses are not frequently used.

The authors also demonstrate decreased mobility and earnings are

not

due to increased job satisfaction (

i.e.,

if workers are more satisfied with their jobs, they may be less likely to change jobs, and more likely to accept lower pay).

Finally, they show that decreased mobility and earnings are not because workers are searching for jobs less frequently, suggesting that job openings and firm behavior matter more to the underlying mechanism.

Id.

at 10.

Id.

at 13.

Id.

The second study, conducted by Johnson, Lavetti, and Lipsitz, isolates the impact of a state's enforceability policy on workers not directly affected by that policy to demonstrate non-compete clauses affect not just the workers subject to those non-compete clauses, but the broader labor market as well. In particular, the study finds that increases in non-compete clause enforceability in one state have negative impacts on workers' earnings in bordering states, and the effects are nearly as large as the effects in the state in which enforceability changed. Johnson, Lavetti, and Lipsitz estimate that the impact on earnings of a law change in one state on workers just across that state's border is 87% as great as for workers in the state in which the law was changed (the effect tapers off as the distance to the bordering state increases).

When a law change in one state decreases workers' earnings in that state by 4%, that would therefore mean that workers just across the border (

i.e.,

workers who share a commuting zone—a delineation of a local economy

—but who live in another state) would experience decreased earnings of 3.5%. The authors conclude that, since the workers across the border are not

directly

affected by the law change (

i.e.,

contracts that they have signed do not become more or less enforceable), this effect must be due to changes in the local labor market.

Johnson, Lavetti, & Lipsitz,

supra

note 63 at 51. Eighty seven percent is calculated as the coefficient on the donor state NCA score (−.181) divided by the coefficient on own state NCA score (−.207).

See U.S. Econ. Rsch. Serv., Commuting Zones and Labor Market Areas,

https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/.

Johnson, Lavetti, & Lipsitz,

supra

note 63 at 30.

d. Earnings—Distributional Effects

There is evidence that non-compete clauses increase racial and gender wage gaps by disproportionately reducing the wages of women and non-white workers. This may be, for example, because firms use the monopsony power which results from use of non-compete clauses as a means by which to wage discriminate. The study by Johnson, Lavetti, and Lipsitz finds that while earnings of white men would increase by about 3.2% if a state's enforceability moved from the fifth-strictest to the fifth most lax, the comparable earnings increase for workers in other demographic groups would be 3.7-7.7%, depending on the characteristics of the group (though it is not clear from the study whether or not the differences are statistically significant).

The authors estimate that banning non-compete clauses nationwide would close racial and gender wage gaps by 3.6-9.1%.

Id.

at 38.

Id.

e. Job Creation

While non-compete clauses may theoretically incentivize firms to create jobs by increasing the value associated with any given worker covered by a non-compete clause, the evidence is inconclusive. One study, by Gerald Carlino, estimates the job creation rate at startups increased by 7.8% when Michigan increased non-compete clause enforceability.

However, the job creation rate calculated in this study is the ratio of jobs created by startups to overall employment in the state: therefore, the job creation rate at startups may rise either because the number of jobs created by startups rose, or because employment overall fell. The study does not investigate which of these two factors drives the increase in the job creation rate at startups.

Gerald A. Carlino,

Do Non-Compete Covenants Influence State Startup Activity? Evidence from the Michigan Experiment

at 16 (Fed. Reserve Bank of Phila. Working Paper 21-26, 2021).

Another study finds that several increases in non-compete clause enforceability were associated with a 1.4% increase in average per-firm employment at new firms (though not necessarily total employment).

In this

study, the authors attribute the increase in average employment to a change in the composition of newly founded firms. The increases in non-compete clause enforceability prevented the entry of relatively small startups which would otherwise have existed. Therefore, the firms which entered in spite of increases in non-compete clause enforceability had more workers on average: this increased the average job creation rate at new firms, because the average entering firm was relatively larger. However, if the mechanism identified by the authors is correct, increases in enforceability generate fewer total jobs, because the same number of large firms may enter (regardless of non-compete clause enforceability), but fewer small firms enter.

Evan Starr, Natarajan Balasubramanian, & Mariko Sakakibara,

Screening Spinouts? How Noncompete Enforceability Affects the Creation,

Growth, and Survival of New Firms,

64 Mgmt. Sci. 552, 561 (2018).

A similar mechanism may explain the results in both studies above. If that is indeed the case, then an increase in average per-firm employment among startups is not a positive effect of non-compete clause enforceability: instead, it could actually represent a negative effect, since non-compete clauses prevent small firms from existing in the first place, and overall job creation may decrease. The Commission therefore believes, with respect to job creation rates, the evidence is inconclusive.

2. Product and Service Markets

In addition to analyzing how non-compete clauses affect competition in labor markets, researchers have also analyzed whether non-compete clauses affect competition in markets for products and services. The available evidence indicates the use of non-compete clauses interferes with competitive conditions in product and service markets as well.

The adverse effects of non-compete clauses on product and service markets likely result from reduced voluntary labor mobility. Non-compete clauses directly impede voluntary labor mobility by restricting workers subject to non-compete clauses from moving to new jobs covered by their non-compete clause. Since non-compete clauses prevent some job openings from occurring (by keeping workers in their jobs), they also prevent workers who are not subject to non-compete clauses from finding new jobs (since the new jobs are already occupied by workers with non-compete clauses).

Influenced by Ronald Gilson's research positing that high-tech clusters in California may have been aided by increased labor mobility because non-compete clauses are generally unenforceable in that state,

many studies have examined how non-compete clauses affect labor mobility. Even literature primarily focused on other outcomes has examined labor mobility as a secondary outcome. Across the board, all studies have found decreased rates of mobility, measured by job separations, hiring rates, job-to-job mobility, implicit mobility defined by job tenure, and within- and between-industry mobility. We briefly describe each of these studies in turn.

Ronald J. Gilson,

The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Non-Compete Clauses,

74 N.Y.U. L. Rev. 575 (1999).

A 2006 study conducted by Fallick, Fleischman, and Rebitzer supported Gilson's hypothesis by showing that labor mobility in information technology industries in metropolitan statistical areas (MSAs) in California was 56% higher than in comparison MSAs outside California. They note, however, the estimates may not be fully (or at all) attributable to non-compete clause enforceability. Although the Commission therefore does not find this particular study to be sufficiently probative of the relationship between non-compete clauses and labor mobility, its qualitative findings are in line with the rest of the literature.

Bruce Fallick, Charles A. Fleischman, & James B. Rebitzer,

Job-Hopping in Silicon Valley: Some Evidence Concerning the Microfoundations of a High-Technology Cluster,

88 Rev. Econ. & Statistics 472, 477 (2006).

To estimate the impacts of non-compete clause enforceability in a fashion that may more plausibly attribute causality to the relationship, in 2009, Marx, Strumsky, and Fleming examined the impact on labor mobility of Michigan's switch to enforcing non-compete clauses. They found that Michigan's increase in enforceability led to an 8.1% decline in the mobility of inventors.

Matt Marx, Deborah Strumsky, & Lee Fleming,

Mobility, Skills, and the Michigan Non-Compete Experiment,

55 Mgmt. Sci. 875, 884 (2009).

In 2011, Mark Garmaise examined how a suite of changes in non-compete clause enforceability affected labor mobility. Garmaise found executives made within-industry job changes 47% more often, between-industry job changes 25% more often (though this result was not statistically significant), and any job change 35% more often when non-compete clauses were less enforceable.

Garmaise,

supra

note 69 at 398.

A 2019 study by Jessica Jeffers uses several legal changes to analyze the impact of non-compete clauses on workers' mobility, finding that decreases in non-compete clause enforceability were associated with an 8.6% increase in departure rates of workers, and a 15.4% increase in within-industry departure rates of workers.

Jessica Jeffers,

The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

22 (2019),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393.

Evan Starr's 2019 study comparing workers in occupations which use non-compete clauses at a high versus low rate found that a state moving from mean enforceability to no enforceability would cause a decrease in employee tenure for workers in high-use occupations of 8.2%, compared with those in low-use occupations. Here, tenure serves as a proxy for mobility, since tenure is the absence of prior mobility.

Starr,

supra

note 66 at 798. The value is calculated as 8.2% = 0.56/6.46, where 0.56 is the reported impact on tenure and 6.46 is mean tenure in the sample.

Returning to an examination of executives, Liyan Shi's 2020 paper qualitatively confirmed Garmaise's results, showing that executives with enforceable non-compete clauses were 1.8 percentage points less likely to separate from their employers, compared with executives without enforceable non-compete clauses.

Shi,

supra

note 51 at 26.

Starr, Prescott, and Bishara's 2020 study found that having a non-compete clause was associated with a 35% decrease in the likelihood a worker would leave for a competitor.

However, they also found enforceability does not impact this prediction, in contrast with prior studies. Digging deeper into the mechanism, they find that what matters is the worker's belief about the likelihood their employer would seek to enforce a non-compete clause in court. Workers who did not believe employers would enforce non-compete clauses in court were more likely to report they would be willing to leave for a competitor.

This result confirms the need to ensure that workers are aware of the proposed rule, though it suffers from the same limitations as do previously discussed studies of the impacts of non-compete clause use, rather than enforceability: that studies of use are not causally interpretable, since they may conflate the effects of factors which cause use for the effects of use itself.

Evan Starr, J.J. Prescott, & Norm Bishara,

The Behavioral Effects of (Unenforceable) Contracts,

36 J.L., Econ., & Org. 633, 652 (2020).

Id.

at 664.

Two recent studies examined subgroups of the population affected by

state law changes. Balasubramanian et al., in 2022, focused on high-tech workers whose non-compete clauses were banned in Hawaii, and Lipsitz and Starr, in 2022, focused on hourly workers whose non-compete clauses were banned in Oregon. The former found that the ban increased mobility by 12.5% in the high-tech sector,

while the latter found that mobility of hourly workers increased by 17.3%.

Balasubramanian et al.,

supra

note 68 at S351.

Lipsitz & Starr,

supra

note 46 at 157.

Finally, a 2022 study by Johnson, Lavetti, and Lipsitz examined the impact on labor mobility of all legal changes after 1991 across the entire labor force. They found moving from the enforceability level of the fifth strictest state to that of the fifth most lax state causes a 6.0% increase in job-to-job mobility in industries using non-compete clauses at a high rate.

Furthermore, they found when a state changes its non-compete clause enforceability in that fashion, workers in neighboring states experience 4.8% increases in mobility as measured by job separations, and 3.9% increases as measured by hiring rates, though neither result was statistically significant.

100

Johnson, Lavetti, & Lipsitz,

supra

note 63 at 21.

100

Id.

at 76.

As described below in Part IV.A.1.a.ii, the Commission does not view reduced labor mobility from non-compete clauses—in and of itself—as evidence non-compete clauses negatively affect competition in product and service markets. Instead, reduced labor mobility is best understood as the primary driver of effects in product and service markets that the Commission is concerned about. These effects are described below.

a. Consumer Prices and Concentration

There is evidence that non-compete clauses increase consumer prices and concentration in the health care sector. There is also evidence non-compete clauses increase industrial concentration more broadly. Non-compete clauses may have these effects by inhibiting entrepreneurial ventures (which could otherwise enhance competition in goods and service markets) or by foreclosing competitors' access to talented workers.

One study, by Naomi Hausman and Kurt Lavetti, finds increased concentration, as measured by the Herfindahl-Hirschman Index (HHI), at the firm level

101

and increased final goods prices

102

as the enforceability of non-compete clauses increases. Hausman and Lavetti's study focuses on physician markets, showing that while non-compete clauses allow physician practices to allocate clients more efficiently across physicians, this comes at the cost of greater concentration and prices for consumers. Generally, greater concentration may or may not lead to greater prices in all situations and may arise for reasons which simultaneously cause higher prices (indicating, therefore, a noncausal relationship between concentration and prices). In this case, the authors claim that researching the direct link between changes in law governing non-compete clauses and changes in concentration allows them to identify a causal chain starting with greater enforceability of non-compete clauses, which leads to greater concentration, and higher consumer prices.

101

Naomi Hausman & Kurt Lavetti,

Physician Practice Organization and Negotiated Prices: Evidence from State Law Changes,

13 a.m. Econ. J. Applied Econ. 258, 284 (2021). Note that Hausman and Lavetti find decreased HHI at the establishment level (where an establishment is a physical location, and a firm is a company which may own multiple establishments). For the purposes of consumer outcomes such as a price or product quality, the relevant measure of concentration is at the firm level, since firms are unlikely to compete against themselves on price or quality.

102

Id.

at 280.

While there is no additional direct evidence on the link between non-compete clauses and consumer prices, another study, by Michael Lipsitz and Mark Tremblay, shows increased enforceability of non-compete clauses at the state level increases concentration, as measured by an employment-based HHI.

103

Lipsitz and Tremblay theorize non-compete clauses inhibit entrepreneurial ventures which could otherwise enhance competition in goods and service markets, and show that the potential for harm is greatest in exactly those industries in which non-compete clauses are likely to be used at the highest rate.

104

If the general causal link governing the relationship between enforceability of non-compete clauses, concentration, and consumer prices acts similarly to that identified in the study by Hausman and Lavetti, then it is plausible that increases in concentration identified by Lipsitz and Tremblay would lead to higher prices in a broader set of industries.

103

Michael Lipsitz & Mark Tremblay,

Noncompete Agreements and the Welfare of Consumers

6 (2021),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975864.

104

Id.

at 3.

In many settings, it is also theoretically plausible that increases in worker earnings from restricting non-compete clauses may increase consumer prices by raising firms' costs (though there is countervailing evidence, especially in goods manufacturing

105

). However, we are not aware of empirical evidence that this occurs, and there are also countervailing forces—such as the impacts on concentration described above and positive impacts on innovation

106

—that would tend to decrease consumer prices. Additionally, the greater wages observed for workers where non-compete clauses are less enforceable may be due to better worker-firm matching, which could simultaneously increase wages and increase productivity, which could lead to lower prices.

105

Sebastian Heise, Fatih Karahan, & Ayşegül Şahin

The Missing Inflation Puzzle: The Role of the Wage‐Price Pass‐Through,

54 J. Money, Credit & Banking 7 (2022).

106

See infra

Part II.B.2.d.

In addition, the only study of how non-compete clauses affect prices—the Hausman and Lavetti study described above—finds decreased non-compete clause enforceability decreases prices in the healthcare market, rather than increasing them. The study notes that, in theory, changes in non-compete clause enforceability could impact physicians' earnings, which could subsequently pass through to prices in healthcare markets. However, the authors show that, where prices decrease due to decreased non-compete clause enforceability, labor cost pass-through is not driving price decreases. As the authors note, if price decreases associated with non-compete clause enforceability decreases were due to pass-through of decreases in physicians' earnings, then the most labor-intensive procedures would likely experience the greatest price decreases when enforceability decreased. However, they find the opposite: there is little to no effect on prices for the most labor-intensive procedures, in contrast with procedures which use relatively less labor. As the authors explain, this shows that decreases in healthcare prices associated with decreases in non-compete clause enforceability are not due to pass-through of lower labor costs.

107

Hausman & Lavetti,

supra

note 101 at 278.

b. Foreclosing Competitors' Ability To Access Talent

There is evidence that non-compete clauses foreclose the ability of competitors to access talent by effectively forcing future employers to buy out workers from their non-compete clauses if they want to hire them. Firms must either make inefficiently high payments to buy workers out of non-compete clauses with a former employer, which leads to deadweight economic loss, or forego the payment—

and, consequently, the access to the talent the firm seeks. Whatever choice a firm makes, its economic outcomes in the market are harmed, relative to a scenario in which no workers are bound by non-compete clauses.

Liyan Shi studies this effect in a 2022 paper. This paper finds non-compete clauses are used to ensure that potential new employers of executives make a buyout payment to the executive's current employer.

108

Such a mechanism could be tempered by the ability of a labor market to provide viable alternative workers for new or competing businesses. However, when a particular type of labor is somewhat scarce, when on-the-job experience matters significantly, or when frictions prevent workers from moving to new jobs, there is no way for the market to fill the gap created by non-compete clauses. By studying CEOs, who are difficult to replace and relatively scarce, Shi's paper shows that non-compete clauses foreclose the ability of competitors to access talent by effectively forcing them to make inefficiently high buyout payments. Shi ultimately concludes that “imposing a complete ban on noncompete clauses would be close to implementing the social optimum.”

109

108

Shi,

supra

note 51.

109

Id.

at 35.

c. New Business Formation

The weight of the evidence indicates non-compete clauses likely have a negative impact on new business formation. Three studies show that non-compete clauses and increased enforceability of non-compete clauses reduce entrepreneurship, new business formation, or both. A fourth study also finds that non-compete clauses reduce the rate at which men and women found new startups, though the result is not statistically significant for men. A fifth study finds mixed effects which likely support the theory that non-compete clauses reduce new business formation, and a sixth study finds no effect.

New business formation may refer to entrepreneurs creating new businesses from scratch or to businesses being spun off from existing businesses. New business formation increases competition first by bringing new ideas to market, and second, by forcing incumbent firms to respond to new firms' ideas instead of stagnating. New businesses disproportionately create new jobs and are, as a group, more resilient to economic downturns.

110

Recent evidence that new business formation is trending downward has led to concerns that productivity and technological innovation are not as strong as they would have been had new business formation remained at higher levels.

111

Non-compete clauses restrain new business formation by preventing workers subject to non-compete clauses from starting their own businesses. In addition, firms are more willing to enter markets in which they know there are potential sources of skilled and experienced labor, unhampered by non-compete clauses.

110

See, e.g., The Importance of Young Firms for Economic Growth,

Policy Brief, Ewing Marion Kauffman Foundation (Sept. 24, 2015).

111

See, e.g.,

Cong. Budget Off.,

Federal Policies in Response to Declining Entrepreneurship

(December 2020).

Three studies show that non-compete clauses and increased enforceability of non-compete clauses reduce entrepreneurship and new business formation. First, Sampsa Samila and Olav Sorenson, in a 2011 study, examined the differential impacts of venture capital on business formation, patenting, and employment growth. They found when non-compete clauses are more enforceable, rates of entrepreneurship, patenting, and employment growth slow. They find that a 1% increase in venture capital funding increased the number of new firms by 0.8% when non-compete clauses were enforceable, and by 2.3% when non-compete clauses were not enforceable.

112

Similarly, a 1% increase in the rate of venture capital funding increased employment by 0.6% when non-compete clauses were enforceable, versus 2.5% where non-compete clauses were not enforceable.

113

112

Sampsa Samila & Olav Sorenson,

Noncompete Covenants: Incentives to Innovate or Impediments to Growth,

57 Mgmt. Sci. 425, 432 (2011). The values are calculated as 0.8% = e

0.00755

−1 and 2.3% = e

0.00755+0.0155

−1, respectively.

113

Id.

at 433. The values are calculated as 0.6% = e

0.00562

−1 and 2.3% = e

0.00562+0.0192

−1, respectively.

The second study, conducted by Jessica Jeffers in 2019, uses several state law changes to show a decline in new firm entry when non-compete clauses are more enforceable. When non-compete clause enforceability is made stricter (based on the relatively meaningful changes examined in her study), the entry rate of new firms decreased by 10% in the technology sector and the professional, scientific, and technical services sector.

114

Jeffers,

supra

note 92 at 32.

The third study, conducted by Evan Starr, Natarajan Balasubramanian, and Mariko Sakakibara in 2018, finds that the rate of within-industry spinouts (WSOs) decreases by 0.13 percentage points (against a mean of 0.4%) when non-compete clause enforceability increases by one standard deviation.

115

The study's measured impact on the entry rate of non-WSOs (

i.e.,

spinoffs into other industries) is statistically indistinguishable from zero (0.07 percentage point increase associated with a one standard deviation increase in enforceability).

116

WSOs have been shown to be highly successful, on average, when compared with typical entrepreneurial ventures.

117

By reducing intra-industry spinoff activity, non-compete clauses prevent entrepreneurial activity that is likely to be highly successful.

115

Starr, Balasubramanian, & Sakakibara,

supra

note 87 at 561.

116

Id.

at 561.

117

For reviews of the literature,

see, e.g.,

Steven Klepper,

Spinoffs: A Review and Synthesis,

6 European Mgmt. Rev. 159-71 (2009) and April Franco,

Employee Entrepreneurship: Recent Research and Future Directions,

in Handbook of Entrepreneurship Research (2005) 81-96.

The fourth study, published by Matt Marx in 2021, examines the impact of several changes in non-compete clause enforceability between 1991 and 2014.

118

Marx finds that, when non-compete clauses are more enforceable, men are 46% less likely to found a rival startup after leaving their employer (though this result is statistically insignificant), that women are 69% less likely to do so, and that the difference in the effect of non-compete clause enforceability on founding rates between men and women

statistically significant.

119

This study therefore supports both the theory that non-compete clauses inhibit new business formation and that non-compete clauses tend to have more negative impacts for women than for men.

118

Matt Marx,

Employee Non-compete Agreements, Gender, and Entrepreneurship,

Org. Sci. (Online ahead of print) (2021).

119

Id.

at 9.

A fifth study finds mixed effects of non-compete clause enforceability on the entry of businesses into the State of Florida. Hyo Kang and Lee Fleming, in a 2020 study, examine a legal change in Florida which made non-compete clauses more enforceable. This study finds that larger businesses entered the state more frequently (by 8.5%), but smaller businesses entered less frequently (by 5.6%) following the change.

120

Similarly, Kang and Fleming found that employment at large businesses rose by 15.8% following the change, while employment at smaller businesses effectively did not change.

121

120

Hyo Kang & Lee Fleming,

Non‐Competes, Business Dynamism, and Concentration: Evidence From a Florida Case Study,

29 J. Econ. & Mgmt. Strategy 663, 673 (2020).

121

Id.

at 674. The value is calculated as 15.8% = e

0.1468

−1.

In the Commission's view, however, the results of this study do not necessarily show how non-compete clauses affect new business formation. This study does not examine new business formation specifically; instead, it assesses the number of “business entries” into the state. As the authors acknowledge, many of these business entries are not new businesses being formed in Florida (

i.e.,

startups), but existing businesses that are moving to the state.

122

Because startups are almost never large businesses, the authors' finding that larger businesses entered the state more frequently is much more likely to reflect businesses moving to the state, rather than new businesses being formed in the state. (While a business's relocation to Florida may benefit Florida, it is not net beneficial from a national perspective, since the business is simply moving from somewhere else.) The authors' finding that increased non-compete clause enforceability decreased the entry of smaller businesses is more likely to reflect an effect of non-compete clause enforceability on new business formation, since smaller businesses are relatively more likely than larger businesses to be startups.

122

Id.

at 668.

A sixth study finds no effect of non-compete clauses on new business formation. A 2021 study by Gerald Carlino analyzes the impact of a legal change in Michigan that allowed the courts to enforce non-compete clauses. This study finds no significant impact on new business formation.

123

Carlino,

supra

note 86 at 36.

d. Innovation

The weight of the evidence indicates non-compete clauses decrease innovation. Innovation may directly improve economic outcomes by increasing product quality or decreasing prices, or may promote competition because successful new products and services force competing firms to improve their own products and services. Non-compete clauses affect innovation by reducing the movement of workers between firms, which decreases knowledge flow between firms. Non-compete clauses also prevent workers from starting businesses in which they can pursue innovative new ideas.

One study shows increased enforceability of non-compete clauses decreases the value of patenting, using a variety of legal changes. Another study shows that increased non-compete clause enforceability decreases the rate at which venture capital funding increases patenting. Finally, using a legal change in Michigan which increased enforceability, one study shows there were mixed effects on patenting in terms of both quantity and quality, but mechanical patenting (a large part of patenting in Michigan) increased.

The first study, a 2021 study by Zhaozhao He, finds the value of patents, relative to the assets of the firm, increase by about 31% when non-compete clause enforceability decreases.

124

In contrast to the other two studies of innovation, the study uses the value of patents, rather than the number of patents, to mitigate concerns that patenting activity may not represent innovation, but rather substitutions of protections (in other words, that when non-compete clauses are made less enforceable, firms may use patents instead of non-compete clauses to seek to protect sensitive information).

125

The study also analyzes the impact of several legal changes to non-compete clause enforceability, which means that the results may be most broadly applicable.

124

Zhaozhao He,

Motivating Inventors: Non-Competes, Innovation Value and Efficiency

21 (2021),

https://ssrn.com/abstract=3846964.

Thirty one percent is calculated as e

0..272

−1.

125

Id.

at 17.

The second study, by Samila and Sorensen, found that, when non-compete clauses are enforceable, venture capital induced less patenting, by 6.6 percentage points.

126

However, as explained above, the authors note patenting may or may not reflect the true level of innovation, as firms may use patenting as a substitute for non-compete clauses where they seek to protect sensitive information.

127

The final study of innovation, a 2021 study by Gerald Carlino, examined how patenting activity in Michigan was affected by an increase in non-compete enforceability. The study finds that mechanical patenting increased following the law change, but drug patenting fell, and the quality of computer patents fell (as measured by citations).

128

The increase in mechanical patenting appears to have primarily occurred approximately 14 years after non-compete clause enforceability changed, however, suggesting some other mechanism may have led to the increase in patenting activity.

129

We place relatively greater weight on studies focused on multiple legal changes to non-compete clause enforceability (such as the above referenced study by He), in which factors unrelated to the legal changes at issue are less likely to drive the results. The Carlino study also does not discuss whether patenting activity is an appropriate measure of innovation, though the other two studies suggest that it may be an unreliable measure at best. The study by Samila and Sorensen examines the enforceability of non-compete clauses across all states but does not consider changes in enforceability: they are therefore unable to rule out that their results could be due to underlying differences in the states rather than non-compete clause enforceability.

126

Samila & Sorenson,

supra

note 112 at 432. The value is calculated as 6.6% = e

0.0208+0.0630

−e

0.0208

127

Id.

128

Carlino,

supra

note 86 at 40.

129

Id.

at 48.

The Commission therefore places greatest weight on the study by He, which suggests innovation is largely harmed by non-compete clause enforceability. Though the results from Carlino countervail this finding, those results are subject to criticism (as is the corroborating evidence found in Samila and Sorensen).

Two additional studies address firm strategies related to innovation. The first, by Raffaele Conti, uses two changes in non-compete clause enforceability (in Texas and Florida), and indicates that firms engage in riskier strategies with respect to research and development when non-compete clause enforceability is greater.

130

Riskier research and development strategies lead to more breakthrough innovations, but also lead to more failures, leaving the net impact unclear. The paper does not quantify the total impact on innovation.

130

Raffaele Conti,

Do Non-Competition Agreements Lead Firms to Pursue Riskier R&D Strategies?,

35 Strategic Mgmt. J. 1230 (2014).

The second, by Fenglong Xiao, found increases in non-compete clause enforceability led to increases in exploitative innovation (

i.e.,

innovation which stays within the bounds of the innovating firm's existing competences), and decreases in exploratory innovation (

i.e.,

innovation which moves outside those bounds) in medical devices.

131

Overall, this leads to an increase in the quantity of innovation as measured by the introduction of new medical devices. This increase in quantity, however, is the net result of an increase in exploitative innovation and a decrease in explorative innovation, where the latter is the mode of innovation which the empirical

literature has found to be associated with high growth firms.

132

131

Fenglong Xiao,

Non-Competes and Innovation: Evidence from Medical Devices,

51 Rsch. Pol'y 1 (2022).

132

Alessandra Colombelli, Jackie Krafft & Francesco Quatraro,

High-Growth Firms and Technical Knowledge: Do Gazelles Follow Exploration or Exploitation Strategies?,

23.1 Industrial and Corporate Change 262 (2014).

While these two additional studies bring nuance to the changes in the types of innovation pursued by firms when non-compete clause enforceability changes, neither undermines the weight of the evidence described above: that increased non-compete clause enforceability broadly diminishes the rate of innovation.

e. Training and Other Investment

There is evidence that non-compete clauses increase employee training and other forms of investment. Four studies have examined investment outcomes: two examine the effects of non-compete clause enforceability on investment (both of which find positive impacts on investment), while two examine the relationship between non-compete clause use and investment (only one of which finds positive impacts on investment).

Of the two studies that examine the effects of non-compete clause enforceability on investment, one looks at employee training, and one looks at firm capital expenditures (

e.g.,

investment in physical assets, such as machines). The first study, a 2020 study by Evan Starr, finds that moving from mean non-compete clause enforceability to no non-compete clause enforceability would decrease the number of workers receiving training by 14.7% in occupations that use non-compete clauses at a high rate (relative to a control group of occupations that use non-compete clauses at a low rate).

133

The study further finds changes in training are primarily due to changes in firm-sponsored, rather than employee-sponsored, training.

134

Firm-sponsored training is the type of training non-compete clauses are often theorized to protect, as the firm may be unwilling to make an unprotected investment.

133

Starr,

supra

note 66 at 796-97.

134

Id.

at 797.

The second study, a 2021 study by Jessica Jeffers, finds knowledge-intensive firms invest 32% less in capital equipment following decreases in the enforceability of non-compete clauses.

135

While firms may invest in capital equipment for many different reasons, Jeffers examines this outcome (as opposed to labor-focused outcomes) to avoid looking at research and development expenditure as a whole, which is in large part composed of labor expenses. This allows the study to isolate the effects of non-compete clause enforceability on investment from other effects of non-compete clauses, such as reduced worker earnings. Jeffers finds that there are likely two mechanisms driving these effects: first, that firms may be more likely to invest in capital when they train their workers because worker training and capital expenditure are complementary (

i.e.,

the return on investment in capital equipment is greater when workers are more highly trained); and second, that non-compete clauses reduce competition, and firms' returns to capital expenditure are greater when competition is lower, incentivizing firms to invest more in capital.

136

135

Jeffers,

supra

note 92 at 28.

136

Id.

at 29.

The first study that examines the impact of non-compete clause use on investment is a 2021 study by Starr et. al. using their 2014 survey of non-compete clause use. They find no statistically significant impact on either training or the sharing of trade secrets (after inclusion of control variables) but cannot examine other investment outcomes.

137

The second study, a 2021 study by Johnson and Lipsitz, examines investment in the hair salon industry. It finds that firms that use non-compete clauses train their employees at a higher rate and invest in customer attraction through the use of digital coupons (on so-called “deal sites”) to attract customers at a higher rate, both by 11 percentage points.

138

However, the authors of both studies caution that these results do not necessarily represent a causal relationship.

139

In each study, the use of non-compete clauses and the decision to invest may be jointly determined by other characteristics of the firms, labor markets, or product markets. For this reason, the Commission places relatively minimal weight on these studies in terms of how they inform the relationship between the proposed rule and future potential firm investment.

137

Starr, Prescott, & Bishara,

supra

note 42 at 76.

138

Johnson & Lipsitz,

supra

note 54 at 711.

139

Starr, Prescott, & Bishara,

supra

note 42 at 73; Johnson & Lipsitz,

supra

note 54 at 711.

Overall, the additional incentive to invest (in assets like physical capital, human capital, or customer attraction, or in the sharing of trade secrets and confidential commercial information) is the primary justification for use of non-compete clauses. Any investment which is lost due to the inability of firms to use non-compete clauses would likely represent the greatest cost of the proposed rule. Indeed, one study, by Kenneth Younge and Matt Marx, finds that the value of publicly traded firms increased by 9% due to an increase in non-compete clause enforceability.

140

However, they attribute this increase to the value of retaining employees, which comes with the negative effects to parties other than the firm (employees, competitors, and consumers) described in this Part II.B. In particular, if benefits to the firm arise primarily from reductions in labor costs, then the increase in the value of firms is in part a transfer from workers to firms, and is therefore not necessarily a procompetitive benefit of non-compete clauses. However, the authors do not explore the extent to which increases in firm value arise from decreases in labor costs. The authors additionally note that since the time frame used in the study is short, “there may be deleterious effects of non-competes in the long run” which are absent in their findings.

141

140

Kenneth A. Younge & Matt Marx,

The value of employee retention: evidence from a natural experiment,

25 J. Econ. & Mgmt. Strategy 652 (2016).

141

Id.

at 674.

The Commission requests comment on all aspects of its description, in this Part II.B, of the empirical evidence relating to non-compete clauses and their effects on competition. In particular, the Commission seeks submissions of additional data that could inform the Commission's understanding of these effects.

C. Current Law Governing Non-Compete Clauses

The states have always placed a variety of restrictions on the ability of employers to enforce non-compete clauses. These restrictions are based on public policy concerns American courts—and English courts before them—have recognized for centuries. For example, in the English opinion

Mitchel

Reynolds

(1711), which provided the foundation for the American common law on non-compete clauses,

142

the court expressed concerns that workers were vulnerable to exploitation under non-compete clauses and these clauses threatened workers' ability to practice their trades and earn a living.

143

142

Harlan Blake,

Employment Agreements Not to Compete,

73 Harv. L. Rev. 625, 630-31 (1960).

143

Mitchel

Reynolds,

1 P. Wms. 181, 190 (Q.B. 1711) (expressing concern that non-compete clauses threaten “the loss of [the worker's] livelihood, and the subsistence of his family,” and also “the great abuses these voluntary restraints are liable to,” for example, “from masters, who are apt to give their apprentices much vexation” by using “many indirect practices to procure such bonds from them, lest they should prejudice them in their custom, when they come to set up for themselves.”).

Today, while the enforceability of non-compete clauses varies between

states, all fifty states restrict non-compete clauses between employers and workers to some degree.

144

Non-compete clauses between employers and workers are generally subject to greater scrutiny under state common law than other employment terms, due to “the employee's disadvantageous bargaining position at the time of contracting and hardship at the time of enforcement.”

145

For these reasons, state courts often characterize non-compete clauses as “disfavored.”

146

144

Cynthia Estlund,

Between Rights and Contract: Arbitration Agreements and Non-Compete Covenants as a Hybrid Form of Employment Law,

155 U. Pa. L. Rev. 379, 391 (2006).

145

Id. See also

Restatement (Second) of Contracts sec. 188, cmt. g (1981) (“Postemployment restraints are scrutinized with particular care because they are often the product of unequal bargaining power and because the employee is likely to give scant attention to the hardship he may later suffer through loss of his livelihood.”).

146

See, e.g., Navarre Chevrolet, Inc.

Begnaud,

205 So. 3d 973, 975 (La. Ct. App. 3d 2016);

Eastman Kodak Co.

Carmosino,

77 A.D.3d 1434, 1435 (N.Y. App. Div. 4th 2010);

Access Organics, Inc.

Hernandez,

175 P.3d 899, 904 (Mont. 2008);

Bybee

Isaac,

178 P.3d 616, 621 (Idaho 2008);

Softchoice, Inc.

Schmidt,

763 NW2d 660, 666 (Minn. Ct. App. 2009).

In addition to state common law, non-compete clauses have always been considered proper subjects for scrutiny under the nation's antitrust laws.

147

See, e.g., Am. Tobacco Co.,

221 U.S. at 181-83 (holding several tobacco companies violated Sections 1 and 2 of the Sherman Act due to the collective effect of six of the companies' practices, one of which was the “constantly recurring” use of non-compete clauses);

Newburger, Loeb & Co., Inc.,

563 F.2d at 1082 (“Although such issues have not often been raised in the federal courts, employee agreements not to compete are proper subjects for scrutiny under section 1 of the Sherman Act. When a company interferes with free competition for one of its former employee's services, the market's ability to achieve the most economically efficient allocation of labor is impaired. Moreover, employee-noncompetition clauses can tie up industry expertise and experience and thereby forestall new entry.”) (internal citation omitted).

1. State Law on Non-Compete Clauses

The question of whether or under what conditions an employer can enforce a particular non-compete clause depends on the applicable state law. Three states—California, North Dakota, and Oklahoma—have adopted statutes rendering non-compete clauses void for nearly all workers.

148

Among the 47 states where non-compete clauses may be enforced under certain circumstances, 11 states and the District of Columbia have enacted statutes making non-compete clauses void or unenforceable—or have banned employers from entering into non-compete clauses—based on the worker's earnings or a similar factor.

149

In addition, the majority of these 47 states have statutory provisions that ban or limit the enforceability of non-compete clauses for workers in certain specified occupations. In most states, those limits apply to just one or two occupations (most commonly, physicians).

150

148

See

Cal. Bus. & Prof. Code sec. 16600; N.D. Cent. Code sec. 9-08-06; Okla. Stat. Ann. tit. 15, sec. 219A. While California law permits non-compete clauses if they are necessary to protect an employer's trade secrets,

see Muggill

Reuben H. Donnelley Corp.,

62 Cal. 2d 239, 242 (Cal. 1965), the scope of this exception is unclear. In a recent case, the California Supreme Court declined to address the issue.

Edwards

Arthur Andersen LLP,

189 P.3d 285, 289 n.4 (Cal. 2008).

149

Colorado, Colo Rev. Stat. Ann. sec. 8-2-113(2)(a)-(b), as amended by H.B. 22-1317 (effective Aug. 10, 2022) (non-compete clauses are void except where they apply to a “highly compensated worker,” currently defined as a worker earning at least $101,250 annually,

see

Colo. Code Regs. sec. 1103-14:1.2); District of Columbia, DC Code sec. 32-581.02(a)(1) (effective Oct. 1, 2022) (where the employee's compensation is less than $150,000, or less than $250,000 if the employee is a medical specialist, employers may not require or request that the employee sign an agreement or comply with a workplace policy that includes a non-compete clause); Illinois, 820 Ill. Comp. Stat. 90/10(a) (effective Jan. 1, 2017) (no employer shall enter into a non-compete clause unless the worker's actual or expected earnings exceed $75,000/year); Maine, Me. Rev. Stat. Ann. tit. 26, sec. 599-A(3) (effective Sep. 19, 2019) (an employer may not require or permit an employee earning wages at or below 400% of the federal poverty level to enter into a non-compete clause with the employer); Maryland, Md. Code Ann., Lab. & Empl. sec. 3-716(a)(1)(i) (effective Oct. 1, 2019) (non-compete clauses are void where an employee earns equal to or less than $15 per hour or $31,200 per year); Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec. 24L(c) (effective Jan. 14, 2021) (non-compete clauses shall not be enforceable against workers classified as nonexempt under the Fair Labor Standards Act (“FLSA”)); Nevada, Nev. Rev. Stat. sec. 613.195(3) (effective Oct. 1, 2021) (non-compete clauses may not apply to hourly workers); New Hampshire, N.H. Rev. Stat. Ann. sec. 275:70-a(II) (effective Sept. 8, 2019) (employers shall not require a worker who earns an hourly rate less than or equal to 200% of the federal minimum wage to enter into a non-compete clause, and non-compete clauses with such workers are void and unenforceable); Oregon, Or. Rev. Stat. sec. 653.295(1)(e) (effective Jan. 1, 2022) (non-compete clauses are void and unenforceable except where the worker's annualized gross salary and commissions at the time of the worker's termination exceed $100,533); Rhode Island, R.I. Gen Laws sec. 28-59-3(a)(1) (effective Jan. 15, 2020) (non-compete clauses shall not be enforceable against workers classified as nonexempt under the FLSA); Virginia, Va. Code Ann. sec. 40.1-28.7:8(B) (effective July 1, 2020) (no employer shall enter into, enforce, or threaten to enforce a non-compete clause with an employee whose average weekly earnings are less than the Commonwealth's average weekly wage); Washington, Wash. Rev. Code Ann. sec. 49.62.020(1)(b) and 49.62.030(1) (effective Jan. 1, 2020) (non-compete clause is void and unenforceable unless worker's annualized earnings exceed $100,000 for employees and $250,000 for independent contractors, to be adjusted for inflation).

150

See

Russell Beck, Beck Reed Riden LLP,

Employee Noncompetes: A State-by-State Survey

(August 17, 2022), (hereinafter “Beck Reed Riden Chart”).

States have been particularly active in restricting non-compete clauses in recent years. Of the twelve state statutes restricting non-compete clauses based on a worker's earnings or a similar factor (including the DC statute), eleven were enacted in the past ten years.

151

States have also recently passed legislation limiting the use of non-compete clauses for certain occupations.

152

Other recent state legislation has imposed additional requirements on employers that use non-compete clauses. For example, Oregon, Maine, Massachusetts, New Hampshire, and Washington have enacted laws requiring employers to provide prior notice that a non-compete clause will be required as a condition of employment.

153

Massachusetts and Oregon have enacted “garden leave” provisions, which require employers to compensate workers during the post-employment period in which the workers are bound by the non-compete clause.

154

Washington limited the permissible duration of non-compete clauses to 18 months,

155

and Massachusetts and Oregon limited it to one year.

156

151

See supra

note 149.

152

See, e.g.,

Connecticut, Conn. Gen. Stat. Ann. sec. 20-681 (effective June 26, 2019) (home health care workers); Florida, Fla. Stat. Ann. sec. 542.336 (effective June 25, 2019) (certain physicians in certain counties); Hawaii, Haw. Rev. Stat. sec. 480-4(d) (effective July 1, 2015) (technology workers); Indiana, Ind. Code sec. 25-22.5-5.5-2 (effective July 1, 2020) (physicians); Utah, Utah Code Ann. sec. 34-51-201 (effective May 18, 2018) (broadcasting employees).

153

Oregon, Or. Rev. Stat. sec. 653.295(1)(a)(A) (effective Jan. 1, 2008); Maine, Me. Rev. Stat. Ann. tit. 26, sec. 599-A(4) (effective Sep. 19, 2019); Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec. 24L(b)(i) (effective Jan. 14, 2021); New Hampshire, N.H. Rev. Stat. Ann. sec. 275:70 (effective July 28, 2014); Washington, Wash. Rev. Code Ann. sec. 49.62.020(1)(a)(i) (effective Jan. 1, 2020).

154

Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec. 24L(b)(vii) (effective Jan. 14, 2021); Oregon, Or. Rev. Stat. sec. 653.295(7) (effective Jan. 1, 2022).

155

Washington, Wash. Rev. Code Ann. sec. 49.62.020(2) (effective Jan. 1, 2020).

156

Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec. 24L(b)(iv) (effective Jan. 14, 2021); Oregon, Or. Rev. Stat. sec. 653.295(3) (effective Jan. 1, 2022).

For workers not covered by these statutory restrictions, the question of whether or under what conditions a non-compete clause may be enforced against them depends on state common law.

In the 47 states where at least some non-compete clauses may be enforced, courts use a reasonableness inquiry to determine whether to enforce a non-compete clause, in addition to whatever statutory limits they are bound to apply. While the precise language of the test differs from state to state, states typically use a test similar to the test in the Restatement (Second) of Contracts:

A promise to refrain from competition that imposes a restraint that is ancillary

to an otherwise valid transaction or relationship is unreasonably in restraint of trade if (a) the restraint is greater than is needed to protect the promisee's legitimate interest, or (b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public.

157

Restatement (Second) of Contracts sec. 188 (1981).

The first basis on which a non-compete clause can be found unreasonable is where the restraint is greater than needed to protect the employer's legitimate interest. Nearly all states recognize the protection of an employer's trade secrets as a legitimate interest.

158

Some states also recognize an interest in protecting confidential information that is not a trade secret.

159

Some states also recognize an interest in protecting the employer's investment in training, although many of these states define the interest as protecting specialized training.

160

A few states recognize an interest in preventing an worker who provides “unique” services from working for a competitor.

161

Courts do not recognize protection from ordinary competition as a legitimate business interest.

162

158

See. e.g., Reed, Roberts Assocs.

Strauman,

40 N.Y.2d 303, 308-09 (N.Y. 1976);

see

Beck Reed Riden Chart,

supra

note 150 (listing each state's approach).

159

See. e.g., Proudfoot Consulting Co.

Gordon,

576 F.3d 1223, 1233-34 (11th Cir. 2009);

see

Beck Reed Riden Chart, supra note 150 (listing each state's approach).

160

See, e.g., IDMWORKS LLC

Pophaly,

192 F. Supp. 3d 1335, 1342 (S.D. Fla. 2016);

see

Beck Reed Riden Chart, supra note 150 (listing each state's approach).

161

See, e.g., Ticor Title Ins.

Cohen,

173 F.3d 63, 70 (2d Cir. 1999);

see

Beck Reed Riden Chart, supra note 150 (listing each state's approach).

162

See, e.g., Valley Med. Specialists

Farber,

982 P.2d 1277, 1281 (Ariz. 1999).

If the employer can demonstrate a legitimate interest, the employer must then show the non-compete clause is tailored to that interest. This analysis typically considers whether the non-compete clause prohibits a greater scope of activity than necessary to protect the employer's legitimate interests;

163

covers a geographic area more extensive than necessary to protect those interests;

164

or lasts longer than needed to protect those interests.

165

163

See, e.g., Diversified Hum. Res. Grp., Inc.

Levinson-Polakoff,

752 SW2d 8, 11 (Tex. Ct. App. 1988).

164

See, e.g., Orkin Exterm. Co., Inc.

Girardeau,

301 So. 2d 38, 39 (Fla. Ct. App. 1st 1974).

165

See, e.g., Jorgensen

Coppedge,

181 P.3d 450, 454 (Idaho 2008).

The second basis under which a non-compete clause can be found unreasonable is where the employer's need for the non-compete clause is outweighed by the hardship to the worker and the likely injury to the public. When assessing the “hardship to the worker” prong, courts typically consider whether the non-compete clause would be unreasonable in light of the worker's personal circumstances. For example, courts have invalidated non-compete clauses where they would destroy a worker's sole means of support.

166

See, e.g., Chavers

Copy Prods. Co. of Mobile,

519 So. 2d 942, 945 (Ala. 1988).

When assessing the “likely injury to the public” prong, the factor most frequently considered by courts is whether enforcing the non-compete clause against the worker would deprive the community of essential goods and services.

167

Because these cases arise in the context of individual litigation, courts focus the “likely injury to the public” inquiry on the loss of the individual worker's services and not on the aggregate effects of non-compete clauses on competition in the relevant market.

167

See, e.g., Dick

Geist,

693 P.2d 1133, 1136-37 (Idaho Ct. App. 1985).

State law also differs with respect to the steps courts take when they conclude that a non-compete clause is unenforceable as drafted. The majority of states have adopted the “reformation” or “equitable reform” doctrine, which allows courts to revise the text of an unenforceable non-compete clause to make it enforceable.

168

Some states have adopted the “blue pencil” doctrine, under which courts may remove any defective provisions and may enforce the non-compete clause if the remaining provisions constitute a valid non-compete clause.

169

A few states have adopted the “red pencil” doctrine, under which courts declare an entire non-compete clause void if one or more of its provisions are found to be defective.

170

168

See, e.g., Butler

Arrow Mirror & Glass, Inc.,

51 SW3d 787, 794 (Tex. Ct. App. 2001).

See also

Beck Reed Riden Chart, supra note 150 (listing each state's approach).

As noted above, the general language of the test for whether a non-compete clause is reasonable is fairly consistent from state to state. However, the specifics of non-compete clause law differ from state to state. For example, states vary in how narrowly or broadly they define legitimate interests for using a non-compete clause and the extent to which courts are permitted to modify an unenforceable non-compete clause to render it enforceable. As a result, among the 47 states where non-compete clauses may be enforced, variation exists with respect to the enforceability of non-compete clauses.

171

Norman D. Bishara,

Fifty Ways to Leave Your Employer: Relative Enforcement of Non-Compete Clauses, Trends, and Implications for Employee Mobility Policy,

13 U. Pa. J. Bus. L. 751, 778-79 (2011).

Because the enforceability of non-compete clauses varies from state to state, the question of which state's law applies in a legal dispute between an employer and a worker can determine the outcome of the case. Non-compete clauses often contain choice-of-law provisions designating a particular state's law for resolution of any future dispute.

172

Some non-compete clauses include forum-selection provisions specifying the court and location where any dispute will be heard.

173

The default rule under conflict-of-laws principles is that the court honors the parties' choice of law, meaning the burden is typically on the worker to argue that the law of a different forum should apply.

174

172

Gillian Lester & Elizabeth Ryan,

Choice of Law and Employee Restrictive Covenants: An American Perspective,

31 Comp. Lab. & Pol'y J. 389, 396-402 (2010).

173

Id.

at 402-04.

174

Lester & Ryan,

supra

note 172 at 394.

Cf.

Cal. Lab. Code § 925(a) (stating that employers shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would either (1) require the employee to adjudicate outside of California a claim arising in California or (2) deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

In addition, there is significant variation in how courts apply choice of law rules in disputes over non-compete clauses.

175

As a result, it can be difficult for employers and workers to predict how disputes over choice of law will be resolved.

176

Additionally—aside from the question of which state's law should apply—employers and workers may be uncertain about whether the non-compete clause is enforceable under the state's law. Furthermore, state non-compete law may change; as described above in Part II.C.1, there have been many changes in state non-compete law in recent years. The result is that employers and workers may face considerable uncertainty as to whether

a particular non-compete clause may be enforced.

175

Id.

176

Id.

at 394-95 (“The state of the law is perhaps characterized more by inconsistency than anything else, so much so that commentators lament the `disarray' and `mish-mash' of the law, and criticize courts for their `post-hoc rationalizing of intuitions' or their use of a `hodgepodge of factors, often with insignificant explanation of how they decide what weight to give each.'”) (internal citations omitted).

Workers may also be subject to arbitration clauses, which require that legal disputes with the employer—including disputes related to non-compete clauses—be resolved through binding arbitration rather than in court. Where such clauses are valid, the Federal Arbitration Act requires that courts enforce them.

177

See, e.g., Nitro-Lift Techs.

Howard,

568 U.S. 17, 21-22 (2012).

Most state courts apply different rules to non-compete clauses when they are entered into between the seller and buyer of a business, compared with non-compete clauses that arise solely out of the employment relationship.

178

The three states in which non-compete clauses are void in nearly all instances—California, North Dakota, and Oklahoma—permit enforcement when non-compete clauses are entered into between the seller and buyer of a business.

179

In most of the other states, non-compete clauses between the seller and buyer of a business are either exempted from the state's non-compete clause statute, subject to a more lenient test under the statute, or subject to more lenient standard under the state's case law.

180

Courts cite several different reasons for why they accord different treatment to non-compete clauses between the seller and buyer of a business. These reasons include the relatively equal bargaining power of both parties in the context of a business sale, relative to the employer-worker context, where there is more likely to be unequal bargaining power; the need to protect the buyer's right to the goodwill for which it has paid; and the fact that the proceeds from the sale will ensure that the seller of the business will not experience undue hardship.

181

178

Based on a review of the state cases in Malsberger (2017),

supra

note 62 and Fenwick & West LLC,

Summary of Non-Compete Clauses: A Global Perspective, https://assets.fenwick.com/legacy/FenwickDocuments/RS_Summary-of-Covenants.pdf.

179

Cal. Bus. & Prof. Code sec. 16601; N.D. Cent. Code sec. 9-08-06; Okla. Stat. Ann. tit. 15, sec. 218.

180

See, e.g.,

Colo. Rev. Stat. Ann. sec. 8-2-113(3)(c) (statutory exemption); Ga. Code Ann. sec. 13-8-57(d) (more lenient statutory test);

Jiffy Lube Int'l, Inc.

Weiss Bros., Inc.,

834 F. Supp. 683, 691 (D.N.J. 1993) (more lenient standard under case law).

181

See, e.g., Woodward

Cadillac Overall Supply Co.,

240 NW 2d 710, 715 (Mich. 1976) (bargaining power);

Bybee,

178 P.3d at 622 (Idaho 2008) (goodwill);

Centorr-Vacuum Indus., Inc.

Lavoie,

609 A.2d 1213, 1215 (N.H. 1992) (undue hardship).

2. Non-Compete Clauses and Antitrust Law

Non-compete clauses are “contract[s] . . . in restraint of trade.” Therefore, they are subject to Section 1 of the Sherman Act.

182

The Commission has identified 17 cases in cases in which private plaintiffs or the federal government have challenged a non-compete clause between an employer and a worker under either Section 1 or an analogous provision in a state antitrust statute.

183

(Three of these 17 cases concerned non-compete clauses between the seller and buyer of a business,

184

and two of these 17 cases were brought under state antitrust statutes.

185

)

182

See, e.g., Newburger, Loeb & Co., Inc.,

563 F.2d at 1082.

183

U.S.

Am. Tobacco Co.,

221 U.S. 106 (1911);

Alders

AFA Corp. of Fla.,

353 F. Supp. 654 (S.D. Fla. 1973) (non-compete clause between seller and buyer of a business);

Bradford

N.Y. Times Co.,

501 F.2d 51 (2d Cir. 1974);

Golden

Kentile Floors, Inc.,

512 F.2d 838 (5th Cir. 1975);

U.S.

Empire Gas Corp.,

537 F.2d 296 (8th Cir. 1976);

Newburger, Loeb & Co., Inc.

Gross,

563 F.2d 1057 (2d Cir. 1977);

Lektro-Vend Corp.

Vendo Co.,

660 F.2d 255 (7th Cir. 1981) (non-compete clause between seller and buyer of a business);

Aydin Corp.

Loral Corp.,

718 F.2d 897 (9th Cir. 1983);

Consultants & Designers, Inc.

Butler Serv. Grp., Inc.,

720 F.2d 1553 (11th Cir. 1983);

Caremark Homecare, Inc.

New England Critical Care, Inc.,

700 F. Supp. 1033 (D. Minn. 1988);

GTE Data Servs., Inc.

Elec. Data Sys. Corp.,

717 F. Supp. 1487 (M.D. Fla. 1989);

DeSantis

Wackenhut Corp.,

793 SW2d 670 (Tex. 1990) (state antitrust law case);

Borg-Warner Protective Servs. Corp.

Guardsmark, Inc.,

946 F. Supp. 495 (E.D. Ky. 1996);

Caudill

Lancaster Bingo Co., Inc.,

2005 WL 2738930 (S.D. Ohio Oct. 24, 2005);

Dallas South Mill, Inc.

Kaolin Mushroom Farms, Inc.,

2007 WL 9712116 (N.D. Tex. Feb. 23, 2007);

Cole

Champion Enters., Inc.,

496 F. Supp. 2d 613 (M.D.N.C. 2007) (non-compete clause between seller and buyer of a business) (state antitrust law case);

Signature MD, Inc.

MDVIP, Inc.,

2015 WL 3988959 (C.D. Cal. Apr. 21, 2015). There are also several opinions addressing whether non-compete clauses between businesses violate Section 1. Courts generally apply a less restrictive legal standard to non-compete clauses between businesses.

See, e.g., Lumber Liquidators, Inc.,

415 F. Supp. 3d at 715-16.

184

Alders,

353 F. Supp. 654;

Lektro-Vend,

660 F.2d 255;

Cole,

496 F. Supp. 2d 613.

185

DeSantis,

793 SW2d 670;

Cole,

496 F. Supp. 2d 613.

In two of these 17 cases, the parties challenging the non-compete clause were successful to some degree. In the early antitrust case of

United States

American Tobacco Co.,

the Supreme Court held that several tobacco companies violated both Section 1 and Section 2 of the Sherman Act because of the collective effect of six of the companies' practices, one of which was the “constantly recurring” use of non-compete clauses.

186

This is the only case the Commission has identified in which a court analyzed the collective, rather than isolated, use of non-compete clauses.

186

Am. Tobacco Co.,

221 U.S. at 181-83. Section 2 of the Sherman Act, 15 U.S.C. 2, prohibits monopolization or attempted monopolization.

More recently, a federal district court denied a motion to dismiss a plaintiff's claim that a non-compete clause between a concierge medicine firm and physicians violated Section 1. The court held that while the reasonableness of the non-compete clause ultimately would be a factual determination, the plaintiff stated a valid claim under Section 1 where it alleged the firm “includes post-contract non-compete clauses with an unreasonably large liquidated damage provision in its employment contracts,” in addition to other practices.

187

Signature MD, Inc.,

2015 WL 3988959 at *7.

In the other 15 Sherman Act cases, the challenge to the individual non-compete clause was unsuccessful. These claims failed for three main reasons. First, in several of these cases, the parties challenging the non-compete clause argued solely that the non-compete clause they were challenging should be

per se

unlawful under Section 1. Courts rejected these arguments, reasoning that non-compete clauses may serve legitimate business interests in some instances

188

and that courts have had insufficient experience with non-compete clauses to warrant a

per se

categorization under Section 1.

189

188

See, e.g., Lektro-Vend,

660 F.2d at 265.

189

See, e.g., Aydin,

718 F.2d at 900.

The second main reason these challenges have been unsuccessful is that, in the vast majority of these 15 cases, the party challenging the non-compete clause did not allege the non-compete clause adversely affected competition, which is an essential element of a Section 1 claim in rule of reason cases.

190

In only one case did the plaintiff appear to allege facts related to anticompetitive effect beyond the effect on the person bound by the non-compete clause. In that case, the court dismissed the plaintiff's claim because the plaintiff did not sufficiently allege “the amount of competition foreclosed by defendant.”

191

190

See, e.g., Ohio

Am. Express Co.,

— U.S.—, 138 S. Ct. 2274, 2284 (2018).

191

GTE Data Servs.,

717 F. Supp. at 1492.

Third, courts have also rejected challenges to non-compete clauses based on reasoning that a corporation is not capable of conspiring with its employees as a matter of law.

192

See, e.g., Borg-Warner,

946 F. Supp. 499;

Dallas South Mill,

2007 WL 9712116 at *3.

Plaintiffs have also challenged non-compete clauses between employers and workers under Section 2 of the Sherman Act, which prohibits monopolization or attempted monopolization.

193

The Commission is not aware of a case in which a Section 2 claim relating to an

employer's use of a non-compete clause has been successful.

193

15 U.S.C. 2.

See, e.g., BRFHH Shreveport, LLC.

Willis Knighton Med. Ctr.,

176 F. Supp. 3d 606, 616-26 (W.D. La. 2016).

3. Federal and State Enforcement Activity Related to Non-Compete Clauses

In recent years, state attorneys general in Illinois, New York, and Washington have sued companies for unlawfully using non-compete clauses. As of January 2020, state attorneys general have publicly announced settlements with seven companies regarding the use of non-compete clauses.

194

In February 2022, the Antitrust Division filed a statement of interest in a state non-compete clause case brought by private plaintiffs.

195

194

See

Public Comments of 19 State Attorneys General in Response to the Federal Trade Commission's January 9, 2020 Workshop on Non-Compete Clauses in the Workplace at 6 n.23 (listing the settlements).

195

Statement of Interest of the United States,

Beck

Pickert Med. Grp.,

No. CV21-02092 (Nev. Dist. Ct. Feb. 25, 2022).

The Antitrust Division and the Commission have also taken steps in recent years to address other types of contractual provisions that restrict competition in labor markets. The Antitrust Division has brought civil enforcement actions under Section 1 against several technology companies for entering into no-poach agreements with competitors. These enforcement actions ended with consent judgments against the companies.

196

In addition, the Antitrust Division has brought criminal charges for wage-fixing and no-poach agreements against companies and individuals.

197

The Commission too has brought civil enforcement actions against companies related to competition for employment, which ended in consent judgments against the companies.

198

In addition, the attorney general of the State of Washington has entered into settlement agreements with over 200 companies in which the companies have agreed to stop using no-poach clauses.

199

196

See

Antitrust Guidance for Human Resource Professionals,

supra

note 37 at 3-4 (citing cases).

197

U.S.

Neeraj Jindal and John Rodgers,

No. 4:20-cr-358-ALM-KPJ (E.D. Tex. Dec. 9, 2020);

U.S.

Surgical Care Affiliates, LLC and SCAI Holdings, LLC,

No. 3:21-cr-011-L (N.D. Tex. Jan. 5, 2021);

U.S.

Ryan Hee and VDA OC,

LLC, formerly ADVANTAGE ON CALL, LLC, No. 2:21-cr-00098-RFB-BNW (D. Nev. Mar. 26, 2021);

U.S.

DaVita, Inc. and Kent Thiry,

No. 21-cr-00229-RBJ (D. Colo. Nov. 3, 2021);

U.S.

Patel, et al.,

3:21-cr-220-VHB-RAR (D. Conn. Dec. 15, 2021);

U.S.

Manahe, et al.,

2:22-cr-00013-JAW (D. Me. Jan. 27, 2022). The defendants in the

Jindal

case were found not guilty of the wage-fixing charge, and the defendants in the

DaVita

cases were found not guilty of all charges.

Jindal,

Jury Verdict (E.D. Tex. Apr. 14, 2022);

DaVita,

Verdict (D. Colo. Apr. 15, 2022). However, both courts found that the conduct alleged in the indictment properly fell within the confines of the

per se

rule.

Jindal,

Memorandum Opinion and Order, 2021 WL 5578687 (E.D. Tex. Nov. 29, 2021) at *4-*8;

DaVita,

Order Denying Defendants' Motion to Dismiss, 2022 WL 266759 (D. Colo. Jan. 28, 2022) at *4-*8. The court in

Manahe

likewise recently denied a motion to dismiss, holding the indictment charged a recognized form of per se illegal conduct. 2022 WL 3161781, at **7, 9 (D. Me. Aug. 8, 2022).

198

See

Antitrust Guidance for Human Resource Professionals,

supra

note 37 at 4 (citing cases).

199

Office of the Att'y Gen. of the State of Wash., Press Release,

AG Report: Ferguson's Initiative Ends No-Poach Practices Nationally at 237 Corporate Franchise Chains

(June 16, 2020).

The Commission seeks comment on all aspects of its description, in this Part II.C, of the law currently governing non-compete clauses. The Commission specifically seeks comment on the extent to which employers use choice-of-law provisions to evade the laws of states where non-compete clauses are relatively less enforceable. The Commission also seeks comment on the extent to which a uniform federal standard for non-compete clauses would promote certainty for employers and workers.

D. The Commission's Work on Non-Compete Clauses

This rulemaking represents the culmination of several years of activity by the Commission related to non-compete clauses and their effects on competition. This activity has included extensive public outreach and fact-gathering related to non-compete clauses, other restrictive employment covenants that may harm competition, and competition in labor markets generally. The Commission has also analyzed non-compete clauses in connection with its enforcement, research, and merger review work.

The Commission first began focusing on non-compete clauses in the mid-2010s, as a growing body of empirical research raised concerns about the anticompetitive effects of non-compete clauses. In 2018 and 2019, the Commission held several “Hearings on Competition and Consumer Protection in the 21st Century.”

200

The Commission invited public comment on a wide range of topics, including “the use of non-competition agreements and the conditions under which their use may be inconsistent with the antitrust laws.”

201

Participants addressed non-compete clauses at two of the hearings.

202

200

Fed. Trade Comm'n,

Hearings on Competition and Consumer Protection in the 21st Century, https://www.ftc.gov/enforcement-policy/hearings-competition-consumer-protection.

201

Fed. Trade Comm'n, Notice,

Hearings on Competition and Consumer Protection in the 21st Centu

ry, 83 FR 38307, 38309 (Aug. 6, 2018).

202

Fed. Trade Comm'n, Transcript,

Competition and Consumer Protection in the 21st Century

(Oct. 16, 2018),

https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_2_10-16-18_1.pdf;

Fed. Trade Comm'n, Transcript,

Competition and Consumer Protection in the 21st Century

(June 12, 2019),

https://www.ftc.gov/system/files/documents/public_events/1519667/ftc_hearings_session_14_transcript_6-12-19_0.pdf.

Also in 2019, the Open Markets Institute, 19 labor and public interest organizations, and 46 individual advocates and scholars petitioned the Commission to initiate a rulemaking to prohibit non-compete clauses.

203

Open Markets Inst. et al.,

Petition for Rulemaking to Prohibit Worker Non-Compete Clauses

(March 20, 2019).

As evidence mounted regarding the anticompetitive effects of non-compete clauses, the Commission's focus on this issue increased. On January 9, 2020, the Commission held a public workshop on non-compete clauses. At the workshop, speakers and panelists addressed topics including statutory and judicial treatment of non-compete clauses; the Commission's authority to address non-compete clauses; the economic literature regarding the effects of non-compete clauses; and whether the Commission should initiate a rulemaking on non-compete clauses.

204

In connection with the workshop, the Commission sought public comment on a wide range of topics related to a potential rulemaking on non-compete clauses. The Commission received 328 comments addressing these topics from researchers, advocates for workers, employers, trade associations, attorneys, members of Congress, state and local officials, unions, other organizations, and individual members of the public.

205

204

Fed. Trade Comm'n,

Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues, https://www.ftc.gov/news-events/events/2020/01/non-compete clauses-workplace-examining-antitrust-consumer-protection-issues.

205

Fed. Trade Comm'n, Docket FTC-2019-0093,

Workshop on Non-Compete Clauses Used in Employment Contracts, https://www.regulations.gov/document/FTC-2019-0093-0001/comment.

In addition, on August 5, 2021, the Commission issued a solicitation for public comment on contract terms that may harm competition, including “non-compete clauses that prevent workers from seeking employment with other firms.” The Commission received 280 comments on this solicitation from a wide range of stakeholders.

206

On December 6-7, 2021, the Commission and the Antitrust Division held a workshop entitled “Making Competition Work: Promoting Competition in Labor Markets.” The Commission sought

comment from the public in connection with this event and received 27 comments.

207

206

Fed. Trade Comm'n,

Solicitation for Public Comments on Contract Terms that May Harm Competition

(Aug 5, 2021),

https://www.regulations.gov/document/FTC-2021-0036-0022.

207

Fed. Trade Comm'n, Docket FTC-2021-0057,

Making Competition Work: Promoting Competition in Labor Markets, https://www.regulations.gov/docket/FTC-2021-0057/comments.

As it has developed this proposed rule, the Commission has closely considered the views expressed at these forums and the public comments it has received through these engagement efforts. The comments have informed the Commission's understanding of the evidence regarding the effects of non-compete clauses; the law currently governing non-compete clauses; and the options for how the Commission may seek to restrict the unfair use of non-compete clauses through rulemaking, among other topics.

The Commission has also focused on non-compete clauses in connection with its enforcement, merger review, and research work. With respect to enforcement, in 2021, the Commission initiated investigations into the use of non-compete clauses by manufacturers of glass containers used for food and beverage packaging. On December 28, 2022, the Commission accepted, subject to final approval, consent agreements with two manufacturers in the industry.

208

The glass container industry is highly concentrated and is characterized by substantial barriers to entry and expansion. Among these barriers, it is difficult to identify and employ personnel with skills and experience in glass container manufacturing.

209

208

Fed. Trade Comm'n, Decision and Order,

In re O-I Glass, Inc. et al,

Matter No. 211 0182 (December 28, 2022); Fed. Trade Comm'n, Decision and Order,

In re Ardaugh Group S.A. et al,

Matter No. 211 0182 (December 28, 2022).

209

Fed. Trade Comm'n, Analysis of Agreements Containing Consent Order to Aid Public Comment,

In re O-I Glass Inc. et al., In re Ardaugh Group S.A. et al,

Matter No. 211 0182 (December 28, 2022) at 2.

The complaints allege the manufacturers required employees across a variety of positions—including employees who work with the glass plants' furnaces and forming equipment and in other glass production, engineering, and quality assurance roles—to enter into non-compete clauses. The complaints allege this conduct has a tendency or likelihood to impede rivals' access to the restricted employees' labor, to limit workers' mobility, and thus to harm workers, consumers, competition, and the competitive process. As such, the complaints allege each company has engaged in an unfair method of competition in violation of Section 5 of the FTC Act.

210

The proposed consent orders would prohibit each manufacturer from “entering or attempting to enter, maintaining or attempting to maintain, or enforcing or attempting to enforce a Non-Compete Restriction with an Employee, or communicating to an Employee or a prospective or current employer of that Employee that the Employee is subject to a Non-Compete Restriction.”

211

210

Id.

at 1-2.

211

Id.

at 7.

In 2021, the Commission also initiated investigations into the use of non-compete clauses in the security guard services industry. On December 28, 2022, the Commission accepted, subject to final approval, a consent agreement with Prudential Security, Inc., Prudential Command Inc., and the firms' co-owners (collectively “Prudential Respondents”). Prudential Security, Inc. and Prudential Command Inc. provided security guard services to clients in several states.

The Commission's complaint alleges the Prudential Respondents' use of non-compete clauses is an unfair method of competition under Section 5 because it is restrictive, coercive, and exploitative and negatively affects competitive conditions.

212

The complaint further alleges the Prudential Respondents' imposition of non-compete clauses took advantage of the unequal bargaining power between Prudential Respondents and their employees, particularly low-wage security guard employees, and thus reduced workers' job mobility, limited competition for workers' services, and ultimately deprived workers of higher wages and more favorable working conditions.

213

Under the terms of the proposed order, Prudential Respondents—including any companies the co-owners may control in the future—must cease and desist from entering, maintaining, enforcing, or attempting to enforce any non-compete clause.

214

212

Fed. Trade Comm'n, Analysis of Agreement Containing Consent Order to Aid Public Comment,

In re Prudential Sec., Inc. et al.,

Matter No. 211 0026 at 1, 5-7 (December 28, 2022).

213

Id.

at 1.

214

Id.

These consent orders have been placed on the public record for 30 days in order to receive comments from interested persons. After 30 days, the Commission will again review the consent agreements and the comments received and will decide whether it should make the proposed orders final or take other appropriate action.

215

Id.

at 1-2; Glass Container Analysis to Aid Public Comment,

supra

note 209 at 1.

In addition, as part of a 2020 settlement with the Commission, three national rent-to-own companies agreed to refrain from enforcing non-compete clauses that were entered into in connection with reciprocal purchase agreements.

216

Fed. Trade Comm'n, Press Release,

Rent-to-Own Operators Settle Charges that They Restrained Competition through Reciprocal Purchase Agreements

(Feb. 21, 2020),

https://www.ftc.gov/news-events/news/press-releases/2020/02/rent-own-operators-settle-charges-they-restrained-competition-through-reciprocal-purchase-agreements.

With respect to merger review, on August 11, 2015, the Commission approved a final order settling charges that Zimmer Holdings, Inc.'s acquisition of Biomet, Inc. would have eliminated competition between the companies in the markets for certain orthopedic medical products. Among other things, the order requires Zimmer to “remove any impediments or incentives” that may deter workers from accepting employment with the divested businesses, including non-compete clauses.

217

Fed. Trade Comm'n,

In the Matter of Zimmer Holdings, Inc. et al.,

No. C-4534, Decision and Order (Aug. 11, 2015),

https://www.ftc.gov/system/files/documents/cases/150820zimmerdo.pdf.

On November 10, 2021, the Commission approved a final order settling charges that 7-Eleven's acquisition of Marathon Petroleum Corporation's Speedway subsidiary violated federal antitrust laws. Among other things, the order prohibits 7-Eleven from enforcing any non-compete clauses against any franchisees or employees working at or doing business with the divested assets.

218

Fed. Trade Comm'n, Press Release,

FTC Approves Final Order Requiring Divestitures of Hundreds of Retail Gas and Diesel Fuel Stations Owned by 7-Eleven, Inc.

(Nov. 10, 2021),

https://www.ftc.gov/news-events/news/press-releases/2021/11/ftc-approves-final-order-requiring-divestitures-hundreds-retail-gas-diesel-fuel-stations-owned-7.

On January 10, 2022, the Commission approved a final order settling charges that dialysis service provider DaVita, Inc.'s acquisition of University of Utah Health's dialysis clinics would reduce competition in vital outpatient dialysis services in the Provo, Utah market. As part of the order, DaVita was required to remove certain non-compete clauses and prohibited from enforcing or entering into non-compete clauses with certain parties.

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And on August 9, 2022, the Commission issued a final consent order in which ARKO Corp. and its subsidiary GPM agreed to roll back a sweeping non-compete clause they

imposed on a company to which they sold 60 gas stations.

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219

Fed. Trade Comm'n,

In the Matter of Davita Inc. and Total Renal Care, Inc.,

No. C-4752, Decision and Order (Jan. 10, 2022) at 12-14,

https://www.ftc.gov/system/files/documents/cases/211_0056_c4752_davita_utah_health_order.pdf.

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Fed. Trade Comm'n, Press Release,

FTC Approves Final Order Restoring Competitive Markets for Gasoline and Diesel in Michigan and Ohio

(Aug. 9, 2022),

https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-approves-final-order-restoring-competitive-markets-gasoline-diesel-michigan-ohio.

With respect to research, in September 2021, the Commission issued a study analyzing acquisitions by five large technology companies that were not reported to the Commission and the U.S. Department of Justice under the Hart-Scott-Rodino Act.

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The study found 76.7% of transactions included non-compete clauses for founders and key employees of the acquired entities. The study also found that higher-value transactions were more likely to use non-compete clauses.

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The study does not explain why the companies used non-compete clauses or analyze the effects of these particular non-compete clauses on competition.

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Fed. Trade Comm'n,

Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019: An FTC Study

(September 2021) at 1.

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Id.

at 21-22. The table states that the figure is 77.3%. The reason for this discrepancy is not clear.

The Commission seeks comment on its description, in this Part II.D, of the Commission's work on non-compete clauses prior to this NPRM.

III. Legal Authority

Section 5 of the FTC Act declares “unfair methods of competition” to be unlawful.

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Section 5 further directs the Commission “to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce.”

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225

Taken together, Sections 5 and 6(g) provide the Commission with the authority to issue regulations declaring practices to be unfair methods of competition.

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223

15 U.S.C. 45(a)(1).

224

15 U.S.C. 45(a)(2).

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15 U.S.C. 46(g).

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Nat'l Petroleum Refiners Ass'n

Fed. Trade Comm'n,

482 F.2d 672, 697-98 (D.C. Cir. 1973).

Courts have made clear Section 5's prohibition of unfair methods of competition encompasses all practices that violate either the Sherman or Clayton Acts.

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However, courts have long held the scope of Section 5 is not confined to the conduct that is prohibited under the Sherman Act, Clayton Act, or common law.

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Section 5 reaches incipient violations of the antitrust laws—conduct that, if left unrestrained, would grow into an antitrust violation in the foreseeable future.

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Additionally, Section 5 reaches conduct that, while not prohibited by the Sherman or Clayton Acts, violates the spirit or policies underlying those statutes.

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227

See, e.g., Fed. Trade Comm'n

Cement Inst.,

333 U.S. 683, 693 (1948) (holding practices that violate the Sherman Act are unfair methods of competition);

Fashion Originators' Guild of Am.

Fed. Trade Comm'n,

312 U.S. 457, 464 (1941) (holding practices that violate the Clayton Act are unfair methods of competition).

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See, e.g., Fed. Trade Comm'n

Motion Picture Advert. Serv. Co.,

344 U.S. 392, 394-95 (1953) (“The `Unfair methods of competition', which are condemned by [Section] 5(a) of the [FTC] Act, are not confined to those that were illegal at common law or that were condemned by the Sherman Act. Congress advisedly left the concept flexible to be defined with particularity by the myriad of cases from the field of business.”) (internal citations omitted).

229

See, e.g., Cement Inst.,

333 U.S. at 708 (“A major purpose of [the FTC] Act was to enable the Commission to restrain practices as `unfair' which, although not yet having grown into Sherman Act dimensions would most likely do so if left unrestrained.”);

Fashion Originators' Guild,

312 U.S. at 466;

Triangle Conduit & Cable Co.

Fed. Trade Comm'n,

168 F.2d 175, 176 (7th Cir. 1948).

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See, e.g., Fashion Originators' Guild,

312 U.S. at 463 (stating that “[i]f the purpose and practice of the combination of garment manufacturers and their affiliates runs counter to the public policy declared in the Sherman and Clayton Acts, the Federal Trade Commission has the power to suppress it as an unfair method of competition”);

E.I. du Pont de Nemours & Co.

Fed. Trade Comm'n (Ethyl),

729 F.2d 128, 136-37 (2d Cir. 1984) (finding that the Commission may bar “conduct which, although not a violation of the letter of the antitrust laws, is close to a violation or is contrary to their spirit”). On November 10, 2022, the Commission issued a policy statement describing the key principles of general applicability concerning whether conduct is an unfair method of competition under Section 5. Fed. Trade Comm'n,

Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act

(Nov. 10, 2022).

IV. The Commission's Preliminary Determination That Non-Compete Clauses Are an Unfair Method of Competition

The Commission preliminarily determines it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe the worker is subject to an enforceable non-compete clause.

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This preliminary determination is the basis for this proposed rule, which would provide that each of these practices is an unfair method of competition under Section 5.

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This Part IV sets forth a series of preliminary findings that provide the basis for this preliminary determination. The Commission's preliminary determination and each of these preliminary findings are subject to further consideration in light of the comments received and the Commission's additional analysis. The Commission seeks comment on all aspects of this Part IV.

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For ease of reference, this Part IV employs the term “use of non-compete clauses” as a shorthand to refer to this conduct.

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See

proposed § 910.2(a).

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The Commission intends for this Part IV to satisfy the requirements in Section 22 of the FTC Act that, in an NPRM, the Commission issue a preliminary regulatory analysis that contains “a concise statement of the need for, and the objectives of, the proposed rule.” 15 U.S.C. 57b-3.

A. Non-Compete Clauses Are an Unfair Method of Competition Under Section 5

1. Non-Compete Clauses Are Unfair

Courts have held conduct is an “unfair method of competition” under Section 5 where the conduct is facially unfair. In

Atlantic Refining Co.

FTC

and

FTC

Texaco, Inc.,

the Court held the Commission established an unfair method of competition where an oil company used its economic power over its gas stations to coerce them into buying certain tires, batteries, or accessories only from firms that paid the oil company a commission.

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Texaco,

the Court held the conduct was an unfair method of competition even though Texaco's conduct was not overtly coercive, reasoning that Texaco's conduct was “inherently coercive” because its “dominant economic power was used in a manner which tended to foreclose competition.”

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FTC

R.F. Keppel & Bro.,

the Court held the Commission established an unfair method of competition where a manufacturer exploited the inability of children to protect themselves in the marketplace by marketing inferior goods to them through use of a gambling scheme.

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E.I. du Pont de Nemours & Co.

FTC (Ethyl),

the U.S. Court of Appeals for the Second Circuit reaffirmed that coercive conduct is quintessentially covered by Section 5's prohibition of unfair methods of competition.

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234

Atl. Refin. Co.,

381 U.S. at 369-70;

Texaco, Inc.,

393 U.S. at 228-29.

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393 U.S. 223 at 228-29 (1968).