Corporate non-compete agreements have recently become a hotly debated issue centered around whether they are in fact effective and stimulate economic growth.[1] States are divided on this issue and have handled non-compete agreements differently; California, for example, has taken measures to prohibit all non-compete agreements on account of being invalid and unenforceable, while New York generally enforces non-compete agreements.[2] Currently, approximately thirty million employees in the U.S. are bound by non-compete agreements, which implicates the economy on a national scale.[3] Accordingly, the sheer influence of non-compete agreements on employees and the economy begs the question: what is the purpose of corporate non-compete agreements and how do these agreements further that purpose?
Corporate non-compete agreements are agreements “between an employer and employee where the employee agrees not to use information learned during employment in subsequent business efforts for a set period of time.”[4] Generally, these agreements become applicable once the “employer-employee” relationship terminates.[5] Once this relationship terminates, the employee must adhere to the terms of the non-compete agreement, which essentially prohibits an employee from working for another competitor within a specified geographical limit for a specified time.[6]
There are several justifications given for non-compete agreements. The primary justification is that these agreements protect a corporation’s trade secrets and goodwill.[7] Trade secrets encompass “technical information and business practices that firms have a strong interest in protecting.”[8] The second justification includes social benefits for employees: by signing a non-compete agreement, an employee is encouraged to stay within the company and invest in their own growth and skill potential.[9] The third justification is that non-compete agreements protect company investments in training their employees.[10] This also benefits the corporation by reducing turnover costs associated with the hiring process.[11]
The opponents of non-compete agreements argue that these justifications are not actually carried out by these agreements, and, instead, argue that non-compete agreements undermine the national economy and social welfare.[12] For instance, there are other ways to prevent the disclosure of trade secrets that are less costly to individual employees and to the economy;[13] many states have laws that prohibit trade secrets disclosures and provide legal redress for such disclosures.[14] Also, many employees who sign non-competes are often entry level employees with little access to highly classified information, which casts doubt on the notion that non-compete agreements are effective in preventing the disclosure of trade secrets.[15]
Opponents also argue that non-compete agreements may actually hurt the public because of their binding and restrictive nature.[16] Their restrictive nature has negative economic impact by stunting job growth and reducing employment flexibility.[17] This reduced employment flexibility may foster stagnation within a company and reduce productivity rates.[18] Moreover, if the employer-employee relationship terminates, it will likely take a longer time for the employee to find a job in an area of their expertise that is not prohibited by the non-compete agreement, likely increasing the national unemployment rate.[19] Finally, limiting competition in the marketplace undermines the core value of free enterprise, which could lower economic growth in the long term.[20]
In response to the controversy, some state legislatures have proposed modifications to limit the unequal bargaining power inherent in non-compete agreements: (1) shorter duration of the non-compete period and (2) making employers pay an employee for lost wages from the time employment ended until the time the employee finds new employment.[21] Other states have ruled that certain non-compete agreements are unenforceable, because they constitute a contract of adhesion or are manifestly unreasonable.[22] At the federal level, Congress passed the Ability to Demand Detrimental Employment Restrictions Act (Ladder Act).[23] Whether non-compete agreements have a future for corporate America remains to be seen.
[1] Orly Lobel, Companies Compete but Won’t Let Their Workers Do the Same, N.Y. Times (May 4, 2017), https://www.nytimes.com/2017/05/04/opinion/noncompete-agreements-workers.html?mcubz=1.
[2] Investopedia, Non-Compete Agreement, http://www.investopedia.com/terms/n/noncompete-agreement.asp (last visited Sept. 14, 2017).
[3] U.S. Dept. of the Treasury, Non-Compete Contracts: Economic Effects and Policy Implications (March 2016), https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf.
[4] Investopedia, Non-Compete Agreement, http://www.investopedia.com/terms/n/noncompete-agreement.asp (last visited Sept. 14, 2017).
[5] Non-Competition Agreements: Overview, http://employment.findlaw.com/hiring-process/non-competition-agreements-overview.html (last visited Sept. 14, 2017).
[6] Peter S. Lubin, Vincent L. Ditommaso & Patrick Austermuehle, Global Economy Meets Geography Limit in Non-Compete Agreement, Chi. Bus. Litig. Law. Blog (June 1, 2017), https://www.chicagobusinesslitigationlawyerblog.com/2017/06/global-economy-meets-geography-limit-non-compete-agreement.html.
[7] U.S. Dept. of the Treasury, supra note 3 at 7.
[8] Id.
[9] Karen Dynan, The Economic Effects of Non-compete Agreements, U.S. Dept. of the Treasury: Treasury Notes Blog (Mar. 31, 2016), https://www.treasury.gov/connect/blog /Pages/The-Economic-Effects-of-Non-compete-Agreements-.aspx.
[10] Dynan, supra note 9; U.S. Dept. of the Treasury, supra note 3 at 12.
[11] U.S. Dept. of the Treasury, supra note 3 at 12.
[12] Dynan, supra note 9.
[13] U.S. Dept. of the Treasury, supra note 3 at 13.
[14] Id. at 8.
[15] Id. at 11.
[16]Dynan, supra note 9.
[17] Ryan Burke, What You Need to Know About Non-Compete Agreements, and How States Are Responding, The White House, President Barak Obama (May 5, 2016, 11:16 AM), https://obamawhitehouse.archives.gov/blog/2016/05/05/what-you-need-know-about-non-compete-agreements-and-how-states-are-responding.
[18] Lobel, supra note 1.
[19] Noah Smith, Non-Compete Clauses Make Your Economy Sick, Bloomberg: Economics (April 22, 2016, 10:45 AM), https://origin-www.bloombergview.com/articles/2016-04-22/noncompete-clauses-will-make-your-economy-sick.
[20] Burke, supra note 17.
[21] Barb Darrow, Non-Compete Agreements Are Bad for the Little Guy and Bad for the Larger Economy (May 25, 2016), http://fortune.com/2016/05/25/non-compete-agreements-are-bad/.
[22] Lobel, supra note 1.
[23] Id.
