What’s Wrong with Noncompete Clauses

NY Times (1/9/23): Lina Khan: Noncompetes Depress Wages and Kill Innovation

This editorial provides a rationale for the FTC’s proposal to eliminate non-compete clauses.

Background: “When you’re subject to a noncompete clause, you lose your right to go work for a competing company or start your own, typically within a certain geographic area and for a certain period of time…In theory, noncompete clauses promote investment and innovation by assuring companies that their employees can’t run off with valuable secrets. And, again in theory, workers should be paid more in exchange for agreeing to sign a contract that restricts their autonomy. But the reality looks very different.”

Key points:

  • About 1 in 5 U.S. workers are subject to noncompete clauses.
  • “Noncompete clauses systemically drive down wages, even for workers who aren’t bound by one.”
  • Employees do not receive additional compensation for signing a noncompete clause. “Employers often spring them on workers after they’ve accepted a job, when their bargaining power is effectively zero.”
  • “Noncompetes reduce entrepreneurship and start-up formation…and keep innovative ideas from breaking into the market.”
  • “Noncompetes are the type of restriction that Section 5 of the F.T.C. Act, a federal law passed by Congress more than a century ago, is supposed to prevent.”
  • There are alternative ways to protect company secrets like nondisclosure agreements
  • California does not allow noncompete clauses (since 19th century) and this “hasn’t kept the California economy — the world’s fifth-largest — stuck in the Stone Age.”

My take: Elimination of noncompete clauses would be good for doctors (and other workers) and for the economy as well. Established business with market dominance will need to use other ways besides coercion to keep talented employees when noncompete clauses go away.

Siesta Key Beach, FL