Are Non-Competes Really Ending?

The Federal Trade Commission proposed a full ban in April. What's the status of that ban? Plus, more than a dozen states have acted after the effort of journalists, lawyers, regulators, and citizens.

“My employer comes far too close to owning me than should be possible in a ‘free’ country.” - Anonymous commenter to the FTC

Over the past year, lawyers and human resource experts are starting to recommend an unusual strategy for corporate America. Treat your employees better.

A few months ago, for instance, James Moore & Co., an accounting and services corporation, suggested to clients that they start the “enhancing workplace conditions, offering competitive compensation packages and providing opportunities for career development and advancement.” In late July, Steven Clark of Wealth Management magazine wrote that “firms may need to focus more on creating a positive work environment and attractive compensation packages to retain talent.”

Why? Because non-compete agreements, which are standard contractual provisions for tens of millions of employees that lock them to their current employer, are getting harder and harder to impose and enforce. Firms are removing non-competes from employment contracts, big law lawyers are launching complex sites for their clients on how to track what contracts are outlawed, corporate CEOs are starting to brag that they do not force employees to sign non-competes, and creative labor-focused lawyers like Matt Bruenig are taking on cases and voiding these provisions in front of newly sympathetic judges.

The story of this massive change in our economic order is important, because it shows that, while there is no silver bullet for social change, it’s also not that complex to constrain the power of concentrated capital. What’s happening with non-competes is an ideological story, what I’ll call a ‘Gang Tackle for Justice,’ and I’ve seen it happen in other areas.

“I’m Just a Bill”

In the Schoolhouse Rock version of politics, creating a law is simple. Politicians argue, they propose a bill, pass it through Congress and have it signed by the President. But laws, especially those constraining powerful interests, are only as good as enforcement, and without some form of social consensus, they often don’t matter, held up in courts or just ignored.

But there is a process, and that is to build *public consensus,* and then throw enough litigation, press, regulation, and legislation at a problem until it shrinks or goes away, and lots of people are persuaded to change their behavior. You have to gang tackle a problem, go at it everywhere. America is a big and complex place, so such a process makes sense for large shifts in how we organize ourselves. The key players in such a gang tackle are plaintiff lawyers, the press, legislators, regulators, and the public.

And with that, let’s talk about why non-compete agreement are ending. It’s a bit of a weird story, because the origin of the mass use of non-competes is murky. But at some point in the late 1980s, these provisions, used only sparingly in industries like TV, became widespread. Over the next twenty years, states confronted the challenge of enforceability, and many, like Texas and Florida, passed laws clarifying that non-compete agreements are enforceable in court by employers. In the era of Bill Clinton and George W. Bush, the ideological goal was to encourage capital, and according to this logic, constraining employees, like offshoring to China or facilitating big tech mergers, seemed only logical.

But since this situation affected millions of people, it wasn’t a secret. Employment lawyers got question after question, and news stories began popping up about how widespread these agreements had become. Usually, these stories were framed in the ideological context of personal advice, as in ‘here’s what to do if presented with a non-compete to sign.’

In the 1990s, there were plenty of stories on how widespread these agreements had become. But the political organizing was on behalf of employers.

So what happened to flip the presumption and create a movement to ban these provisions? I started hearing about these agreements in the post-financial crisis era of early 2010s, when I was in the early stages of researching my book on monopolies. At the time, there was a great deal of puzzlement at why wages weren’t increasing despite what looked like a good economy. The overuse of non-competes, as part of the broader anti-monopoly argument emerging at that time, could explain at least part of the story.

In 2014, Huffington Post labor journalist Dave Jamieson reported on a class action suit on wage theft against sandwich chain Jimmy John’s, where that corporation used non-compete agreements to control and allegedly steal from workers. Then the New York Times picked up on the trend, doing a series of high-profile pieces led by labor journalist Steven Greenhouse.

It wasn’t just journalists who began building public consensus, but plaintiff lawyers as well. The suit against Jimmy John’s was originally brought in a class action suit by Kathleen Chavez of Foote, Mielke, Chavez & O’Neil. State-level politicians had been hearing from their constituents, and were proposing legislation to limit or ban them. The sandwich chain, beset with public ire, soon abandoned its practice.

The Federal government began acting in response to these stories. The Treasury Department released a report in 2016, which included the remarkable statistics that one in five Americans has a non-compete, and 40% have signed one at some point in their careers. White House economists published research, and President Obama, seeking accomplishments in the waning days of his administration, asked state legislators to pass state-level laws.

The political class soon realized that such contracts, which most thought were limited to high-level executives, are common in almost every industry, such as finance, medicine, startup founders, printing, floor installations, title and escrow work, software, NASA contracting, dialysis, computer anti-virus research, and video game production.

Economist Evan Starr (along with a host of fellow scholars) began studying the provisions, publishing the foundational research on the problem. This research showed that non-competes lower wages, reduce innovation, limit firm formation, lower capital investment, and help consolidation. Historians started looking at the 19th century ban on non-competes in California, and pointing out that subsequently Silicon Valley took root there. Economic columnists like Noah Smith chimed in, popularizing the research.

These arguments and research on non-competes worked to build a social consensus for two reasons. The first is that they built on the argument from a network of anti-monopolists, who had suggested that concentrated capital was constraining workers and businesspeople. In the early 2010s, for instance, Lina Khan was a journalist writing about market power in industries like seeds, airlines, and candy. Non-competes fit within this larger framework - they are called ‘non-competes’, after all.

The second is that the argument against non-competes reinforced the latent view of fairness that Americans have always held. The Anglo-American legal tradition has always considered that the freedom to ply a trade is a core part of what it means to have liberty. Agreements to restrict someone from working elsewhere were therefore rare and limited in scope. As I noted above, at some point the late 1980s, the use of non-competes exploded, in part because it became easier to print out employment contracts, and in part because the law and economics world legitimizes a host of coercive contracts, non-competes being one of them.

Until the early 2010s, most didn’t realize that this new form of soft indentured servitude had been extended across much of the economy. Those who did were lawyers and lobbyists for employers, who had actually implemented this new regime and took it for granted. In 2014, Christopher P. Geehern, an executive vice president of Associated Industries of Massachusetts, for instance, didn’t even realize that keeping their pervasiveness secret was the key to maintaining them. “They’re used in almost every sector of the economy,” he told the New York Times, “to the seemingly mutual satisfaction of employers and individuals.” That’s the quiet part out loud.

Antitrust lawyers began to act, as did nonprofits like the Economic Innovation Group. Politicians in Hawaii, Maine, New Hampshire, Colorado, Massachusetts, Illinois, Washington, Utah, Indiana, Rhode Island, Montana, Virginia, Connecticut, Nevada and Oregon drafted and passed new limits, Minnesota banned them altogether, and New York considered a full ban last year, but the Governor vetoed it.

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On a partisan level, the Democratic Party broadly began adopting opposition to non-competes as a consensus position. The places where non-competes were limited are nearly all blue states. One of the few areas where Kamala Harris engaged on competition policy as Vice President was in supporting the ban on non-competes. Even Reid Hoffman, the billionaire who recently asked Kamala Harris to fire Lina Khan, said he supported Khan’s work to get rid of non-competes. The Republicans, by contrast, generally though not entirely accepted the employer-friendly status quo, though they often couched their position in process oriented language about excessive regulations and rules, rather than on the substance.

Enter the Federal Government

At a Federal level, Senators Chris Murphy and Todd Young introduced legislation to ban noncompetes, as did Republican Marco Rubio and a host of House progressives. In 2018, the Trump Federal Trade Commission, spurred by minority commissioner Rohit Chopra, began studying these provisions, and in 2020, it launched a workshop on noncompetes, and asked for public comments.

Because of that workshop, BIG started writing about the legal and political fight over non-competes, and you were some of the first readers to put public comments in the FTC docket. In 2020, Biden campaigned on eliminating non-competes, and in 2021, the Biden administration put a ban on non-competes into its executive order on competition.

Last April, the Federal Trade Commission put forward a proposed rule that bans virtually all such arrangements altogether. It was a 3-2 vote, with all three Democrats voting for the ban, and Republican commissioners Melissa Holyoak and Andrew Ferguson objecting on process grounds rather than policy ones, which is consistent with the general conservative approach of refusing to engage on the underlying social problem.

To comply with this new rule, firms can’t sign such agreements, and must tell employees their non-competes are void. The new regulation is set to go into effect on September 4th. This move accelerated the momentum of the campaign, and enraged corporate America, especially the private equity firms who rely on locking in professionals such as doctors and vets into these arrangements.

The FTC proposed ban got massive headlines, but the drumbeat of press, litigation, and legislation continued. Last week, for instance, Senator Elizabeth Warren used her spot on the Senate Banking Committee to hold a hearing where Say Yes to the Dress star Hayley Paige discussed how a non-compete nearly destroyed her life and her ability to ply her trade.

Moreover, other parts of the Federal government, like the National Labor Relations Board, are seeking to ban non-competes on different grounds, with success in the courtroom.

Where is the FTC Non-Compete Ban?

While the FTC ban is part of a big campaign, it’s also important in and of itself. Every proposed rule must be accompanied by a rationalization, and the commission put together a 500+ page compendium of economic research, along with tens of thousands of comments. This research itself, like the FTC’s report on pharmacy benefit managers, is spurring litigation and legislation, changing the minds of judges who hear cases on non-competes. More states are set to act, broadening their restrictions.

So what of the ban? Here the FTC ran up against the law and economics movement in its purest form, the Fifth Circuit courts in Mississippi, Louisiana, and Texas. While routinely overturned by the Supreme Court, the Fifth Circuit has struck down 15 proposed rules in the last few years, creating a shadow national government veto over economic policy. Its latest last week was striking down a rule that forces airlines to include fees when displaying a ticket price, under the logic that the Department of Transportation can’t write rules, and that forcing airlines to change their websites would cause them “irreparable harm.”

In early July, Judge Ada Brown in Texas, who is in the Fifth Circuit, issued a ruling in a case of an accounting company challenging the ban, ruling that the FTC did not have the authority bar non-competes, and that the FTC rule was “arbitrary and capricious.” Judge Brown conceded that Congress put rule-writing authority in the FTC statute, but found a tortured rationale for why Congress didn’t actually mean it. The Fifth Circuit appeals panel will likely uphold Brown’s decision. The defense bar scoffed at Khan when this decision came out, saying “ha another loss for her!” But even Brown was affected by the public debate, as she did not issue a nationwide stay on the FTC rule, though she may do so later this month. So the rule survives.

Then, on July 23, Judge Kelley Brisbon Hodge in the eastern district of Pennsylvania, which is in the Third Circuit, ruled in a different case on the same subject, brought by a tree trimming company, that the Federal Trade Commission’s proposed ban on these agreements was legal. The plaintiffs were represented by a right-wing organization called the Pacific Legal Foundation, and their case was so shoddy that the plaintiffs didn’t even have a non-compete to show the court.

Hodge relied on the evidence and discourse over the past ten years, part of the social consensus built by journalists, politicians, scholars, legislators, businesspeople, and ordinary citizens offering comments. But she also just read the FTC statute, which plainly allows rule-writing around precisely these kinds of problems.

Hodge noted that the FTC had written 26 substantive rules using its authority, and these had been upheld by the courts. “In Section 6, entitled ‘Additional powers of Commission,’” she wrote, “Congress provided the FTC with the power ‘to make rules and regulations for the purpose of carrying out the provisions of this subchapter.’” And there we go. This case too will be appealed to the Third Circuit.

What does this legal wrangling mean? Well, when two Federal courts in different parts of the country issue different rulings, it’s called a “circuit split,” and it creates legal uncertainty. The Fifth Circuit can do anything they want to do, including blocking the rule from going into effect, but a circuit split makes it tacky to just issue nationwide injunctions, since they would then have to fight with other judges over the matter. We’re in somewhat uncharted territory here.

In other words, right now, the FTC’s ban on non-competes is set to go into effect in September. If that ban goes into effect, it means the fight is almost over. It will never fully end, since there will always be attempts at coercion, with new tactics like forcing people who leave to pay large sums of money to “reimburse” an employer for training (so-called “Training Repayment Agreements,” or TRAPs, which are sort of covered in the various bans.) But non-competes will become much rarer, as they used to be.

But even if the ban is struck down, it only means ending non-competes will take a little more time. States are going to continue to act, so will Congress, and judges are going to be much more skeptical on the enforceability of these provisions. Employees won’t just pro forma sign their agreements, some employers will realize these agreements don’t make sense, and others will be embarrassed as stories come out on their abusive use of these provisions.

That’s why corporations are removing these provisions from their contracts. They have to find new strategies to retain talent, which means treating their employees as if they are free to ply their trade anywhere, instead of as soft indentured servants operating at their beck and call.

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Thanks for reading! Your tips make this newsletter what it is, so please send me tips on weird monopolies, stories I’ve missed, or other thoughts. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation, and democracy. Consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller