Banning non-compete agreements hurts US companies and workers

President Biden recently touted the Federal Trade Commission’s proposal to ban all non-compete agreements, which prevent employees who leave jobs from working for rival firms for a limited time.

But the FTC’s staggeringly broad proposal would stunt job growth and curb investment in research and development. That’ll hurt every U.S. worker.

Non-compete agreements have existed for hundreds of years, for good reason. One of the earliest cases upheld in court involved rival bakers in 18th-century London. Today, non-competes are common in high-tech industries, where senior employees are privy to highly confidential data, formulas, techniques, processes, and other trade secrets that provide their company with a competitive edge. That insider knowledge drives innovation and economic growth.

Quite rationally, companies don’t want workers to jump ship and immediately share secrets with competitors, or use proprietary information to start their own businesses. Once secret information is divulged, the harm is done and the competitive edge can be erased forever. If companies had no way to prevent such behavior, they’d be hesitant to invest in risky new technologies and expand hiring.

The protection of trade secrets is of paramount importance, and having tools to ensure it is not stolen in the first place is crucial. Consider two memorable cases of trade-secret theft.

In 2014, real estate tech company Zillow hired two high-level executives from competitor Move, which operates Realtor.com. The departing executives allegedly stole trade secrets, then destroyed documents and used burner phones to cover their tracks.

Move was understandably upset — but it hadn’t required its executives to sign non-competes, so there was nothing it could do to pre-emptively block the defection. Only after the fact was it able to sue, alleging corporate espionage. After two years of expensive legal proceedings, Move settled out of court for a small fraction of the money it had originally sought in damages.

Contrast that case with one involving beverage conglomerate Keurig Dr Pepper, which requires high-ranking managers to sign non-competes. That foresight proved pivotal after a manager responsible for the Walmart account decided to leave for sports-drink maker BodyArmor — where he would once again be responsible for selling to Walmart.

When Keurig Dr Pepper investigated, it discovered that the manager had secretly downloaded a confidential proposal aimed at pitching Walmart — a likely effort to appropriate trade secrets and steal business from his former employer.

Thanks to the non-compete, Keurig Dr Pepper was able to make a straightforward legal case, and quickly obtained a court order barring the manager from “directly or indirectly providing Competitive Services” to BodyArmor for an appropriate period of time. That likely saved it millions of dollars in sales.

Non-compete agreements are most common in well-paid, high-skill jobs, with some 80 percent of executives signing such clauses. At this senior level of employment, non-competes are essential for protecting trade secrets.

Some argue that non-competes are unnecessary because we already have robust trade secret laws. But trade secret laws alone aren’t enough. If a high-level executive at a company that depends on proprietary technology moves to a Chinese competitor, for example, and shares highly confidential information taken from his last employer, that last employer’s competitive edge might evaporate forever to China’s benefit. By the time the afflicted company sues to enforce trade secret laws, it may be too late; irreparable damage is often done when the information is disclosed to the new employer because that bell can’t be unrung.

Occasionally, companies try to foist non-compete agreements on low-level employees with limited knowledge and responsibility —  which does nothing to protect trade secrets, but simply limits these workers’ earning potential and job mobility. Perhaps the most notorious example involved Jimmy John’s, the sandwich chain that, until 2016, forced some low-level employees to agree that they would not work for “any business which derives more than 10% of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” within three miles of a Jimmy John’s location for two years after their employment.

Fortunately, such contracts are rare, and already largely illegal. Courts routinely strike down overly broad non-competes, especially those that last longer than two years or attempt to protect “trade secrets” that aren’t really secrets, like how to make a sandwich. In the Jimmy John’s case, multiple state attorneys general quickly brought lawsuits, and the sandwich chain agreed to stop enforcing its non-compete clause.

The swiftness with which the legal system struck down the Jimmy John’s non-compete shows why the FTC’s proposed rule is unnecessary. Hundreds of years of case law equip the courts to deal with occasional cases of overreach. Hurting the job prospects of low and middle-income earners is, quite literally, indefensible.

On the other hand, U.S. technology leadership depends on the continued effectiveness of non-compete clauses that protect actual trade secrets, which are a type of intellectual property alongside patents, trademarks, and copyrights. IP is the cornerstone of every cutting-edge sector, from agriculture to biotechnology to artificial intelligence.

The FTC proposal would effectively greenlight corporate espionage, all to “solve” a problem that’s already easily — and regularly — handled by the courts. The rule would make it much harder for companies to stop trillions of dollars’ worth of IP from walking out the door. Given that America’s R&D-heavy companies are already grappling with a well-organized Chinese campaign to steal their trade secrets, losing a critical tool for fighting IP theft would only add insult to injury.

The agency is set to make a final decision on the rule after a public comment period. Workers and consumers can only hope that an outpouring of opposition causes the agency to rethink its rash proposal before it’s too late.

Andrei Iancu served as the undersecretary of Commerce for intellectual property and director of the U.S. Patent and Trademark Office from 2018 to 2021, under former President Donald Trump. David Kappos served as the undersecretary of Commerce for intellectual property and director of the United States Patent and Trademark Office from 2009 to 2013, under former President Barack Obama. Both serve as board co-chairs of the Council for Innovation Promotion.