Testimony

EIG Letter: FTC Should Move to Limit Non-compete Contracts; Congressional Action Still Needed

Jun 30, 2021

The Economic Innovation Group submitted a comment letter on June, 30, 2021 to the Federal Trade Commission (FTC) regarding the “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition” and to express support for non-compete reform and argue for additional congressional action.

Chair Khan, Federal Trade Commissioners, thank you for the opportunity to comment on the question of whether to rescind the “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” (2015). I write on behalf of the Economic Innovation Group (“EIG”) to express our support for proposals to significantly limit the enforceability of covenants not to compete (“non-compete agreements” or “non-competes”) and to argue that further Congressional action is needed.

Non-compete agreements limit worker mobility and dampen the dynamism of the U.S. economy. Once reserved for senior executives and those possessing valuable trade secrets, these provisions are now used extensively throughout the labor market and affect millions of low-wage and highly-skilled workers alike—with profoundly detrimental results for individual career advancement and the broader economy.

Greater enforceability of non-competes significantly reduces rates of company spinoffs and new firm entry in knowledge-intensive sectors of the economy, and the companies that do start under strict non-competes enforcement regimes are less likely to grow and survive. (Jessica Jeffers, “The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship,” Working Paper. Evan Starr, et al., “Screening Spinouts? Non-Compete Enforceability and the Creation, Growth, and Survival of New Firms,” Management Science 64 (2) (2018). Matt Marx, “Punctuated Entrepreneurship (Among Women)” U.S. Census Bureau Working Paper CES-18-26 (2018)). Empirical evidence shows that non-compete enforcement also hurts worker wages and job satisfaction. (See Evan Starr “The Use, Abuse, and Enforceability of Non-compete and No-Poach Agreements: A Brief Review of the Theory, Evidence, and Recent Reform Efforts,” Economic Innovation Group (2019)).

We agree that non-compete agreements are tools of unfair competition that deprive some companies of fair access to talent, deprive workers of free and fair competition for their labor, and illegitimately ward off the formation of new competitors by incumbent firms. However, we believe that durable federal reform that stands up to judicial review must include complementary Congressional action. More robust FTC enforcement should be joined up with a legislative push to dramatically curtail the use and abuse of non-compete agreements across the U.S. economy to provide a clear and powerful signal to employers where the law is headed.

In testimony to the Senate Committee on Small Business, John W. Lettieri, President and CEO of EIG, argued that reforms should be shaped around four core objectives. The same objectives are applicable to any potential actions the FTC may take in the future as well.

  • Require Transparency: Many of the negative effects of non-competes can be reduced simply by ensuring greater transparency and improving workers’ awareness of their bargaining position. As noted above, employers exploit their informational advantage by requiring non-competes in states where they are unenforceable, or by offering a non-compete on an employee’s first day of work when other options have been foreclosed. Rules governing non-competes should be clear and easy to administer, and employees should be given adequate notice before being asked to sign away future job opportunities.
    Examples: Employers should be required to notify job candidates of their intent to request signature as well as present non-competes when the formal job offer is made – not after the employee has accepted the job. Employers should disclose their intent to require a non-compete in any job posting or advertisement for the position. Additionally, employers requesting a non-compete agreement should be required to fully inform their prospective employee of applicable state and federal laws and allow adequate time for the candidate to discuss the terms of the agreement before making a decision.
  • Create Disincentives for Overuse: There are currently few disincentives for an employer to require non-competes of its employees – even when agreements are written so broadly as to be unenforceable, and even when they cover employees who have no specialized skills or trade secrets. Federal law should seek to discourage overuse of non-competes wherever possible by ensuring that employers carefully consider whether the benefits are worth the costs.
    Examples: Employers should be required to compensate former employees while their non-compete is in effect. Non-competes drafted in an overly broad manner should be rendered completely void – not rewritten by courts to make them enforceable. Federal law should also penalize employers who request signature in states where non-competes are unenforceable.
  • Limit the Pool of Eligible Workers: Most states currently have no restrictions on the kinds of workers that can be bound by a non-compete. Many options exist to narrow the eligible pool of workers by industry, by wage level, or by education attainment so that non-competes are reserved only for senior executives and other top talent.
    Example: Signature of a non-compete should be disallowed for any worker outside of the top five percent of the national income distribution.
  • Limit the Scope of Agreements: Even when policymakers see a valid use for non-competes under certain circumstances, most agree the scope of such agreements should be limited in various ways.
    Examples: The duration of non-competes should be limited to no more than one year, and any non-compete should be voided if an employee is terminated without cause or laid off.

EIG urges Congress to act on the Workforce Mobility Act, bipartisan legislation introduced in both chambers to limit the use of non-competes except for in the sale of a business and the dissolution of a partnership. As part of this meeting’s stated purpose, the FTC would benefit from this clearer expression of the congressional intent to condemn “unfair methods of competition” that passage of this legislation would provide. This approach would establish a nationwide policy to the benefit of workers and entrepreneurs with clear authority for administrative action and enforcement.

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