{10} The FTC Seeks to Ban Noncompete Clauses 🙌

Tweet thread from Lina Khan, Chair of the FTC

Jan 14

I’ve spent some time today thinking about noncompetes. My initial reaction to the proposed ban was borderline emotional. I can tell you firsthand that it sucks to work for a company and have this overwhelming belief that you have the ability to build a better product but not have the freedom to do so.

Here is a thread by Lina Khan, along with a few of my thoughts.

Lina Khan @linakhanFTC

1. One in five US workers is bound by a noncompete clause, which restricts them from freely switching jobs, lowering wages and undermining fair competition. Today @FTC proposed a rule to prohibit firms from imposing noncompete clauses on their workers.

ftc.govFTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm CompetitionThe Federal Trade Commission

It cuts to the heart of the problem. I often think about how noncompetes undermine competition by preventing employees from starting new companies. But making it hard for people to switch jobs and using that as leverage to underpay people might be a bigger issue.

Lina Khan @linakhanFTC

2. Noncompetes undermine core economic liberties. Evidence suggests noncompetes also suppress earnings and opportunity even for workers who are *not* subject to a noncompete. FTC economists estimate that noncompetes lower US workers’ collective income by $250-$296 billion.

I suspect legal experts might talk about the enforceability of noncompetes in various worker-friendly states. That doesn’t matter. Even if a noncompete is not enforceable, it can still suppress earnings and deter competition through fear alone. The average worker does not have a personal lawyer to help defend their economic rights.

Lina Khan @linakhanFTC

3. Evidence shows that noncompetes also reduce innovation, entrepreneurship, and new business formation. Locking workers in place can enable incumbents to close off markets to new rivals, undermining dynamism and healthy competition.

I’m shocked by some of the data here. The FTC says removing noncompetes could DOUBLE the number of companies competing in various industries. I think mileage may vary, but that’s an exciting number.

Lina Khan @linakhanFTC

4. @FTC economists estimate that the proposed ban on noncompetes would increase workers’ total earnings by close to $300 billion per year. Evidence also suggests that it could lower decrease consumer prices in the healthcare sector, potentially to the tune of $150 billion a year.

To put this into perspective, the market cap of Amazon is $1T. We could create a new Amazon composed of small businesses about every 3 years by eliminating noncompetes.

That prospect might make environmentalists cringe. The environment is a fair thing to consider. I’d love to see the data on how much additional CO2 we might pump into the air and how we might offset that.

Lina Khan @linakhanFTC

5. To address these harms, @FTC's proposed rule would (1) prohibit employers from using noncompete clauses in their contracts with workers, and (2) require them to rescind existing noncompetes and actively inform workers that they are no longer in effect.

ftc.govNon-Compete Clause RulemakingOverview About one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities.

I love that the proposal would require rescinding existing noncompetes. There is no reason to grandfather in contracts that violate worker rights.

Lina Khan @linakhanFTC

6. @FTC is seeking public comment on the proposed rule. Hearing from entrepreneurs, workers, and employers will help ensure that the final rule reflects market realities. The proposal identifies potential alternative rules & key questions we are exploring:

Out of curiosity, I read through ~50 of the 2.5k public comments. I had to go through roughly 25 comments in favor of the change before finding the first pro-noncompete comment.

Lina Khan @linakhanFTC

7. The proposed rule draws on years of expertise that @FTC has been building through pursuing enforcement actions, studying empirical evidence, and reviewing hundreds of public comments. I'm grateful to staff across our agency for their thorough & careful work on this initiative.

It would be nice to know how much research went into this. It doesn’t look like a willy-nilly proposal which I appreciate. But there could be more transparency into the data that supports the proposal. Or maybe the data is there and I’ve missed it.

Lina Khan @linakhanFTC

8. In recent years scholars have studied the concrete real-world effects of noncompetes, including on factors like wages, labor mobility, innovation, and new business formation. The proposed rule closely surveys and reflects this available evidence:

Lina Khan @linakhanFTC

9. As my statement with @RKSlaughterFTC & @BedoyaFTC explains, addressing noncompetes through a rule rather than case-by-case adjudication can promote greater legal clarity, more efficient enforcement, and broader public participation.

ftc.govStatement of Chair Lina M. Khan Joined by Commissioners Slaughter and Bedoya Concerning the Notice of Proposed Rulemaking for the Non-Compe…

Lina Khan @linakhanFTC

10. Lastly, as @RKSlaughterFTC notes, this effort follows years of vital work by academics, reporters, and advocates to highlight the proliferation of noncompetes & their effects. As we seek comment on the proposal, hearing from the public will be key.

ftc.govStatement of Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya Concerning the Notice of Proposed Rulemaking for the Non-Compete Cl…

It’s inevitable that companies benefiting from noncompetes will fight this. They will argue it hurts innovation by putting trade secrets at risk. In some cases that might be true. I’m not overly sympathetic, but I do think there are better solutions to that problem.

If an employee learns an industry from a company then invents a superior solution, I would be in favor of the company owning a small stake in the new solution. Such a system could incentivize companies to share ideas rather than protect them. I know the implementation would be challenging. It’s worth it if we can protect worker rights and build a more collaborative future.