Just out: Another proposed ban on noncompetes

Photo credit: Martin Falbisoner

It’s Thursday, so it must be time for another bill to ban noncompetes.

This one comes from Senator Chris Murphy (D-CT) and Senator Todd Young (R-IN), and is a federal bill. (As many of you know, there have already been seven states that have changed their noncompete laws just this year alone, and there are many more state and local governments with current bills to change their noncompete laws, as well as many other states that have changed their noncompete laws in the past several years.)

The current bill – only the third at the federal level, and the first bipartisan one at that – is called the Workforce Mobility Act, and would all but ban the use of employee noncompete agreements.

According to their press release, the bill would:

  • “Narrow the use of non-compete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business.”
  • “Place the enforcement responsibility on the Federal Trade Commission and the Department of Labor, as well as a private right of action.”
  • “Require employers to make their employees aware of the limitation on non-competes, as studies have found that non-competes are often used even when they are illegal or unenforceable. The Department of Labor would also be given the authority to make the public aware of the limitation.”
  • “Require the Federal Trade Commission and the Department of Labor to submit a report to Congress on any enforcement actions taken.”

The full bill text is available here.

The bill goes too far.

While the bill is certainly well-intended and is a perfectly legitimate approach from a purely philosophical standpoint, it is premised on some mistaken assumptions (see below) and, from my perspective, goes too far (more on that in a later post).

As readers of this blog know, while I am not a fan of noncompetes on a philosophical level, I recognize the need for them on a practical level. They are an important tool to protect trade secrets.

Yes, they are a blunt instrument. Yes, they protect other business interests too. Yes, there are other tools to protect trade secrets in a less-restrictive way. Yes, they are over used.

But, frequently, they are all that work – and they are much less disruptive, time-consuming, and costly than the trade secrets litigation that will supplant them. See California Trade Secrets Litigation Supplants Noncompete Litigation.

Here’s why:

While businesses would not exist without employees, employees rarely stay with one company for life. In fact, the typical employee remains in his or her job for an average of about 4 years, resulting in approximately 12 job changes over a standard career. (Instructively, contrary to conventional wisdom, turnover is no greater now that it was in the past. “Workers are not witching jobs more often”.)

The problem:  When employees change jobs, up to 72 percent of them take – and are willing to use – their employer’s trade secrets. Similarly, as reported on CBS Money Watch, “The U.S. Chamber of Commerce estimates that 75% of employees steal from the workplace and that most do so repeatedly.”

Further complicating the situation is that information is increasingly more valuable and more portable (think USB thumb drives and other high-capacity removable storage devices; smartphones; laptops; tablets; social networking sites; online storage, transfer, and backup sites like Dropbox, Box.com, and Google Drive; and cloud computing). Further, employees have more access to more information.

The workforce is also increasingly remote and mobile, with a resulting lack of oversight and control that, all other things being equal, allows information to be taken more easily.

And, employees are often unaware that information that they helped develop does not belong to them – it belongs to the company.

Not surprisingly, therefore, eighty-five percent of trade-secret thefts are committed by either an employee or a party to a contract, i.e., someone known to the party whose trade secrets were stolen.

The result, “the [United States] Commission on the Theft of American Intellectual Property estimated that annual losses to the American economy caused by trade secrets theft are over $300 billion, comparable to the current annual level of U.S. exports to Asia” and similarly, the Center for Responsible Enterprise and Trade (CREATe.org) and PricewaterhouseCoopers (PwC) estimate that the cost of trade secrets misappropriation is between one and three percent of the U.S. gross domestic product (GDP), possibly costing U.S. companies as much as $480 billion a year.

In short, noncompetes, no matter how you feel about them, still serve an important purpose — particularly at a time when trade secrets protection is such a key concern in our economy.

Interested in the background on the federal legislation?

This is the first bipartisan federal bill concerning noncompetes, though it is the third federal effort to ban or restrict noncompetes. The first two were as follows:

Back on April 26, 2018, Senators Elizabeth Warren (D-MA), Chris Murphy (D-CT), and Ron Wyden (D-OR) introduced the Workforce Mobility Act of 2018 (S. 2782) to impose a federal ban on the use of employee noncompetes. A companion bill was introduced in the House by Representatives Joseph Crowley (D-NY), Linda Sanchez (D-CA), Mark Pocan (D-WI), Keith Ellison (D-MN), Jerrold Nadler (D-NY), and David Cicilline (D-RI), who have since been joined by Janice Schakowsky (D-IL), and Alan Lowenthal (D-CA). The text of the analogue House bill (H.R. 5631) is available here. The two bills were largely the same, although they differed in some ancillary respects, including that the Senate version instructs the Secretary of Labor to enforce the law and provides for civil penalties, while the House bill adds that such contracts violate antitrust laws absent a showing by the employer to the contrary. That bill went nowhere.

Then, in January 2019Florida Senator Marco Rubio introduced the “Freedom to Compete Act.” That Act sought to amend the Fair Labor Standards Act of 1938 (29 U.S.C. 201, et seq.) to ban noncompetes for most nonexempt workers. It was referred to the Senate Committee on Health, Education, Labor, and Pensions. As written, the bill would arguably ban not just true noncompete agreements, but nonsolicitation and other agreements as well. (That creates its own significant problems for businesses, which I will likely expound on in a subsequent blog post, if a bill like this moves forward.) However, assuming you agree that this is something the federal government should start regulating and that nonexempt workers should be protected from noncompetes, this bill (while overly broad insofar as it bans other restrictive covenants) gets pretty close to the mark.

Where do we go from here? 

While some people reflexively want to ban noncompetes, they are missing the bigger picture. The proper regulation of employee noncompetes is an extremely complicated issue with no silver bullet.

As I have said before, if policymakers believe that the prevailing market forces are insufficient to adequately limit the abuses, legislative action is certainly an appropriate response. But, absent making the affirmative decision to base legislative policy on a visceral antipathy toward noncompetes, policymakers should engage in a critical analysis and avoid the temptation to rush to judgment. In particular, they need to be aware of – and at least consider, if not carefully weigh – the unintended adverse consequences of a policy that would ban noncompetes wholesale. The research into those considerations is, however, even more nascent than the research into the theorized adverse impacts of noncompetes. For more information, see Misconceptions In The Debate About Noncompetes (available without a subscription here: Correlation Does Not Imply Causation: The False Comparison of Silicon Valley and Boston’s Route 128).

In sum, lawmakers should tread cautiously down any path that leads to the elimination of noncompete agreements. Indeed, the Obama Administration in its Call to Action and every state changing its noncompete laws has so far recognized this as well – and all have taken a tempered, considered approach. Indeed, the FTC recently announced that there is not enough evidence to support a ban.