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Proposed Rule2023-00414

Non-Compete Clause Rule

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Published

January 19, 2023

Issuing agencies

Federal Trade Commission

Abstract

Pursuant to Sections 5 and 6(g) of the Federal Trade Commission Act, the Federal Trade Commission ("Commission") is proposing the Non-Compete Clause Rule. The proposed rule would, among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.

Full Text

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<title>Federal Register, Volume 88 Issue 12 (Thursday, January 19, 2023)</title>
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[Federal Register Volume 88, Number 12 (Thursday, January 19, 2023)]
[Proposed Rules]
[Pages 3482-3546]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00414]

[[Page 3481]]

Vol. 88

Thursday,

No. 12

January 19, 2023

Part II

Federal Trade Commission

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16 CFR Part 910

Non-Compete Clause Rule; Proposed Rule

Federal Register / Vol. 88 , No. 12 / Thursday, January 19, 2023 /
Proposed Rules

[[Page 3482]]

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FEDERAL TRADE COMMISSION

16 CFR Part 910

RIN 3084-AB74

Non-Compete Clause Rule

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Pursuant to Sections 5 and 6(g) of the Federal Trade
Commission Act, the Federal Trade Commission (``Commission'') is
proposing the Non-Compete Clause Rule. The proposed rule would, among
other things, provide that it is an unfair method of competition for an
employer to enter into or attempt to enter into a non-compete clause
with a worker; to maintain with a worker a non-compete clause; or,
under certain circumstances, to represent to a worker that the worker
is subject to a non-compete clause.

DATES: Comments must be received on or before March 20, 2023.

ADDRESSES: Interested parties may file a comment online or on paper by
following the instructions in the Request for Comment part of the
SUPPLEMENTARY INFORMATION section below. Write ``Non-Compete Clause
Rulemaking, Matter No. P201200'' on your comment, and file your comment
online at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, by following the instructions on
the web-based form. If you prefer to file your comment on paper, mail
your comment to the following address: Federal Trade Commission, Office
of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C),
Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Shannon Lane (202-876-5651), Attorney,
Office of Policy Planning, Federal Trade Commission.

SUPPLEMENTARY INFORMATION:

I. Overview of the Proposed Rule

A non-compete clause is a contractual term between an employer and
a worker that typically blocks the worker from working for a competing
employer, or starting a competing business, within a certain geographic
area and period of time after the worker's employment ends. Non-compete
clauses limit competition by their express terms. As a result, non-
compete clauses have always been considered proper subjects for
scrutiny under the nation's antitrust laws.\1\ In addition, non-compete
clauses between employers and workers are traditionally subject to more
exacting review under state common law than other contractual terms,
due, in part, to concerns about unequal bargaining power between
employers and workers and the fact that non-compete clauses limit a
worker's ability to practice their trade.\2\
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\1\ See, e.g., U.S. v. Am. Tobacco Co., 221 U.S. 106, 181-83
(1911) (holding several tobacco companies violated Sections 1 and 2
of the Sherman Act due to the collective effect of six of the
companies' practices, one of which was the ``constantly recurring''
use of non-compete clauses); Newburger, Loeb & Co., Inc. v. Gross,
563 F.2d 1057, 1082 (2d Cir. 1977) (``Although such issues have not
often been raised in the federal courts, employee agreements not to
compete are proper subjects for scrutiny under section 1 of the
Sherman Act. When a company interferes with free competition for one
of its former employee's services, the market's ability to achieve
the most economically efficient allocation of labor is impaired.
Moreover, employee-noncompetition clauses can tie up industry
expertise and experience and thereby forestall new entry.'')
(internal citation omitted).
\2\ See infra Part II.C.
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In recent decades, important research has shed light on how the use
of non-compete clauses by employers affects competition. Changes in
state laws governing non-compete clauses have provided several natural
experiments that have allowed researchers to study the impact of non-
compete clauses on competition. This research has shown the use of non-
compete clauses by employers has negatively affected competition in
labor markets, resulting in reduced wages for workers across the labor
force--including workers not bound by non-compete clauses.\3\ This
research has also shown that, by suppressing labor mobility, non-
compete clauses have negatively affected competition in product and
service markets in several ways.\4\
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\3\ See infra Part II.B.1.
\4\ See infra Part II.B.2.
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In this rulemaking, the Commission seeks to ensure competition
policy is aligned with the current economic evidence about the
consequences of non-compete clauses. In the Commission's view, the
existing legal frameworks governing non-compete clauses--formed decades
ago, without the benefit of this evidence--allow serious
anticompetitive harm to labor, product, and service markets to go
unchecked.
Section 5 of the Federal Trade Commission Act (``FTC Act'')
declares ``unfair methods of competition'' to be unlawful.\5\ Section 5
further directs the Commission ``to prevent persons, partnerships, or
corporations . . . from using unfair methods of competition in or
affecting commerce.'' \6\ Section 6(g) of the FTC Act authorizes the
Commission to ``make rules and regulations for the purpose of carrying
out the provisions of'' the FTC Act, including the Act's prohibition of
unfair methods of competition.\7\
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\5\ 15 U.S.C. 45(a)(1).
\6\ 15 U.S.C. 45(a)(2).
\7\ 15 U.S.C. 46(g).
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Pursuant to Sections 5 and 6(g) of the FTC Act, the Commission
proposes the Non-Compete Clause Rule. The proposed rule would provide
it is an unfair method of competition--and therefore a violation of
Section 5--for an employer to enter into or attempt to enter into a
non-compete clause with a worker; maintain with a worker a non-compete
clause; or, under certain circumstances, represent to a worker that the
worker is subject to a non-compete clause.\8\
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\8\ See proposed Sec. 910.2(a). For ease of reference, this
NPRM employs the term ``use of non-compete clauses'' as a shorthand
to refer to the conduct that the proposed rule would provide is an
unfair method of competition.
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The proposed rule would define the term ``non-compete clause'' as a
contractual term between an employer and a worker that prevents the
worker from seeking or accepting employment with a person, or operating
a business, after the conclusion of the worker's employment with the
employer.\9\ The proposed rule would also clarify that whether a
contractual provision is a non-compete clause would depend not on what
the provision is called, but how the provision functions. As the
Commission explains below, the definition of non-compete clause would
generally not include other types of restrictive employment covenants--
such as non-disclosure agreements (``NDAs'') and client or customer
non-solicitation agreements--because these covenants generally do not
prevent a worker from seeking or accepting employment with a person or
operating a business after the conclusion of the worker's employment
with the employer. However, under the proposed definition of ``non-
compete clause,'' such covenants would be considered non-compete
clauses where they are so unusually broad in scope that they function
as such.\10\
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\9\ See proposed Sec. 910.1(b)(1).
\10\ See infra Part V (in the section-by-section analysis for
proposed Sec. 910.1(b)).
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The proposed rule would define ``employer'' as a person--as the
term ``person'' is defined in 15 U.S.C. 57b-1(a)(6)--that hires or
contracts with a worker to work for the person.\11\ The proposed rule
would define ``worker'' as a natural person who works, whether paid or
unpaid, for an employer. The proposed rule would clarify that the term
``worker'' includes an employee, individual classified as an
independent contractor, extern, intern, volunteer, apprentice, or sole
proprietor who

[[Page 3483]]

provides a service to a client or customer.\12\
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\11\ See proposed Sec. 910.1(c).
\12\ See proposed Sec. 910.1(f).
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In addition to prohibiting employers from entering into non-compete
clauses with workers starting on the rule's compliance date, the
proposed rule would require employers to rescind existing non-compete
clauses no later than the rule's compliance date.\13\ The proposed rule
would also require an employer rescinding a non-compete clause to
provide notice to the worker that the worker's non-compete clause is no
longer in effect.\14\ To facilitate compliance, the proposed rule would
(1) include model language that would satisfy this notice requirement
\15\ and (2) establish a safe harbor whereby an employer would satisfy
the rule's requirement to rescind existing non-compete clauses where it
provides the worker with a notice that complies with this notice
requirement.\16\
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\13\ See proposed Sec. 910.2(b)(1).
\14\ See proposed Sec. 910.2(b)(2)(A).
\15\ See proposed Sec. 910.2(b)(2)(C).
\16\ See proposed Sec. 910.2(b)(3).
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The proposed rule would include a limited exception for non-compete
clauses between the seller and buyer of a business.\17\ This exception
would only be available where the party restricted by the non-compete
clause is an owner, member, or partner holding at least a 25% ownership
interest in a business entity.\18\ The proposed regulatory text would
clarify that non-compete clauses covered by this exception would remain
subject to federal antitrust law as well as all other applicable law.
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\17\ See proposed Sec. 910.3.
\18\ See proposed Sec. Sec. 910.3 and 910.1(e).
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The proposed rule would establish an effective date of 60 days, and
a compliance date of 180 days, after publication of a final rule in the
Federal Register.\19\
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\19\ See proposed Sec. 910.5.
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In this notice of proposed rulemaking (``NPRM''), the Commission
describes and seeks comment on several alternatives to the proposed
rule, including whether non-compete clauses between employers and
senior executives should be subject to a different standard than non-
compete clauses with other workers.\20\ The Commission also assesses
the benefits and costs of the proposed rule, the impact of the proposed
rule on small businesses, and compliance costs related to the proposed
rule's notice requirement.\21\
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\20\ See infra Part VI.
\21\ See infra Parts VII-IX.
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The Commission seeks comment on all aspects of this NPRM. Comments
must be received on or before March 20, 2023.\22\
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\22\ Pursuant to Section 22(d)(4) of the FTC Act, 15 U.S.C. 57b-
3(d)(4), this NPRM was not included in the Commission's Spring 2022
Regulatory Agenda because the Commission first considered it after
the publication deadline for the Regulatory Agenda.
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II. Factual Background

A. What are non-compete clauses?

A non-compete clause is a contractual term between an employer and
a worker that prevents the worker from seeking or accepting employment
with a person, or operating a business, after the conclusion of the
worker's employment with the employer.\23\ A typical non-compete clause
blocks the worker from working for a competing employer, or starting a
competing business, within a certain geographic area and period of time
after their employment ends. A non-compete clause may be part of the
worker's employment contract or may be contained in a standalone
contract. Employers and workers may enter into non-compete clauses at
the start of, during, or at the end of a worker's employment.
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\23\ See proposed Sec. 910.1(b). The term ``non-compete
clause'' has also been used describe agreements between one or more
business not to compete against one another, see, e.g., Lumber
Liquidators, Inc. v. Cabinets To Go, LLC, 415 F. Supp. 3d 703, 709
(E.D. Va. 2009), as well as certain kinds of moonlighting during a
worker's employment, see, e.g., In the Matter of the Investigation
by Barbara D. Underwood, Att'y Gen. of the State of N.Y. of WeWork
Companies, Inc., Assurance of Discontinuance No. 18-101 (Sept. 18,
2018) at Exhibit B. As underscored above, however, this proposed
rule focuses only on post-employment restraints that employers
impose on workers.
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If a worker violates a non-compete clause, the employer may sue the
worker for breach of contract. An employer may be able to obtain a
preliminary injunction ordering the worker, for the duration of the
lawsuit, to stop the conduct that allegedly violates the non-compete
clause. If the employer wins the lawsuit, the employer may be able to
obtain a permanent injunction ordering the worker to stop the conduct
that violates the non-compete clause; a payment of monetary damages
from the worker; or both.\24\ Where workers are subject to arbitration
clauses,\25\ the employer may seek to enforce the non-compete clause
through arbitration.
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\24\ Donald J. Aspelund & Joan E. Beckner, Employee
Noncompetition Law Sec. 8:2, Sec. 8:22 (Aug. 2021).
\25\ See, e.g., Alexander J.S. Colvin, Econ. Pol'y Inst.,
Report, The Growing Use of Mandatory Arbitration (Apr. 6, 2018).
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The below examples of non-compete clauses from recent news reports,
legal settlements, and court opinions are illustrative.
<bullet> A contractual term between a security guard firm and its
security guards requiring that, for two years following the conclusion
of the security guards' employment with the firm, the security guard
may not ``[a]ccept employment with or be employed by'' a competing
business ``within a one hundred (100) mile radius'' of the security
guard's primary jobsite with the firm and stating that the security
guards may not ``[a]ssist, aid or in any manner whatsoever help any
firm, corporation, partnership or other business to compete with'' the
firm. The non-compete clause also contains a ``liquidated damages''
clause requiring the security guard to pay the firm $100,000 as a
penalty for any conduct that contravenes the agreement.\26\
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\26\ Fed. Trade Comm'n, Complaint, In re Prudential Sec., Inc.
et al., Matter No. 221 0026 at ] 12-] 13 (December 28, 2022).
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<bullet> A contractual term between a glass container manufacturing
company and its workers typically requiring that, for two years
following the conclusion of the worker's employment with the company,
the worker may not directly or indirectly ``perform or provide the same
or substantially similar services'' to those the worker performed for
the company to any business in the U.S., Canada, or Mexico that is
``involved with or that supports the sale, design, development,
manufacture, or production of glass containers'' in competition with
the company.\27\
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\27\ Fed. Trade Comm'n, Complaint, In re Ardagh Group S.A. et
al., Matter No. 211 0182 at ] 9 (December 28, 2022).
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<bullet> A contractual term between a sandwich shop chain and its
workers stating that, for two years after the worker leaves their job,
the worker may not perform services for ``any business which derives
more than ten percent (10%) of its revenue from selling submarine,
hero-type, deli-style, pita and/or wrapped or rolled sandwiches''
located within three miles of any of the chain's more than 2,000
locations in the United States.\28\
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\28\ Dave Jamieson, Jimmy John's Makes Low-Wage Workers Sign
`Oppressive' Noncompete Agreements, HuffPost (Oct. 13, 2014). The
company agreed to remove the non-compete clause in 2016 as part of a
settlement. Office of the Att'y Gen. of the State of N.Y., Press
Release, A.G. Schneiderman Announces Settlement With Jimmy John's To
Stop Including Non-Compete Agreements In Hiring Packets (June 22,
2016).
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<bullet> A contractual term between a steelmaker and one of its
executives prohibiting the executive from working for ``any business
engaged directly or indirectly in competition with'' the steelmaker
anywhere in the world for

[[Page 3484]]

one year following the termination of the executive's employment.\29\
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\29\ AK Steel Corp. v. ArcelorMittal USA, LLC, 55 N.E.3d 1152,
1156 (Ohio Ct. App. 2016).
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<bullet> A contractual term between an office supply company and
one of its sales representatives stating that, for two years after the
sales representative's last day of employment, the sales representative
is prohibited from ``engag[ing] directly or indirectly, either
personally or as an employee, associate, partner, or otherwise, or by
means of any corporation or other legal entity, or otherwise, in any
business in competition with Employer,'' within a 100-mile radius of
the sales representative's employment location.\30\
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\30\ Osborne v. Brown & Saenger, Inc., 904 N.W.2d 34, 36 (N.D.
2017).
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<bullet> A contractual term between a nationwide payday lender and
its workers stating that, for one year after the worker leaves their
job, they are prohibited from performing any ``consumer lending
services or money transmission services'' for any entity that provides
such services, or to ``sell products or services that are competitive
with or similar to the products or services of the Company,'' within a
15-mile radius of any of the payday lender's 1,000 locations in the
United States.\31\
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\31\ People of the State of Ill. v. Check Into Cash of Ill.,
LLC, Complaint, 2017-CH-14224 (Ill. Circuit Ct. Oct. 25, 2017), ]
29, ] 70, <a href="https://illinoisattorneygeneral.gov/pressroom/2017_10/Check_Into_Cash-Complaint.pdf">https://illinoisattorneygeneral.gov/pressroom/2017_10/Check_Into_Cash-Complaint.pdf</a>.
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<bullet> A contractual term between an online retailer and its
warehouse workers prohibiting the workers, for 18 months after leaving
their job, from ``directly or indirectly . . . engag[ing] or
support[ing] the development, manufacture, marketing, or sale of any
product or service that competes or is intended to compete with any
product or service sold, offered, or otherwise provided by'' the
retailer--or that is ``intended to be sold, offered, or otherwise
provided by [the retailer] in the future''--that the worker ``worked on
or supported'' or about which the worker obtained or received
confidential information.\32\
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\32\ Spencer Woodman, Exclusive: Amazon makes even temporary
warehouse workers sign 18-month non-compete clauses, The Verge (Mar.
26, 2015). The company removed the non-compete clause following the
media coverage. Josh Lowensohn, Amazon does an about-face on
controversial warehouse worker non-compete contracts, The Verge
(Mar. 27, 2015).
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<bullet> A contractual term between a medical services firm and an
ophthalmologist stating that, for two years after the termination of
the ophthalmologist's employment with the firm, the ophthalmologist
shall not engage in the practice of medicine in two Idaho counties
unless the ophthalmologist pays the firm a ``practice fee'' of either
$250,000 or $500,000, depending on when the ophthalmologist's
employment ends.\33\
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\33\ Intermountain Eye & Laser Ctrs. P.L.L.C. v. Miller, 127
P.3d 121, 123 (Idaho 2005).
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In addition to non-compete clauses, other types of contractual
provisions restrict what a worker may do after they leave their job.
These other types of provisions include, among others:
<bullet> Non-disclosure agreements (NDAs)--also known as
``confidentiality agreements''--which prohibit the worker from
disclosing or using certain information;
<bullet> Client or customer non-solicitation agreements, which
prohibit the worker from soliciting former clients or customers of the
employer (referred to in this NPRM as ``non-solicitation agreements'');
\34\
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\34\ The term ``non-solicitation agreement'' can also refer to a
type of agreement between employers not to solicit one another's
employees. In this NPRM, however, the term refers only to
contractual provisions between employers and workers prohibiting the
worker from soliciting clients or customers of the employer.
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<bullet> No-business agreements, which prohibit the worker from
doing business with former clients or customers of the employer,
whether or not solicited by the worker;
<bullet> No-recruit agreements, which prohibit the worker from
recruiting or hiring the employer's workers;
<bullet> Liquidated damages provisions, which require the worker to
pay the employer a sum of money if the worker engages in certain
conduct; and
<bullet> Training-repayment agreements (TRAs), a type of liquidated
damages provision in which the worker agrees to pay the employer for
the employer's training expenses if the worker leaves their job before
a certain date.\35\
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\35\ See, e.g., Norman D. Bishara, Kenneth J. Martin, and
Randall S. Thomas, An Empirical Analysis of Non-Competition Clauses
and Other Restrictive Post-Employment Covenants, 68 Vand. L. Rev. 1,
13 (2015); Uniform Law Comm'n, Uniform Restrictive Employment
Agreement Act, Draft For Approval (2021) at Sec. 2.
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These other types of restrictive employment covenants can sometimes
be so broad in scope that they serve as de facto non-compete
clauses.\36\
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\36\ See, e.g., Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir.
1981); Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 306, 319
(Cal. Ct. App. 2020).
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In addition to restricting what workers may do after they leave
their jobs, employers have also entered into agreements with other
employers in which they agree not to compete for one another's workers.
These include no-poach agreements, in which employers agree not to
solicit or hire one another's workers, and wage-fixing agreements, in
which employers agree to limit wages or salaries (or other terms of
compensation).\37\
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\37\ Fed. Trade Comm'n & U.S. Dep't of Justice Antitrust
Division, Antitrust Guidance for Human Resource Professionals (Oct.
2016) at 3.
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The Commission seeks comment on its description in this Part II.A
of non-compete clauses. The Commission also encourages workers,
employers, and other members of the public to submit comments
describing their experiences with non-compete clauses.

B. Evidence Relating to the Effects of Non-Compete Clauses on
Competition

Non-compete clauses have presented challenging legal issues for
centuries.\38\ But only in the last two decades has empirical evidence
emerged to help regulators and the general public understand how non-
compete clauses affect competition in labor markets and product and
service markets.
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\38\ See infra Part II.C.
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In the early 2000s, researchers began to shed new light on the
impacts of non-compete clauses on innovation and productivity. As this
new body of research was evolving, news reports revealed non-compete
clauses were being imposed even on low-wage workers.\39\ These reports
surprised many observers, who had assumed only highly skilled workers
were subject to non-compete clauses.\40\ Researchers responded by
applying the tools of economic research to better understand how
employers were using non-compete clauses and how they were affecting
competition.
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\39\ See, e.g., Jamieson, supra note 28.
\40\ See, e.g., Alan B. Kreuger & Eric A. Posner, The Hamilton
Project, Policy Proposal 2018-05, A Proposal for Protecting Low-
Income Workers from Monopsony and Collusion (February 2018) at 7.
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1. Labor Markets
The empirical research on how non-compete clauses affect
competition shows that the use of non-compete clauses in the aggregate
is interfering with competitive conditions in labor markets.
Labor markets function by matching workers and employers. Workers
offer their skills and time to employers. In return, employers offer
pay, benefits, and job satisfaction.\41\ In a well-functioning labor
market, a worker who is seeking a better job--more pay, better hours,
better working conditions, more enjoyable work, or whatever the worker
may be seeking--can enter the labor market by looking for work.
Employers who have positions available compete for the worker's
services. The worker's

[[Page 3485]]

current employer may also compete with these prospective employers by
seeking to retain the worker--for example, by offering to raise the
worker's pay or promote the worker. Ultimately, the worker chooses the
job that best meets their objectives. In general, the more jobs
available--i.e., the more options the worker has--the stronger the
match the worker will find.
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\41\ See, e.g., Dep't of the Treasury, Report, The State of
Labor Market Competition (March 7, 2022) at 3.
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Just as employers compete for workers in a well-functioning labor
market, workers compete for jobs. An employer who needs a worker will
make it known that the employer has a position available. Workers who
learn of the opening will apply for the job. From among the workers who
apply, the employer will choose the worker that best meets the
employer's needs--in general, the worker most likely to be the most
productive. In general, the more workers who are available--i.e., the
more options the employer has--the stronger the match the employer will
find.
Through these processes--employers competing for workers, workers
competing for jobs, and employers and workers matching with one
another--competition in the labor market leads to higher earnings for
workers, greater productivity for employers, and better economic
conditions.
In a perfectly competitive labor market, if a job that a worker
would prefer more--for example, because it has higher pay or is in a
better location--were to become available, the worker could switch to
it quickly and easily. Due to this ease of switching, in a perfectly
competitive labor market, workers would easily match to the optimal job
for them. If a worker were to find themselves in a job where the
combination of their happiness and productivity is less than in some
other job, they would simply switch jobs, making themselves better off.
However, this perfectly competitive labor market exists only in
theory. In practice, labor markets deviate substantially from perfect
competition. Non-compete clauses, in particular, impair competition in
labor markets by restricting a worker's ability to change jobs. If a
worker is bound by a non-compete clause, and the worker wants a better
job, the non-compete clause will prevent the worker from accepting a
new job that is within the scope of the non-compete clause. These are
often the most natural alternative employment options for a worker:
jobs in the same geographic area and in the worker's field of
expertise. For example, a non-compete clause might prevent a nurse in
Cleveland from working in the health care field in Northeast Ohio, or a
software engineer in Orlando from working for another technology
company in Central Florida. The result is less competition among
employers for the worker's services and less competition among workers
for available jobs. Since the worker is prevented from taking these
jobs, the worker may decide not to enter the labor market at all. Or
the worker may enter the labor market but take a job in which they are
less productive, such as a job outside their field.
Non-compete clauses affect competition in labor markets through
their use in the aggregate. The effect of an individual worker's non-
compete clause on competition in a particular labor market may be
marginal or may be impossible to discern statistically. However, the
use of a large number of non-compete clauses across a labor market
markedly affects the opportunities of all workers in that market, not
just those with non-compete clauses. By making it more difficult for
many workers in a labor market to switch to new jobs, non-compete
clauses inhibit optimal matches from being made between employers and
workers across the labor force. As a result, where non-compete clauses
are prevalent in a market, workers are more likely to remain in jobs
that are less optimal with respect to the worker's ability to maximize
their productive capacity. This materially reduces wages for workers--
not only for workers who are subject to non-compete clauses, but for
other workers in a labor market as well, since jobs that would
otherwise be better matches for an unconstrained worker are filled by
workers subject to non-compete clauses.
a. Estimates of Non-Compete Clause Use
Based on the available evidence, the Commission estimates that
approximately one in five American workers--or approximately 30 million
workers--is bound by a non-compete clause.
A 2014 survey of workers by Evan Starr, JJ Prescott, and Norman
Bishara, which resulted in 11,505 responses, found 18% of respondents
work under a non-compete clause and 38% of respondents have worked
under one at some point in their lives.\42\ Among the studies of non-
compete clause use discussed here, this study has the broadest and
likely the most representative coverage of the U.S. labor force.\43\
Starr, Prescott, and Bishara also found that, among workers without a
bachelor's degree, 14% of respondents reported working under a non-
compete clause at the time surveyed and 35% reported having worked
under one at some point in their lives.\44\ For workers earning less
than $40,000 per year, 13% of respondents work under a non-compete
clause and 33% worked under one at some point in their lives.\45\
Furthermore, this survey shows 53% of workers who are covered by non-
compete clauses are hourly workers.\46\
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\42\ Evan P. Starr, James J. Prescott, & Norman D. Bishara,
Noncompete Agreements in the U.S. Labor Force, 64 J.L. & Econ. 53,
53 (2021). A survey of workers conducted in 2017 by <a href="http://Payscale.com">Payscale.com</a>
reached similar results. This survey estimated that 24.2% of workers
are subject to a non-compete clause. Natarajan Balasubramanian, Evan
Starr, & Shotaro Yamaguchi, Bundling Employment Restrictions and
Value Appropriation from Employees 35 (2022), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403</a>. This survey
also found that non-compete clauses are often used together with
other restrictive employment covenants, including non-disclosure,
non-recruitment, and non-solicitation covenants. Id. at 17
(reporting that respondents that had a non-compete clause reported
having all three of the other restrictive employment covenants 74.7%
of the time). However, a key limitation of the <a href="http://Payscale.com">Payscale.com</a> survey
is that it is a convenience sample of individuals who visited
<a href="http://Payscale.com">Payscale.com</a> during the time period of the survey and is therefore
unlikely to be fully representative of the U.S. working population.
Id. at 13. While weighting based on demographics helps, it does not
fully mitigate this concern.
\43\ The final survey sample contained 11,505 responses,
representing individuals from nearly every demographic in the labor
force. Id. at 58.
\44\ Id. at 63.
\45\ Id.
\46\ Michael Lipsitz & Evan Starr, Low-Wage Workers and the
Enforceability of Noncompete Agreements, 68 Mgmt. Sci. 143, 144
(2021) (analyzing data from the Starr, Prescott, & Bishara survey).
---------------------------------------------------------------------------

Starr, Prescott, and Bishara also found, in states where non-
compete clauses are unenforceable, workers are covered by non-compete
clauses at approximately the same rate as workers in other states.\47\
This suggests employers maintain non-compete clauses even where they
likely cannot enforce them.
---------------------------------------------------------------------------

\47\ Starr, Prescott, & Bishara, supra note 42 at 81.
---------------------------------------------------------------------------

Other estimates of non-compete clause use cover subsets of the U.S.
labor force. One study, a 2021 study by Rothstein and Starr, is based
on National Longitudinal Survey of Youth (NLSY) data.\48\ The NLSY
consists of a nationally representative sample of 8,984 men and women
born from 1980-84 and living in the United States at the time of the
initial survey in 1997.\49\ The survey is an often-used labor survey
conducted by the Bureau of Labor Statistics, rather than a one-off
survey

[[Page 3486]]

directed solely at calculating the prevalence of non-compete clauses.
Using this data, Rothstein and Starr estimate the prevalence of non-
compete clauses to be 18%, which is comparable to the number estimated
by Starr, Prescott, and Bishara.\50\
---------------------------------------------------------------------------

\48\ Donna S. Rothstein & Evan Starr, Mobility Restrictions,
Bargaining, and Wages: Evidence from the National Longitudinal
Survey of Youth 1997 (2021), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3974897">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3974897</a>.
\49\ U.S. Bureau of Labor Statistics, NLSY97 Data Overview,
<a href="https://www.bls.gov/nls/nlsy97.htm">https://www.bls.gov/nls/nlsy97.htm</a>.
\50\ Rothstein & Starr, supra note 48 at 7.
---------------------------------------------------------------------------

Finally, four occupations have been studied individually:
executives, physicians, hair stylists, and electrical and electronics
engineers. Both Shi (2021) and Kini et al. (2021) estimate prevalence
of non-compete clauses for executives. Shi (2021) finds the proportion
of executives working under a non-compete clause rose from ``57% in the
early 1990s to 67% in the mid-2010s.'' \51\ Kini et al. (2021) find
that 62% of CEOs worked under a non-compete clause between 1992 and
2014.\52\ Lavetti et al. (2020) find 45% of physicians worked under a
non-compete clause in 2007.\53\ In a survey of independent hair salon
owners, Johnson and Lipsitz (2021) find 30% of hair stylists worked
under a non-compete clause in 2015.\54\ Finally, in a survey of
electrical and electronic engineers, Marx (2011) finds that 43% of
respondents signed a non-compete clause.\55\
---------------------------------------------------------------------------

\51\ Liyan Shi, Optimal Regulation of Noncompete Contracts 27
(2022), <a href="https://static1.squarespace.com/static/59e19b282278e7ca5b9ff84f/t/626658ffb73adb2959bd4371/1650874624095/noncompete_shi.pdf">https://static1.squarespace.com/static/59e19b282278e7ca5b9ff84f/t/626658ffb73adb2959bd4371/1650874624095/noncompete_shi.pdf</a>.
\52\ Omesh Kini, Ryan Williams, & Sirui Yin, CEO Noncompete
Agreements, Job Risk, and Compensation, 34 Rev. Fin. Stud. 4701,
4707 (2021).
\53\ Kurt Lavetti, Carol Simon, & William D. White, The Impacts
of Restricting Mobility of Skilled Service Workers Evidence from
Physicians, 55 J. Hum. Res. 1025, 1042 (2020).
\54\ Matthew S. Johnson & Michael Lipsitz, Why Are Low-Wage
Workers Signing Noncompete Agreements?, 57 J. Hum. Res. 689, 700
(2022).
\55\ Matt Marx, The Firm Strikes Back: Non-Compete Agreements
and the Mobility of Technical Professionals, 76Am. Socio. Rev. 695,
702 (2011). Calculated as 92.60% who signed a non-compete clause of
the 46.80% who were asked to sign a non-compete clause.
---------------------------------------------------------------------------

Some observers have stated that the use of non-compete clauses by
employers appears to have increased over time.\56\ However, there is no
consistent data available on the prevalence of non-compete clauses over
time.
---------------------------------------------------------------------------

\56\ See, e.g., Rachel Arnow-Richman, Cubewrap Contracts and
Worker Mobility: The Dilution of Employee Bargaining Power via
Standard Form Noncompetes, 2006 Mich. St. L. Rev. 963, 981 n.59;
John W. Lettieri, American Enterprise Institute, Policy Brief, A
Better Bargain: How Noncompete Reform Can Benefit Workers and Boost
Economic Dynamism (December 2020) at 2.
---------------------------------------------------------------------------

While many workers are bound by non-compete clauses, many workers
do not know whether their non-compete clause is legally enforceable or
not. As part of their 2014 survey, Starr et al. asked surveyed
individuals ``Are noncompetes enforceable in your state?'' Of the
respondents, 37% indicated that they did not know whether or not their
non-compete clause was enforceable.\57\ Additionally, 11% of
individuals were misinformed: they believed that non-compete clauses
were enforceable in their state when they were not, or they believed
that non-compete clauses were not enforceable when they were.\58\
---------------------------------------------------------------------------

\57\ J.J. Prescott & Evan Starr, Subjective Beliefs About
Contract Enforceability 10 (2022), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3873638">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3873638</a>.
\58\ Id. at 11.
---------------------------------------------------------------------------

Starr et al. also find that only 10.1% of workers with non-compete
clauses report bargaining over it.\59\ Additionally, only 7.9% report
consulting a lawyer, and only 11.4% of respondents thought that they
still would have been hired if they had refused to sign the non-compete
clause.\60\ Marx finds that only 30.5% of electrical engineers who
signed non-compete clauses were asked to sign prior to accepting their
job offer, and 47% of non-compete clause signers were asked to sign on
or after their first day of work.\61\
---------------------------------------------------------------------------

\59\ Starr, Prescott, & Bishara, supra note 42, at 72.
\60\ Id.
\61\ Marx (2011), supra note 55 at 706. Forty-seven percent is
calculated as the sum of 24.43% and 22.86%, the respective
percentage of requests that were made on the first day or after the
first day at the company.
---------------------------------------------------------------------------

b. Earnings--Effects on Workers Across the Labor Force
By inhibiting optimal matches from being made between employers and
workers across the labor force, non-compete clauses reduce the earnings
of workers. Several studies have found that increased enforceability of
non-compete clauses reduces workers' earnings across the labor market
generally and for specific types of workers.
Each of the studies described below analyzes the effects of non-
compete clause enforceability on earnings. While different studies have
defined enforceability of non-compete clauses in slightly different
ways, each uses enforceability as a proxy for the chance that a given
non-compete clause will be enforced.\62\
---------------------------------------------------------------------------

\62\ All the studies described below rely on twelve concepts of
enforceability based on Malsberger's ``Non-Compete Clauses: A State-
by-State Survey'' and Kini et al. supplemented with data from Beck,
Reed, and Riden LLP's state-by-state survey of non-compete clauses.
---------------------------------------------------------------------------

These studies use ``natural experiments'' resulting from changes in
state law to assess how changes in the enforceability of non-compete
clauses affect workers' earnings. The use of a natural experiment
allows for the inference of causal effects, since the likelihood that
other variables are driving the outcomes is minimal.
First, a study conducted by Matthew Johnson, Kurt Lavetti, and
Michael Lipsitz finds that decreasing non-compete clause enforceability
from the approximate enforceability level of the fifth-strictest state
to that of the fifth-most-lax state would increase workers' earnings by
3-4%.\63\ Johnson, Lavetti, and Lipsitz also estimate that a nationwide
ban on non-compete clauses would increase average earnings by 3.3-
13.9%.\64\ The authors also find that non-compete clauses limit the
ability of workers to leverage favorable labor markets to receive
greater pay: when non-compete clauses are more enforceable, workers'
earnings are less responsive to low unemployment rates (which workers
may typically leverage to negotiate pay raises).\65\
---------------------------------------------------------------------------

\63\ Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz, The
Labor Market Effects of Legal Restrictions on Worker Mobility 2
(2020), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381</a>.
\64\ Id.
\65\ Id. at 36.
---------------------------------------------------------------------------

The second study of the effects of non-compete clause
enforceability on earnings, conducted by Evan Starr, estimates that if
a state that does not enforce non-compete clauses shifted its policy to
that of the state with an average level of enforceability, earnings
would fall by about 4%.\66\ Unlike many of the other studies described
here, this study does not use a change in enforceability of non-compete
clauses to analyze the impact of enforceability. Rather, it examines
the differential impact of enforceability on workers in occupations
which use non-compete clauses at a high rate versus workers in
occupations which use non-compete clauses at a low rate. While the
Commission believes that this research design may be less informative
with respect to the proposed rule than designs which examine changes in
enforceability, the study's estimated effects are in line with the rest
of the literature.
---------------------------------------------------------------------------

\66\ Evan Starr, Consider This: Training, Wages, and the
Enforceability of Non-Compete Clauses, 72 I.L.R. Rev. 783, 799
(2019).
---------------------------------------------------------------------------

The third study, conducted by Michael Lipsitz and Evan Starr,
estimates that when Oregon stopped enforcing non-compete clauses for
workers who are paid hourly, their wages increased by 2-3%, relative to
workers in states which did not experience legal changes. The study
also found a greater effect (4.6%) on workers

[[Page 3487]]

in occupations that used non-compete clauses at a relatively high
rate.\67\
---------------------------------------------------------------------------

\67\ Lipsitz & Starr, supra note 46 at 143.
---------------------------------------------------------------------------

The fourth study, conducted by Natarajan Balasubramanian, Jin Woo
Chang, Mariko Sakakibara, Jagadeesh Sivadasan, and Evan Starr, found
that when Hawaii stopped enforcing non-compete clauses for high-tech
workers, earnings of new hires increased by about 4%.\68\
---------------------------------------------------------------------------

\68\ Natarajan Balasubramanian, Jin Woo Chang, Mariko
Sakakibara, Jagadeesh Sivadasan, & Evan Starr, Locked In? The
Enforceability of Non-Compete Clauses and the Careers of High-Tech
Workers, 57 J. Hum. Res. S349, S349 (2022).
---------------------------------------------------------------------------

The fifth and sixth studies both show that enforceable non-compete
clauses reduce earnings for executives. One study, by Mark Garmaise,
finds that decreased enforceability of non-compete clauses increases
executives' earnings by 12.7%.\69\ Another study, by Omesh Kini, Ryan
Williams, and David Yin, finds that decreased enforceability of non-
compete clauses led to lower earnings for CEOs when use of non-compete
clauses is held constant. However, the study also finds use of non-
compete clauses decreases when non-compete clause enforceability
decreases. When that relationship is taken into account, decreased
enforceability results in greater earnings for CEOs. For example, if
the state which enforces non-compete clauses most strictly (Florida)
hypothetically moved to a policy of non-enforcement, then a CEO who had
a non-compete clause prior to the policy change would experience an
estimated 11.4% increase in their earnings, assuming their non-compete
clause was dropped.\70\
---------------------------------------------------------------------------

\69\ Mark J. Garmaise, Ties that Truly Bind: Noncompetition
Agreements, Executive Compensation, and Firm Investment, 27 J.L.,
Econ., & Org. 376, 403 (2011). The reduction in earnings is
calculated as e-1.3575*0.1-1, where -1.3575 is taken from
Table 4.
\70\ Kini, Williams, & Yin, supra note 52 at 4731. The 11.4%
increase is calculated as e\X\-1, where X is calculated as 9 times
the coefficient on CEO Noncompete x HQ Enforce (0.047), where 9 is
the enforceability index in Florida, plus the coefficient on CEO
Noncompete (-0.144), plus 9 times the coefficient on HQ Enforce (-
0.043).
---------------------------------------------------------------------------

Among the studies listed above, Johnson, Lavetti, and Lipsitz
likely has the broadest coverage. The study spans the years 1991 to
2014, examines workers across the labor force, and uses all known
common law and statutory changes in non-compete clause enforceability
to arrive at its estimates. The study by Starr also covers the entire
labor force, from 1996 to 2008. However, the Starr study is only able
to compare effects for occupations that use non-compete clauses at a
high rate to those that use them at a low rate. The next two studies
cover just one legal change, and only a subset of the labor force:
hourly workers in Oregon, in the case of Lipsitz and Starr, and high-
tech workers in Hawaii, in the case of Balasubramanian et al. Finally,
while the studies conducted by Garmaise and Kini et al. examine
multiple legal changes, they focus solely on executives.
One limitation of studies of enforceability alone--i.e., studies
which do not consider the use of non-compete clauses--is that it is
difficult to disentangle the effects of increased enforceability on
workers who are subject to non-compete clauses and workers who are not
subject to non-compete clauses. In other words, since effects are
observed across the labor force (or some subset of it), they include
both effects on workers with and without non-compete clauses. However,
due to the research cited in the next subsection--indicating non-
compete clauses reduce earnings for workers who are not subject to non-
compete clauses--the Commission believes it is reasonable to conclude
based on contextual evidence that the labor-force-wide effects
described in the studies above include effects on both workers with and
without non-compete clauses.
Three additional studies examine the association between non-
compete clause use--rather than enforceability--and earnings. Using the
2014 survey described in Part II.B.1.a, Starr et al. find that the use
of non-compete clauses is associated with 6.6% higher earnings in the
model including the most control variables among those they
observe.\71\ Using the <a href="http://Payscale.com">Payscale.com</a> data, Balasubramanian et al. find
that while non-compete clause use is associated with 2.1-8.2% greater
earnings (compared with individuals with no post-contractual
restrictions), this positive association is due to non-compete clauses
often being bundled with non-disclosure agreements. Compared with
individuals only using non-disclosure agreements, use of non-compete
clauses is associated with a 3.0-7.3% decrease in earnings, though the
authors do not disentangle this effect from the effects of use of non-
solicitation and non-recruitment provisions.\72\ Finally, Lavetti et
al. find that use of non-compete clauses among physicians is associated
with greater earnings (by 14%) and greater earnings growth.\73\ (The
Commission notes, however, this study does not consider how changes in
non-compete clause enforceability affect physicians' earnings. As
described below in the cost-benefit analysis for the proposed rule, the
Commission estimates the proposed rule may increase physicians'
earnings, though the study does not allow for a precise
calculation.\74\)
---------------------------------------------------------------------------

\71\ Starr, Prescott, & Bishara, supra note 42 at 75.
\72\ Balasubramanian, Starr, & Yamaguchi, supra note 42 at 40.
The percentage range is calculated as e-0.030-1 and
e-0.076-1, respectively.
\73\ Lavetti, Simon, & White, supra note 53 at 1051. The
increase in earnings is calculated as e\0.131\-1.
\74\ See infra Part VII.B.1.a.ii.
---------------------------------------------------------------------------

However, the Commission does not believe that studies examining the
association between non-compete clause use--rather than
enforceability--and earnings are sufficiently probative of the effects
of non-compete clauses on earnings. The Commission's concern is that
non-compete clause use and earnings may both be determined by one or
more confounding factors. It may be the case, for example, that
employers who rely most on trade secrets both pay more and use non-
compete clauses at a high rate (which would not necessarily be captured
by the control variables observed in studies of non-compete clause
use). This means these studies do not necessarily inform how
restricting the use of non-compete clauses through a rule would impact
earnings. This methodological limitation contrasts with studies
examining enforceability of non-compete clauses, in which changes in
enforceability are ``natural experiments'' that allow for the inference
of causal effects, since the likelihood that other variables are
driving the outcomes is minimal. A ``natural experiment'' refers to
some kind of change in the real world that allows researchers to study
the impact of the change on an outcome. In a natural experiment, the
change is effectively random, uninfluenced by other factors which could
have simultaneously affected the outcome. In such situations, it is
therefore most likely the change itself caused any impact that is
observed on the outcomes.
The belief that studies of non-compete clause use do not reflect
causal estimates is shared by the authors of at least one of the
studies of non-compete clause use. As noted in Starr et al., ``Our
analysis of the relationships between noncompete use and labor market
outcomes . . . is best taken as descriptive and should not be
interpreted causally.'' \75\ As a result, the Commission gives these
studies minimal weight. The study of physicians conducted by Lavetti et
al. partially mitigates this concern by comparing earnings effects in
high- versus low-enforceability states, though this analysis compares
only California and Illinois, meaning that it is

[[Page 3488]]

impossible to disentangle underlying differences in those two states
from the effects of non-compete clause enforceability.
---------------------------------------------------------------------------

\75\ Starr, Prescott, & Bishara, supra note 42 at 73.
---------------------------------------------------------------------------

c. Earnings--Effects on Workers Not Covered by Non-Compete Clauses
As described above, non-compete clauses negatively affect
competition in labor markets, thereby inhibiting optimal matches from
being made between employers and workers across the labor force. As a
result, non-compete clauses reduce earnings not only for workers who
are subject to non-compete clauses, but also for workers who are not
subject to non-compete clauses.
Two studies show non-compete clauses reduce earnings for workers
who are not subject to non-compete clauses. The first study, a 2019
study of the external effects of non-compete clauses conducted by Evan
Starr, Justin Frake, and Rajshree Agarwal, analyzed workers without
non-compete clauses who worked in states and industries in which non-
compete clauses were used at a high rate.\76\ They find that, when the
use of non-compete clauses in a given state and industry combination
increases by 10%, the earnings of workers who do not have non-compete
clauses, but who work in that same state and industry, go down by about
6.12% more when that state has an average enforceability level,
compared with a state which does not enforce non-compete clauses.\77\
In effect, this study finds when the use of non-compete clauses by
employers increases, that drives down wages for workers who do not have
non-compete clauses but who work in the same state and industry. This
study also finds this effect is stronger where non-compete clauses are
more enforceable.
---------------------------------------------------------------------------

\76\ Evan Starr, Justin Frake, & Rajshree Agarwal, Mobility
Constraint Externalities, 30 Org. Sci. 961, 6 (2019).
\77\ Id. at 11.
---------------------------------------------------------------------------

The Commission notes that, similar to some of the studies described
above, this study relies on use of non-compete clauses, as well as
cross-sectional differences in enforceability of non-compete clauses,
to arrive at their conclusions. While this approach calls into question
the causal relationship outlined in the study, the authors employ tests
to increase confidence in the causal interpretation; however, the tests
rely on what data the authors have available, and therefore cannot rule
out explanations outside of the scope of their data. This study also
analyzes the effect of non-compete clause use for certain workers on
workers in a different firm, meaning that factors simultaneously
driving non-compete clause use and outcomes within a certain firm will
not break the causal chain identified in the study.
Starr, Frake, and Agarwal show the reduction in earnings (and
mobility, discussed below) is due to a reduction in the rate of the
arrival of job offers. Individuals in state/industry combinations which
use non-compete clauses at a high rate do not receive job offers as
frequently as individuals in state/industry combinations where non-
compete clauses are not frequently used.\78\ The authors also
demonstrate decreased mobility and earnings are not due to increased
job satisfaction (i.e., if workers are more satisfied with their jobs,
they may be less likely to change jobs, and more likely to accept lower
pay).\79\ Finally, they show that decreased mobility and earnings are
not because workers are searching for jobs less frequently, suggesting
that job openings and firm behavior matter more to the underlying
mechanism.\80\
---------------------------------------------------------------------------

\78\ Id. at 10.
\79\ Id. at 13.
\80\ Id.
---------------------------------------------------------------------------

The second study, conducted by Johnson, Lavetti, and Lipsitz,
isolates the impact of a state's enforceability policy on workers not
directly affected by that policy to demonstrate non-compete clauses
affect not just the workers subject to those non-compete clauses, but
the broader labor market as well. In particular, the study finds that
increases in non-compete clause enforceability in one state have
negative impacts on workers' earnings in bordering states, and the
effects are nearly as large as the effects in the state in which
enforceability changed. Johnson, Lavetti, and Lipsitz estimate that the
impact on earnings of a law change in one state on workers just across
that state's border is 87% as great as for workers in the state in
which the law was changed (the effect tapers off as the distance to the
bordering state increases).\81\ When a law change in one state
decreases workers' earnings in that state by 4%, that would therefore
mean that workers just across the border (i.e., workers who share a
commuting zone--a delineation of a local economy \82\--but who live in
another state) would experience decreased earnings of 3.5%. The authors
conclude that, since the workers across the border are not directly
affected by the law change (i.e., contracts that they have signed do
not become more or less enforceable), this effect must be due to
changes in the local labor market.\83\
---------------------------------------------------------------------------

\81\ Johnson, Lavetti, & Lipsitz, supra note 63 at 51. Eighty
seven percent is calculated as the coefficient on the donor state
NCA score (-.181) divided by the coefficient on own state NCA score
(-.207).
\82\ See U.S. Econ. Rsch. Serv., Commuting Zones and Labor
Market Areas, <a href="https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/">https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/</a>.
\83\ Johnson, Lavetti, & Lipsitz, supra note 63 at 30.
---------------------------------------------------------------------------

d. Earnings--Distributional Effects
There is evidence that non-compete clauses increase racial and
gender wage gaps by disproportionately reducing the wages of women and
non-white workers. This may be, for example, because firms use the
monopsony power which results from use of non-compete clauses as a
means by which to wage discriminate. The study by Johnson, Lavetti, and
Lipsitz finds that while earnings of white men would increase by about
3.2% if a state's enforceability moved from the fifth-strictest to the
fifth most lax, the comparable earnings increase for workers in other
demographic groups would be 3.7-7.7%, depending on the characteristics
of the group (though it is not clear from the study whether or not the
differences are statistically significant).\84\ The authors estimate
that banning non-compete clauses nationwide would close racial and
gender wage gaps by 3.6-9.1%.\85\
---------------------------------------------------------------------------

\84\ Id. at 38.
\85\ Id.
---------------------------------------------------------------------------

e. Job Creation
While non-compete clauses may theoretically incentivize firms to
create jobs by increasing the value associated with any given worker
covered by a non-compete clause, the evidence is inconclusive. One
study, by Gerald Carlino, estimates the job creation rate at startups
increased by 7.8% when Michigan increased non-compete clause
enforceability.\86\ However, the job creation rate calculated in this
study is the ratio of jobs created by startups to overall employment in
the state: therefore, the job creation rate at startups may rise either
because the number of jobs created by startups rose, or because
employment overall fell. The study does not investigate which of these
two factors drives the increase in the job creation rate at startups.
---------------------------------------------------------------------------

\86\ Gerald A. Carlino, Do Non-Compete Covenants Influence State
Startup Activity? Evidence from the Michigan Experiment at 16 (Fed.
Reserve Bank of Phila. Working Paper 21-26, 2021).
---------------------------------------------------------------------------

Another study finds that several increases in non-compete clause
enforceability were associated with a 1.4% increase in average per-firm
employment at new firms (though not necessarily total employment).\87\
In this

[[Page 3489]]

study, the authors attribute the increase in average employment to a
change in the composition of newly founded firms. The increases in non-
compete clause enforceability prevented the entry of relatively small
startups which would otherwise have existed. Therefore, the firms which
entered in spite of increases in non-compete clause enforceability had
more workers on average: this increased the average job creation rate
at new firms, because the average entering firm was relatively larger.
However, if the mechanism identified by the authors is correct,
increases in enforceability generate fewer total jobs, because the same
number of large firms may enter (regardless of non-compete clause
enforceability), but fewer small firms enter.
---------------------------------------------------------------------------

\87\ Evan Starr, Natarajan Balasubramanian, & Mariko Sakakibara,
Screening Spinouts? How Noncompete Enforceability Affects the
Creation, Growth, and Survival of New Firms, 64 Mgmt. Sci. 552, 561
(2018).
---------------------------------------------------------------------------

A similar mechanism may explain the results in both studies above.
If that is indeed the case, then an increase in average per-firm
employment among startups is not a positive effect of non-compete
clause enforceability: instead, it could actually represent a negative
effect, since non-compete clauses prevent small firms from existing in
the first place, and overall job creation may decrease. The Commission
therefore believes, with respect to job creation rates, the evidence is
inconclusive.
2. Product and Service Markets
In addition to analyzing how non-compete clauses affect competition
in labor markets, researchers have also analyzed whether non-compete
clauses affect competition in markets for products and services. The
available evidence indicates the use of non-compete clauses interferes
with competitive conditions in product and service markets as well.
The adverse effects of non-compete clauses on product and service
markets likely result from reduced voluntary labor mobility. Non-
compete clauses directly impede voluntary labor mobility by restricting
workers subject to non-compete clauses from moving to new jobs covered
by their non-compete clause. Since non-compete clauses prevent some job
openings from occurring (by keeping workers in their jobs), they also
prevent workers who are not subject to non-compete clauses from finding
new jobs (since the new jobs are already occupied by workers with non-
compete clauses).
Influenced by Ronald Gilson's research positing that high-tech
clusters in California may have been aided by increased labor mobility
because non-compete clauses are generally unenforceable in that
state,\88\ many studies have examined how non-compete clauses affect
labor mobility. Even literature primarily focused on other outcomes has
examined labor mobility as a secondary outcome. Across the board, all
studies have found decreased rates of mobility, measured by job
separations, hiring rates, job-to-job mobility, implicit mobility
defined by job tenure, and within- and between-industry mobility. We
briefly describe each of these studies in turn.
---------------------------------------------------------------------------

\88\ Ronald J. Gilson, The Legal Infrastructure of High
Technology Industrial Districts: Silicon Valley, Route 128, and Non-
Compete Clauses, 74 N.Y.U. L. Rev. 575 (1999).
---------------------------------------------------------------------------

A 2006 study conducted by Fallick, Fleischman, and Rebitzer
supported Gilson's hypothesis by showing that labor mobility in
information technology industries in metropolitan statistical areas
(MSAs) in California was 56% higher than in comparison MSAs outside
California. They note, however, the estimates may not be fully (or at
all) attributable to non-compete clause enforceability. Although the
Commission therefore does not find this particular study to be
sufficiently probative of the relationship between non-compete clauses
and labor mobility, its qualitative findings are in line with the rest
of the literature.\89\
---------------------------------------------------------------------------

\89\ Bruce Fallick, Charles A. Fleischman, & James B. Rebitzer,
Job-Hopping in Silicon Valley: Some Evidence Concerning the
Microfoundations of a High-Technology Cluster, 88 Rev. Econ. &
Statistics 472, 477 (2006).
---------------------------------------------------------------------------

To estimate the impacts of non-compete clause enforceability in a
fashion that may more plausibly attribute causality to the
relationship, in 2009, Marx, Strumsky, and Fleming examined the impact
on labor mobility of Michigan's switch to enforcing non-compete
clauses. They found that Michigan's increase in enforceability led to
an 8.1% decline in the mobility of inventors.\90\
---------------------------------------------------------------------------

\90\ Matt Marx, Deborah Strumsky, & Lee Fleming, Mobility,
Skills, and the Michigan Non-Compete Experiment, 55 Mgmt. Sci. 875,
884 (2009).
---------------------------------------------------------------------------

In 2011, Mark Garmaise examined how a suite of changes in non-
compete clause enforceability affected labor mobility. Garmaise found
executives made within-industry job changes 47% more often, between-
industry job changes 25% more often (though this result was not
statistically significant), and any job change 35% more often when non-
compete clauses were less enforceable.\91\
---------------------------------------------------------------------------

\91\ Garmaise, supra note 69 at 398.
---------------------------------------------------------------------------

A 2019 study by Jessica Jeffers uses several legal changes to
analyze the impact of non-compete clauses on workers' mobility, finding
that decreases in non-compete clause enforceability were associated
with an 8.6% increase in departure rates of workers, and a 15.4%
increase in within-industry departure rates of workers.\92\
---------------------------------------------------------------------------

\92\ Jessica Jeffers, The Impact of Restricting Labor Mobility
on Corporate Investment and Entrepreneurship 22 (2019), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393</a>.
---------------------------------------------------------------------------

Evan Starr's 2019 study comparing workers in occupations which use
non-compete clauses at a high versus low rate found that a state moving
from mean enforceability to no enforceability would cause a decrease in
employee tenure for workers in high-use occupations of 8.2%, compared
with those in low-use occupations. Here, tenure serves as a proxy for
mobility, since tenure is the absence of prior mobility.\93\
---------------------------------------------------------------------------

\93\ Starr, supra note 66 at 798. The value is calculated as
8.2% = 0.56/6.46, where 0.56 is the reported impact on tenure and
6.46 is mean tenure in the sample.
---------------------------------------------------------------------------

Returning to an examination of executives, Liyan Shi's 2020 paper
qualitatively confirmed Garmaise's results, showing that executives
with enforceable non-compete clauses were 1.8 percentage points less
likely to separate from their employers, compared with executives
without enforceable non-compete clauses.\94\
---------------------------------------------------------------------------

\94\ Shi, supra note 51 at 26.
---------------------------------------------------------------------------

Starr, Prescott, and Bishara's 2020 study found that having a non-
compete clause was associated with a 35% decrease in the likelihood a
worker would leave for a competitor.\95\ However, they also found
enforceability does not impact this prediction, in contrast with prior
studies. Digging deeper into the mechanism, they find that what matters
is the worker's belief about the likelihood their employer would seek
to enforce a non-compete clause in court. Workers who did not believe
employers would enforce non-compete clauses in court were more likely
to report they would be willing to leave for a competitor.\96\ This
result confirms the need to ensure that workers are aware of the
proposed rule, though it suffers from the same limitations as do
previously discussed studies of the impacts of non-compete clause use,
rather than enforceability: that studies of use are not causally
interpretable, since they may conflate the effects of factors which
cause use for the effects of use itself.
---------------------------------------------------------------------------

\95\ Evan Starr, J.J. Prescott, & Norm Bishara, The Behavioral
Effects of (Unenforceable) Contracts, 36 J.L., Econ., & Org. 633,
652 (2020).
\96\ Id. at 664.
---------------------------------------------------------------------------

Two recent studies examined subgroups of the population affected by

[[Page 3490]]

state law changes. Balasubramanian et al., in 2022, focused on high-
tech workers whose non-compete clauses were banned in Hawaii, and
Lipsitz and Starr, in 2022, focused on hourly workers whose non-compete
clauses were banned in Oregon. The former found that the ban increased
mobility by 12.5% in the high-tech sector,\97\ while the latter found
that mobility of hourly workers increased by 17.3%.\98\
---------------------------------------------------------------------------

\97\ Balasubramanian et al., supra note 68 at S351.
\98\ Lipsitz & Starr, supra note 46 at 157.
---------------------------------------------------------------------------

Finally, a 2022 study by Johnson, Lavetti, and Lipsitz examined the
impact on labor mobility of all legal changes after 1991 across the
entire labor force. They found moving from the enforceability level of
the fifth strictest state to that of the fifth most lax state causes a
6.0% increase in job-to-job mobility in industries using non-compete
clauses at a high rate.\99\ Furthermore, they found when a state
changes its non-compete clause enforceability in that fashion, workers
in neighboring states experience 4.8% increases in mobility as measured
by job separations, and 3.9% increases as measured by hiring rates,
though neither result was statistically significant.\100\
---------------------------------------------------------------------------

\99\ Johnson, Lavetti, & Lipsitz, supra note 63 at 21.
\100\ Id. at 76.
---------------------------------------------------------------------------

As described below in Part IV.A.1.a.ii, the Commission does not
view reduced labor mobility from non-compete clauses--in and of
itself--as evidence non-compete clauses negatively affect competition
in product and service markets. Instead, reduced labor mobility is best
understood as the primary driver of effects in product and service
markets that the Commission is concerned about. These effects are
described below.
a. Consumer Prices and Concentration
There is evidence that non-compete clauses increase consumer prices
and concentration in the health care sector. There is also evidence
non-compete clauses increase industrial concentration more broadly.
Non-compete clauses may have these effects by inhibiting
entrepreneurial ventures (which could otherwise enhance competition in
goods and service markets) or by foreclosing competitors' access to
talented workers.
One study, by Naomi Hausman and Kurt Lavetti, finds increased
concentration, as measured by the Herfindahl-Hirschman Index (HHI), at
the firm level \101\ and increased final goods prices \102\ as the
enforceability of non-compete clauses increases. Hausman and Lavetti's
study focuses on physician markets, showing that while non-compete
clauses allow physician practices to allocate clients more efficiently
across physicians, this comes at the cost of greater concentration and
prices for consumers. Generally, greater concentration may or may not
lead to greater prices in all situations and may arise for reasons
which simultaneously cause higher prices (indicating, therefore, a
noncausal relationship between concentration and prices). In this case,
the authors claim that researching the direct link between changes in
law governing non-compete clauses and changes in concentration allows
them to identify a causal chain starting with greater enforceability of
non-compete clauses, which leads to greater concentration, and higher
consumer prices.
---------------------------------------------------------------------------

\101\ Naomi Hausman & Kurt Lavetti, Physician Practice
Organization and Negotiated Prices: Evidence from State Law Changes,
13 a.m. Econ. J. Applied Econ. 258, 284 (2021). Note that Hausman
and Lavetti find decreased HHI at the establishment level (where an
establishment is a physical location, and a firm is a company which
may own multiple establishments). For the purposes of consumer
outcomes such as a price or product quality, the relevant measure of
concentration is at the firm level, since firms are unlikely to
compete against themselves on price or quality.
\102\ Id. at 280.
---------------------------------------------------------------------------

While there is no additional direct evidence on the link between
non-compete clauses and consumer prices, another study, by Michael
Lipsitz and Mark Tremblay, shows increased enforceability of non-
compete clauses at the state level increases concentration, as measured
by an employment-based HHI.\103\ Lipsitz and Tremblay theorize non-
compete clauses inhibit entrepreneurial ventures which could otherwise
enhance competition in goods and service markets, and show that the
potential for harm is greatest in exactly those industries in which
non-compete clauses are likely to be used at the highest rate.\104\ If
the general causal link governing the relationship between
enforceability of non-compete clauses, concentration, and consumer
prices acts similarly to that identified in the study by Hausman and
Lavetti, then it is plausible that increases in concentration
identified by Lipsitz and Tremblay would lead to higher prices in a
broader set of industries.
---------------------------------------------------------------------------

\103\ Michael Lipsitz & Mark Tremblay, Noncompete Agreements and
the Welfare of Consumers 6 (2021), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975864">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975864</a>.
\104\ Id. at 3.
---------------------------------------------------------------------------

In many settings, it is also theoretically plausible that increases
in worker earnings from restricting non-compete clauses may increase
consumer prices by raising firms' costs (though there is countervailing
evidence, especially in goods manufacturing \105\). However, we are not
aware of empirical evidence that this occurs, and there are also
countervailing forces--such as the impacts on concentration described
above and positive impacts on innovation \106\--that would tend to
decrease consumer prices. Additionally, the greater wages observed for
workers where non-compete clauses are less enforceable may be due to
better worker-firm matching, which could simultaneously increase wages
and increase productivity, which could lead to lower prices.
---------------------------------------------------------------------------

\105\ Sebastian Heise, Fatih Karahan, & Ay[scedil]eg[uuml]l
[Scedil]ahin The Missing Inflation Puzzle: The Role of the
Wage[hyphen]Price Pass[hyphen]Through, 54 J. Money, Credit & Banking
7 (2022).
\106\ See infra Part II.B.2.d.
---------------------------------------------------------------------------

In addition, the only study of how non-compete clauses affect
prices--the Hausman and Lavetti study described above--finds decreased
non-compete clause enforceability decreases prices in the healthcare
market, rather than increasing them. The study notes that, in theory,
changes in non-compete clause enforceability could impact physicians'
earnings, which could subsequently pass through to prices in healthcare
markets. However, the authors show that, where prices decrease due to
decreased non-compete clause enforceability, labor cost pass-through is
not driving price decreases. As the authors note, if price decreases
associated with non-compete clause enforceability decreases were due to
pass-through of decreases in physicians' earnings, then the most labor-
intensive procedures would likely experience the greatest price
decreases when enforceability decreased. However, they find the
opposite: there is little to no effect on prices for the most labor-
intensive procedures, in contrast with procedures which use relatively
less labor. As the authors explain, this shows that decreases in
healthcare prices associated with decreases in non-compete clause
enforceability are not due to pass-through of lower labor costs.\107\
---------------------------------------------------------------------------

\107\ Hausman & Lavetti, supra note 101 at 278.
---------------------------------------------------------------------------

b. Foreclosing Competitors' Ability To Access Talent
There is evidence that non-compete clauses foreclose the ability of
competitors to access talent by effectively forcing future employers to
buy out workers from their non-compete clauses if they want to hire
them. Firms must either make inefficiently high payments to buy workers
out of non-compete clauses with a former employer, which leads to
deadweight economic loss, or forego the payment--

[[Page 3491]]

and, consequently, the access to the talent the firm seeks. Whatever
choice a firm makes, its economic outcomes in the market are harmed,
relative to a scenario in which no workers are bound by non-compete
clauses.
Liyan Shi studies this effect in a 2022 paper. This paper finds
non-compete clauses are used to ensure that potential new employers of
executives make a buyout payment to the executive's current
employer.\108\ Such a mechanism could be tempered by the ability of a
labor market to provide viable alternative workers for new or competing
businesses. However, when a particular type of labor is somewhat
scarce, when on-the-job experience matters significantly, or when
frictions prevent workers from moving to new jobs, there is no way for
the market to fill the gap created by non-compete clauses. By studying
CEOs, who are difficult to replace and relatively scarce, Shi's paper
shows that non-compete clauses foreclose the ability of competitors to
access talent by effectively forcing them to make inefficiently high
buyout payments. Shi ultimately concludes that ``imposing a complete
ban on noncompete clauses would be close to implementing the social
optimum.'' \109\
---------------------------------------------------------------------------

\108\ Shi, supra note 51.
\109\ Id. at 35.
---------------------------------------------------------------------------

c. New Business Formation
The weight of the evidence indicates non-compete clauses likely
have a negative impact on new business formation. Three studies show
that non-compete clauses and increased enforceability of non-compete
clauses reduce entrepreneurship, new business formation, or both. A
fourth study also finds that non-compete clauses reduce the rate at
which men and women found new startups, though the result is not
statistically significant for men. A fifth study finds mixed effects
which likely support the theory that non-compete clauses reduce new
business formation, and a sixth study finds no effect.
New business formation may refer to entrepreneurs creating new
businesses from scratch or to businesses being spun off from existing
businesses. New business formation increases competition first by
bringing new ideas to market, and second, by forcing incumbent firms to
respond to new firms' ideas instead of stagnating. New businesses
disproportionately create new jobs and are, as a group, more resilient
to economic downturns.\110\ Recent evidence that new business formation
is trending downward has led to concerns that productivity and
technological innovation are not as strong as they would have been had
new business formation remained at higher levels.\111\ Non-compete
clauses restrain new business formation by preventing workers subject
to non-compete clauses from starting their own businesses. In addition,
firms are more willing to enter markets in which they know there are
potential sources of skilled and experienced labor, unhampered by non-
compete clauses.
---------------------------------------------------------------------------

\110\ See, e.g., The Importance of Young Firms for Economic
Growth, Policy Brief, Ewing Marion Kauffman Foundation (Sept. 24,
2015).
\111\ See, e.g., Cong. Budget Off., Federal Policies in Response
to Declining Entrepreneurship (December 2020).
---------------------------------------------------------------------------

Three studies show that non-compete clauses and increased
enforceability of non-compete clauses reduce entrepreneurship and new
business formation. First, Sampsa Samila and Olav Sorenson, in a 2011
study, examined the differential impacts of venture capital on business
formation, patenting, and employment growth. They found when non-
compete clauses are more enforceable, rates of entrepreneurship,
patenting, and employment growth slow. They find that a 1% increase in
venture capital funding increased the number of new firms by 0.8% when
non-compete clauses were enforceable, and by 2.3% when non-compete
clauses were not enforceable.\112\ Similarly, a 1% increase in the rate
of venture capital funding increased employment by 0.6% when non-
compete clauses were enforceable, versus 2.5% where non-compete clauses
were not enforceable.\113\
---------------------------------------------------------------------------

\112\ Sampsa Samila & Olav Sorenson, Noncompete Covenants:
Incentives to Innovate or Impediments to Growth, 57 Mgmt. Sci. 425,
432 (2011). The values are calculated as 0.8% = e\0.00755\-1 and
2.3% = e\0.00755+0.0155\-1, respectively.
\113\ Id. at 433. The values are calculated as 0.6% =
e\0.00562\-1 and 2.3% = e\0.00562+0.0192\-1, respectively.
---------------------------------------------------------------------------

The second study, conducted by Jessica Jeffers in 2019, uses
several state law changes to show a decline in new firm entry when non-
compete clauses are more enforceable. When non-compete clause
enforceability is made stricter (based on the relatively meaningful
changes examined in her study), the entry rate of new firms decreased
by 10% in the technology sector and the professional, scientific, and
technical services sector.\114\
---------------------------------------------------------------------------

\114\ Jeffers, supra note 92 at 32.
---------------------------------------------------------------------------

The third study, conducted by Evan Starr, Natarajan
Balasubramanian, and Mariko Sakakibara in 2018, finds that the rate of
within-industry spinouts (WSOs) decreases by 0.13 percentage points
(against a mean of 0.4%) when non-compete clause enforceability
increases by one standard deviation.\115\ The study's measured impact
on the entry rate of non-WSOs (i.e., spinoffs into other industries) is
statistically indistinguishable from zero (0.07 percentage point
increase associated with a one standard deviation increase in
enforceability).\116\ WSOs have been shown to be highly successful, on
average, when compared with typical entrepreneurial ventures.\117\ By
reducing intra-industry spinoff activity, non-compete clauses prevent
entrepreneurial activity that is likely to be highly successful.
---------------------------------------------------------------------------

\115\ Starr, Balasubramanian, & Sakakibara, supra note 87 at
561.
\116\ Id. at 561.
\117\ For reviews of the literature, see, e.g., Steven Klepper,
Spinoffs: A Review and Synthesis, 6 European Mgmt. Rev. 159-71
(2009) and April Franco, Employee Entrepreneurship: Recent Research
and Future Directions, in Handbook of Entrepreneurship Research
(2005) 81-96.
---------------------------------------------------------------------------

The fourth study, published by Matt Marx in 2021, examines the
impact of several changes in non-compete clause enforceability between
1991 and 2014.\118\ Marx finds that, when non-compete clauses are more
enforceable, men are 46% less likely to found a rival startup after
leaving their employer (though this result is statistically
insignificant), that women are 69% less likely to do so, and that the
difference in the effect of non-compete clause enforceability on
founding rates between men and women is statistically significant.\119\
This study therefore supports both the theory that non-compete clauses
inhibit new business formation and that non-compete clauses tend to
have more negative impacts for women than for men.
---------------------------------------------------------------------------

\118\ Matt Marx, Employee Non-compete Agreements, Gender, and
Entrepreneurship, Org. Sci. (Online ahead of print) (2021).
\119\ Id. at 9.
---------------------------------------------------------------------------

A fifth study finds mixed effects of non-compete clause
enforceability on the entry of businesses into the State of Florida.
Hyo Kang and Lee Fleming, in a 2020 study, examine a legal change in
Florida which made non-compete clauses more enforceable. This study
finds that larger businesses entered the state more frequently (by
8.5%), but smaller businesses entered less frequently (by 5.6%)
following the change.\120\ Similarly, Kang and Fleming found that
employment at large businesses rose by 15.8% following the change,
while employment at smaller businesses effectively did not change.\121\
---------------------------------------------------------------------------

\120\ Hyo Kang & Lee Fleming, Non[hyphen]Competes, Business
Dynamism, and Concentration: Evidence From a Florida Case Study, 29
J. Econ. & Mgmt. Strategy 663, 673 (2020).
\121\ Id. at 674. The value is calculated as 15.8% = e\0.1468\-
1.

---------------------------------------------------------------------------

[[Page 3492]]

In the Commission's view, however, the results of this study do not
necessarily show how non-compete clauses affect new business formation.
This study does not examine new business formation specifically;
instead, it assesses the number of ``business entries'' into the state.
As the authors acknowledge, many of these business entries are not new
businesses being formed in Florida (i.e., startups), but existing
businesses that are moving to the state.\122\ Because startups are
almost never large businesses, the authors' finding that larger
businesses entered the state more frequently is much more likely to
reflect businesses moving to the state, rather than new businesses
being formed in the state. (While a business's relocation to Florida
may benefit Florida, it is not net beneficial from a national
perspective, since the business is simply moving from somewhere else.)
The authors' finding that increased non-compete clause enforceability
decreased the entry of smaller businesses is more likely to reflect an
effect of non-compete clause enforceability on new business formation,
since smaller businesses are relatively more likely than larger
businesses to be startups.
---------------------------------------------------------------------------

\122\ Id. at 668.
---------------------------------------------------------------------------

A sixth study finds no effect of non-compete clauses on new
business formation. A 2021 study by Gerald Carlino analyzes the impact
of a legal change in Michigan that allowed the courts to enforce non-
compete clauses. This study finds no significant impact on new business
formation.\123\
---------------------------------------------------------------------------

\123\ Carlino, supra note 86 at 36.
---------------------------------------------------------------------------

d. Innovation
The weight of the evidence indicates non-compete clauses decrease
innovation. Innovation may directly improve economic outcomes by
increasing product quality or decreasing prices, or may promote
competition because successful new products and services force
competing firms to improve their own products and services. Non-compete
clauses affect innovation by reducing the movement of workers between
firms, which decreases knowledge flow between firms. Non-compete
clauses also prevent workers from starting businesses in which they can
pursue innovative new ideas.
One study shows increased enforceability of non-compete clauses
decreases the value of patenting, using a variety of legal changes.
Another study shows that increased non-compete clause enforceability
decreases the rate at which venture capital funding increases
patenting. Finally, using a legal change in Michigan which increased
enforceability, one study shows there were mixed effects on patenting
in terms of both quantity and quality, but mechanical patenting (a
large part of patenting in Michigan) increased.
The first study, a 2021 study by Zhaozhao He, finds the value of
patents, relative to the assets of the firm, increase by about 31% when
non-compete clause enforceability decreases.\124\ In contrast to the
other two studies of innovation, the study uses the value of patents,
rather than the number of patents, to mitigate concerns that patenting
activity may not represent innovation, but rather substitutions of
protections (in other words, that when non-compete clauses are made
less enforceable, firms may use patents instead of non-compete clauses
to seek to protect sensitive information).\125\ The study also analyzes
the impact of several legal changes to non-compete clause
enforceability, which means that the results may be most broadly
applicable.
---------------------------------------------------------------------------

\124\ Zhaozhao He, Motivating Inventors: Non-Competes,
Innovation Value and Efficiency 21 (2021), <a href="https://ssrn.com/abstract=3846964">https://ssrn.com/abstract=3846964</a>. Thirty one percent is calculated as e\0..272\-1.
\125\ Id. at 17.
---------------------------------------------------------------------------

The second study, by Samila and Sorensen, found that, when non-
compete clauses are enforceable, venture capital induced less
patenting, by 6.6 percentage points.\126\ However, as explained above,
the authors note patenting may or may not reflect the true level of
innovation, as firms may use patenting as a substitute for non-compete
clauses where they seek to protect sensitive information.\127\ The
final study of innovation, a 2021 study by Gerald Carlino, examined how
patenting activity in Michigan was affected by an increase in non-
compete enforceability. The study finds that mechanical patenting
increased following the law change, but drug patenting fell, and the
quality of computer patents fell (as measured by citations).\128\ The
increase in mechanical patenting appears to have primarily occurred
approximately 14 years after non-compete clause enforceability changed,
however, suggesting some other mechanism may have led to the increase
in patenting activity.\129\ We place relatively greater weight on
studies focused on multiple legal changes to non-compete clause
enforceability (such as the above referenced study by He), in which
factors unrelated to the legal changes at issue are less likely to
drive the results. The Carlino study also does not discuss whether
patenting activity is an appropriate measure of innovation, though the
other two studies suggest that it may be an unreliable measure at best.
The study by Samila and Sorensen examines the enforceability of non-
compete clauses across all states but does not consider changes in
enforceability: they are therefore unable to rule out that their
results could be due to underlying differences in the states rather
than non-compete clause enforceability.
---------------------------------------------------------------------------

\126\ Samila & Sorenson, supra note 112 at 432. The value is
calculated as 6.6% = e\0.0208+0.0630\-e\0.0208\.
\127\ Id.
\128\ Carlino, supra note 86 at 40.
\129\ Id. at 48.
---------------------------------------------------------------------------

The Commission therefore places greatest weight on the study by He,
which suggests innovation is largely harmed by non-compete clause
enforceability. Though the results from Carlino countervail this
finding, those results are subject to criticism (as is the
corroborating evidence found in Samila and Sorensen).
Two additional studies address firm strategies related to
innovation. The first, by Raffaele Conti, uses two changes in non-
compete clause enforceability (in Texas and Florida), and indicates
that firms engage in riskier strategies with respect to research and
development when non-compete clause enforceability is greater.\130\
Riskier research and development strategies lead to more breakthrough
innovations, but also lead to more failures, leaving the net impact
unclear. The paper does not quantify the total impact on innovation.
---------------------------------------------------------------------------

\130\ Raffaele Conti, Do Non-Competition Agreements Lead Firms
to Pursue Riskier R&D Strategies?, 35 Strategic Mgmt. J. 1230
(2014).
---------------------------------------------------------------------------

The second, by Fenglong Xiao, found increases in non-compete clause
enforceability led to increases in exploitative innovation (i.e.,
innovation which stays within the bounds of the innovating firm's
existing competences), and decreases in exploratory innovation (i.e.,
innovation which moves outside those bounds) in medical devices.\131\
Overall, this leads to an increase in the quantity of innovation as
measured by the introduction of new medical devices. This increase in
quantity, however, is the net result of an increase in exploitative
innovation and a decrease in explorative innovation, where the latter
is the mode of innovation which the empirical

[[Page 3493]]

literature has found to be associated with high growth firms.\132\
---------------------------------------------------------------------------

\131\ Fenglong Xiao, Non-Competes and Innovation: Evidence from
Medical Devices, 51 Rsch. Pol'y 1 (2022).
\132\ Alessandra Colombelli, Jackie Krafft & Francesco Quatraro,
High-Growth Firms and Technical Knowledge: Do Gazelles Follow
Exploration or Exploitation Strategies?, 23.1 Industrial and
Corporate Change 262 (2014).
---------------------------------------------------------------------------

While these two additional studies bring nuance to the changes in
the types of innovation pursued by firms when non-compete clause
enforceability changes, neither undermines the weight of the evidence
described above: that increased non-compete clause enforceability
broadly diminishes the rate of innovation.
e. Training and Other Investment
There is evidence that non-compete clauses increase employee
training and other forms of investment. Four studies have examined
investment outcomes: two examine the effects of non-compete clause
enforceability on investment (both of which find positive impacts on
investment), while two examine the relationship between non-compete
clause use and investment (only one of which finds positive impacts on
investment).
Of the two studies that examine the effects of non-compete clause
enforceability on investment, one looks at employee training, and one
looks at firm capital expenditures (e.g., investment in physical
assets, such as machines). The first study, a 2020 study by Evan Starr,
finds that moving from mean non-compete clause enforceability to no
non-compete clause enforceability would decrease the number of workers
receiving training by 14.7% in occupations that use non-compete clauses
at a high rate (relative to a control group of occupations that use
non-compete clauses at a low rate).\133\ The study further finds
changes in training are primarily due to changes in firm-sponsored,
rather than employee-sponsored, training.\134\ Firm-sponsored training
is the type of training non-compete clauses are often theorized to
protect, as the firm may be unwilling to make an unprotected
investment.
---------------------------------------------------------------------------

\133\ Starr, supra note 66 at 796-97.
\134\ Id. at 797.
---------------------------------------------------------------------------

The second study, a 2021 study by Jessica Jeffers, finds knowledge-
intensive firms invest 32% less in capital equipment following
decreases in the enforceability of non-compete clauses.\135\ While
firms may invest in capital equipment for many different reasons,
Jeffers examines this outcome (as opposed to labor-focused outcomes) to
avoid looking at research and development expenditure as a whole, which
is in large part composed of labor expenses. This allows the study to
isolate the effects of non-compete clause enforceability on investment
from other effects of non-compete clauses, such as reduced worker
earnings. Jeffers finds that there are likely two mechanisms driving
these effects: first, that firms may be more likely to invest in
capital when they train their workers because worker training and
capital expenditure are complementary (i.e., the return on investment
in capital equipment is greater when workers are more highly trained);
and second, that non-compete clauses reduce competition, and firms'
returns to capital expenditure are greater when competition is lower,
incentivizing firms to invest more in capital.\136\
---------------------------------------------------------------------------

\135\ Jeffers, supra note 92 at 28.
\136\ Id. at 29.
---------------------------------------------------------------------------

The first study that examines the impact of non-compete clause use
on investment is a 2021 study by Starr et. al. using their 2014 survey
of non-compete clause use. They find no statistically significant
impact on either training or the sharing of trade secrets (after
inclusion of control variables) but cannot examine other investment
outcomes.\137\ The second study, a 2021 study by Johnson and Lipsitz,
examines investment in the hair salon industry. It finds that firms
that use non-compete clauses train their employees at a higher rate and
invest in customer attraction through the use of digital coupons (on
so-called ``deal sites'') to attract customers at a higher rate, both
by 11 percentage points.\138\ However, the authors of both studies
caution that these results do not necessarily represent a causal
relationship.\139\ In each study, the use of non-compete clauses and
the decision to invest may be jointly determined by other
characteristics of the firms, labor markets, or product markets. For
this reason, the Commission places relatively minimal weight on these
studies in terms of how they inform the relationship between the
proposed rule and future potential firm investment.
---------------------------------------------------------------------------

\137\ Starr, Prescott, & Bishara, supra note 42 at 76.
\138\ Johnson & Lipsitz, supra note 54 at 711.
\139\ Starr, Prescott, & Bishara, supra note 42 at 73; Johnson &
Lipsitz, supra note 54 at 711.
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Overall, the additional incentive to invest (in assets like
physical capital, human capital, or customer attraction, or in the
sharing of trade secrets and confidential commercial information) is
the primary justification for use of non-compete clauses. Any
investment which is lost due to the inability of firms to use non-
compete clauses would likely represent the greatest cost of the
proposed rule. Indeed, one study, by Kenneth Younge and Matt Marx,
finds that the value of publicly traded firms increased by 9% due to an
increase in non-compete clause enforceability.\140\ However, they
attribute this increase to the value of retaining employees, which
comes with the negative effects to parties other than the firm
(employees, competitors, and consumers) described in this Part II.B. In
particular, if benefits to the firm arise primarily from reductions in
labor costs, then the increase in the value of firms is in part a
transfer from workers to firms, and is therefore not necessarily a
procompetitive benefit of non-compete clauses. However, the authors do
not explore the extent to which increases in firm value arise from
decreases in labor costs. The authors additionally note that since the
time frame used in the study is short, ``there may be deleterious
effects of non-competes in the long run'' which are absent in their
findings.\141\
---------------------------------------------------------------------------

\140\ Kenneth A. Younge & Matt Marx, The value of employee
retention: evidence from a natural experiment, 25 J. Econ. & Mgmt.
Strategy 652 (2016).
\141\ Id. at 674.
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The Commission requests comment on all aspects of its description,
in this Part II.B, of the empirical evidence relating to non-compete
clauses and their effects on competition. In particular, the Commission
seeks submissions of additional data that could inform the Commission's
understanding of these effects.

C. Current Law Governing Non-Compete Clauses

The states have always placed a variety of restrictions on the
ability of employers to enforce non-compete clauses. These restrictions
are based on public policy concerns American courts--and English courts
before them--have recognized for centuries. For example, in the English
opinion Mitchel v. Reynolds (1711), which provided the foundation for
the American common law on non-compete clauses,\142\ the court
expressed concerns that workers were vulnerable to exploitation under
non-compete clauses and these clauses threatened workers' ability to
practice their trades and earn a living.\143\
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\142\ Harlan Blake, Employment Agreements Not to Compete, 73
Harv. L. Rev. 625, 630-31 (1960).
\143\ Mitchel v. Reynolds, 1 P. Wms. 181, 190 (Q.B. 1711)
(expressing concern that non-compete clauses threaten ``the loss of
[the worker's] livelihood, and the subsistence of his family,'' and
also ``the great abuses these voluntary restraints are liable to,''
for example, ``from masters, who are apt to give their apprentices
much vexation'' by using ``many indirect practices to procure such
bonds from them, lest they should prejudice them in their custom,
when they come to set up for themselves.'').
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Today, while the enforceability of non-compete clauses varies
between

[[Page 3494]]

states, all fifty states restrict non-compete clauses between employers
and workers to some degree.\144\ Non-compete clauses between employers
and workers are generally subject to greater scrutiny under state
common law than other employment terms, due to ``the employee's
disadvantageous bargaining position at the time of contracting and
hardship at the time of enforcement.'' \145\ For these reasons, state
courts often characterize non-compete clauses as ``disfavored.'' \146\
---------------------------------------------------------------------------

\144\ Cynthia Estlund, Between Rights and Contract: Arbitration
Agreements and Non-Compete Covenants as a Hybrid Form of Employment
Law, 155 U. Pa. L. Rev. 379, 391 (2006).
\145\ Id. See also Restatement (Second) of Contracts sec. 188,
cmt. g (1981) (``Postemployment restraints are scrutinized with
particular care because they are often the product of unequal
bargaining power and because the employee is likely to give scant
attention to the hardship he may later suffer through loss of his
livelihood.'').
\146\ See, e.g., Navarre Chevrolet, Inc. v. Begnaud, 205 So. 3d
973, 975 (La. Ct. App. 3d 2016); Eastman Kodak Co. v. Carmosino, 77
A.D.3d 1434, 1435 (N.Y. App. Div. 4th 2010); Access Organics, Inc.
v. Hernandez, 175 P.3d 899, 904 (Mont. 2008); Bybee v. Isaac, 178
P.3d 616, 621 (Idaho 2008); Softchoice, Inc. v. Schmidt, 763 NW2d
660, 666 (Minn. Ct. App. 2009).
---------------------------------------------------------------------------

In addition to state common law, non-compete clauses have always
been considered proper subjects for scrutiny under the nation's
antitrust laws.\147\
---------------------------------------------------------------------------

\147\ See, e.g., Am. Tobacco Co., 221 U.S. at 181-83 (holding
several tobacco companies violated Sections 1 and 2 of the Sherman
Act due to the collective effect of six of the companies' practices,
one of which was the ``constantly recurring'' use of non-compete
clauses); Newburger, Loeb & Co., Inc., 563 F.2d at 1082 (``Although
such issues have not often been raised in the federal courts,
employee agreements not to compete are proper subjects for scrutiny
under section 1 of the Sherman Act. When a company interferes with
free competition for one of its former employee's services, the
market's ability to achieve the most economically efficient
allocation of labor is impaired. Moreover, employee-noncompetition
clauses can tie up industry expertise and experience and thereby
forestall new entry.'') (internal citation omitted).
---------------------------------------------------------------------------

1. State Law on Non-Compete Clauses
The question of whether or under what conditions an employer can
enforce a particular non-compete clause depends on the applicable state
law. Three states--California, North Dakota, and Oklahoma--have adopted
statutes rendering non-compete clauses void for nearly all
workers.\148\ Among the 47 states where non-compete clauses may be
enforced under certain circumstances, 11 states and the District of
Columbia have enacted statutes making non-compete clauses void or
unenforceable--or have banned employers from entering into non-compete
clauses--based on the worker's earnings or a similar factor.\149\ In
addition, the majority of these 47 states have statutory provisions
that ban or limit the enforceability of non-compete clauses for workers
in certain specified occupations. In most states, those limits apply to
just one or two occupations (most commonly, physicians).\150\
---------------------------------------------------------------------------

\148\ See Cal. Bus. & Prof. Code sec. 16600; N.D. Cent. Code
sec. 9-08-06; Okla. Stat. Ann. tit. 15, sec. 219A. While California
law permits non-compete clauses if they are necessary to protect an
employer's trade secrets, see Muggill v. Reuben H. Donnelley Corp.,
62 Cal. 2d 239, 242 (Cal. 1965), the scope of this exception is
unclear. In a recent case, the California Supreme Court declined to
address the issue. Edwards v. Arthur Andersen LLP, 189 P.3d 285, 289
n.4 (Cal. 2008).
\149\ Colorado, Colo Rev. Stat. Ann. sec. 8-2-113(2)(a)-(b), as
amended by H.B. 22-1317 (effective Aug. 10, 2022) (non-compete
clauses are void except where they apply to a ``highly compensated
worker,'' currently defined as a worker earning at least $101,250
annually, see Colo. Code Regs. sec. 1103-14:1.2); District of
Columbia, DC Code sec. 32-581.02(a)(1) (effective Oct. 1, 2022)
(where the employee's compensation is less than $150,000, or less
than $250,000 if the employee is a medical specialist, employers may
not require or request that the employee sign an agreement or comply
with a workplace policy that includes a non-compete clause);
Illinois, 820 Ill. Comp. Stat. 90/10(a) (effective Jan. 1, 2017) (no
employer shall enter into a non-compete clause unless the worker's
actual or expected earnings exceed $75,000/year); Maine, Me. Rev.
Stat. Ann. tit. 26, sec. 599-A(3) (effective Sep. 19, 2019) (an
employer may not require or permit an employee earning wages at or
below 400% of the federal poverty level to enter into a non-compete
clause with the employer); Maryland, Md. Code Ann., Lab. & Empl.
sec. 3-716(a)(1)(i) (effective Oct. 1, 2019) (non-compete clauses
are void where an employee earns equal to or less than $15 per hour
or $31,200 per year); Massachusetts, Mass. Gen. Laws Ann. ch. 149,
sec. 24L(c) (effective Jan. 14, 2021) (non-compete clauses shall not
be enforceable against workers classified as nonexempt under the
Fair Labor Standards Act (``FLSA'')); Nevada, Nev. Rev. Stat. sec.
613.195(3) (effective Oct. 1, 2021) (non-compete clauses may not
apply to hourly workers); New Hampshire, N.H. Rev. Stat. Ann. sec.
275:70-a(II) (effective Sept. 8, 2019) (employers shall not require
a worker who earns an hourly rate less than or equal to 200% of the
federal minimum wage to enter into a non-compete clause, and non-
compete clauses with such workers are void and unenforceable);
Oregon, Or. Rev. Stat. sec. 653.295(1)(e) (effective Jan. 1, 2022)
(non-compete clauses are void and unenforceable except where the
worker's annualized gross salary and commissions at the time of the
worker's termination exceed $100,533); Rhode Island, R.I. Gen Laws
sec. 28-59-3(a)(1) (effective Jan. 15, 2020) (non-compete clauses
shall not be enforceable against workers classified as nonexempt
under the FLSA); Virginia, Va. Code Ann. sec. 40.1-28.7:8(B)
(effective July 1, 2020) (no employer shall enter into, enforce, or
threaten to enforce a non-compete clause with an employee whose
average weekly earnings are less than the Commonwealth's average
weekly wage); Washington, Wash. Rev. Code Ann. sec. 49.62.020(1)(b)
and 49.62.030(1) (effective Jan. 1, 2020) (non-compete clause is
void and unenforceable unless worker's annualized earnings exceed
$100,000 for employees and $250,000 for independent contractors, to
be adjusted for inflation).
\150\ See Russell Beck, Beck Reed Riden LLP, Employee
Noncompetes: A State-by-State Survey (August 17, 2022), (hereinafter
``Beck Reed Riden Chart'').
---------------------------------------------------------------------------

States have been particularly active in restricting non-compete
clauses in recent years. Of the twelve state statutes restricting non-
compete clauses based on a worker's earnings or a similar factor
(including the DC statute), eleven were enacted in the past ten
years.\151\ States have also recently passed legislation limiting the
use of non-compete clauses for certain occupations.\152\ Other recent
state legislation has imposed additional requirements on employers that
use non-compete clauses. For example, Oregon, Maine, Massachusetts, New
Hampshire, and Washington have enacted laws requiring employers to
provide prior notice that a non-compete clause will be required as a
condition of employment.\153\ Massachusetts and Oregon have enacted
``garden leave'' provisions, which require employers to compensate
workers during the post-employment period in which the workers are
bound by the non-compete clause.\154\ Washington limited the
permissible duration of non-compete clauses to 18 months,\155\ and
Massachusetts and Oregon limited it to one year.\156\
---------------------------------------------------------------------------

\151\ See supra note 149.
\152\ See, e.g., Connecticut, Conn. Gen. Stat. Ann. sec. 20-681
(effective June 26, 2019) (home health care workers); Florida, Fla.
Stat. Ann. sec. 542.336 (effective June 25, 2019) (certain
physicians in certain counties); Hawaii, Haw. Rev. Stat. sec. 480-
4(d) (effective July 1, 2015) (technology workers); Indiana, Ind.
Code sec. 25-22.5-5.5-2 (effective July 1, 2020) (physicians); Utah,
Utah Code Ann. sec. 34-51-201 (effective May 18, 2018) (broadcasting
employees).
\153\ Oregon, Or. Rev. Stat. sec. 653.295(1)(a)(A) (effective
Jan. 1, 2008); Maine, Me. Rev. Stat. Ann. tit. 26, sec. 599-A(4)
(effective Sep. 19, 2019); Massachusetts, Mass. Gen. Laws Ann. ch.
149, sec. 24L(b)(i) (effective Jan. 14, 2021); New Hampshire, N.H.
Rev. Stat. Ann. sec. 275:70 (effective July 28, 2014); Washington,
Wash. Rev. Code Ann. sec. 49.62.020(1)(a)(i) (effective Jan. 1,
2020).
\154\ Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec.
24L(b)(vii) (effective Jan. 14, 2021); Oregon, Or. Rev. Stat. sec.
653.295(7) (effective Jan. 1, 2022).
\155\ Washington, Wash. Rev. Code Ann. sec. 49.62.020(2)
(effective Jan. 1, 2020).
\156\ Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec.
24L(b)(iv) (effective Jan. 14, 2021); Oregon, Or. Rev. Stat. sec.
653.295(3) (effective Jan. 1, 2022).
---------------------------------------------------------------------------

For workers not covered by these statutory restrictions, the
question of whether or under what conditions a non-compete clause may
be enforced against them depends on state common law.
In the 47 states where at least some non-compete clauses may be
enforced, courts use a reasonableness inquiry to determine whether to
enforce a non-compete clause, in addition to whatever statutory limits
they are bound to apply. While the precise language of the test differs
from state to state, states typically use a test similar to the test in
the Restatement (Second) of Contracts:
A promise to refrain from competition that imposes a restraint that
is ancillary

[[Page 3495]]

to an otherwise valid transaction or relationship is unreasonably in
restraint of trade if (a) the restraint is greater than is needed to
protect the promisee's legitimate interest, or (b) the promisee's need
is outweighed by the hardship to the promisor and the likely injury to
the public.\157\
---------------------------------------------------------------------------

\157\ Restatement (Second) of Contracts sec. 188 (1981).
---------------------------------------------------------------------------

The first basis on which a non-compete clause can be found
unreasonable is where the restraint is greater than needed to protect
the employer's legitimate interest. Nearly all states recognize the
protection of an employer's trade secrets as a legitimate
interest.\158\ Some states also recognize an interest in protecting
confidential information that is not a trade secret.\159\ Some states
also recognize an interest in protecting the employer's investment in
training, although many of these states define the interest as
protecting specialized training.\160\ A few states recognize an
interest in preventing an worker who provides ``unique'' services from
working for a competitor.\161\ Courts do not recognize protection from
ordinary competition as a legitimate business interest.\162\
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\158\ See. e.g., Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d
303, 308-09 (N.Y. 1976); see Beck Reed Riden Chart, supra note 150
(listing each state's approach).
\159\ See. e.g., Proudfoot Consulting Co. v. Gordon, 576 F.3d
1223, 1233-34 (11th Cir. 2009); see Beck Reed Riden Chart, supra
note 150 (listing each state's approach).
\160\ See, e.g., IDMWORKS LLC v. Pophaly, 192 F. Supp. 3d 1335,
1342 (S.D. Fla. 2016); see Beck Reed Riden Chart, supra note 150
(listing each state's approach).
\161\ See, e.g., Ticor Title Ins. v. Cohen, 173 F.3d 63, 70 (2d
Cir. 1999); see Beck Reed Riden Chart, supra note 150 (listing each
state's approach).
\162\ See, e.g., Valley Med. Specialists v. Farber, 982 P.2d
1277, 1281 (Ariz. 1999).
---------------------------------------------------------------------------

If the employer can demonstrate a legitimate interest, the employer
must then show the non-compete clause is tailored to that interest.
This analysis typically considers whether the non-compete clause
prohibits a greater scope of activity than necessary to protect the
employer's legitimate interests; \163\ covers a geographic area more
extensive than necessary to protect those interests; \164\ or lasts
longer than needed to protect those interests.\165\
---------------------------------------------------------------------------

\163\ See, e.g., Diversified Hum. Res. Grp., Inc. v. Levinson-
Polakoff, 752 SW2d 8, 11 (Tex. Ct. App. 1988).
\164\ See, e.g., Orkin Exterm. Co., Inc. v. Girardeau, 301 So.
2d 38, 39 (Fla. Ct. App. 1st 1974).
\165\ See, e.g., Jorgensen v. Coppedge, 181 P.3d 450, 454 (Idaho
2008).
---------------------------------------------------------------------------

The second basis under which a non-compete clause can be found
unreasonable is where the employer's need for the non-compete clause is
outweighed by the hardship to the worker and the likely injury to the
public. When assessing the ``hardship to the worker'' prong, courts
typically consider whether the non-compete clause would be unreasonable
in light of the worker's personal circumstances. For example, courts
have invalidated non-compete clauses where they would destroy a
worker's sole means of support.\166\
---------------------------------------------------------------------------

\166\ See, e.g., Chavers v. Copy Prods. Co. of Mobile, 519 So.
2d 942, 945 (Ala. 1988).
---------------------------------------------------------------------------

When assessing the ``likely injury to the public'' prong, the
factor most frequently considered by courts is whether enforcing the
non-compete clause against the worker would deprive the community of
essential goods and services.\167\ Because these cases arise in the
context of individual litigation, courts focus the ``likely injury to
the public'' inquiry on the loss of the individual worker's services
and not on the aggregate effects of non-compete clauses on competition
in the relevant market.
---------------------------------------------------------------------------

\167\ See, e.g., Dick v. Geist, 693 P.2d 1133, 1136-37 (Idaho
Ct. App. 1985).
---------------------------------------------------------------------------

State law also differs with respect to the steps courts take when
they conclude that a non-compete clause is unenforceable as drafted.
The majority of states have adopted the ``reformation'' or ``equitable
reform'' doctrine, which allows courts to revise the text of an
unenforceable non-compete clause to make it enforceable.\168\ Some
states have adopted the ``blue pencil'' doctrine, under which courts
may remove any defective provisions and may enforce the non-compete
clause if the remaining provisions constitute a valid non-compete
clause.\169\ A few states have adopted the ``red pencil'' doctrine,
under which courts declare an entire non-compete clause void if one or
more of its provisions are found to be defective.\170\
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\168\ See, e.g., Butler v. Arrow Mirror & Glass, Inc., 51 SW3d
787, 794 (Tex. Ct. App. 2001). See also Beck Reed Riden Chart, supra
note 150 (listing each state's approach).
\169\ See, e.g., Compass Bank v. Hartley, 430 F. Supp. 2d 973,
980 (D. Ariz. 2006). See also Beck Reed Riden Chart, supra note 150
(listing each state's approach).
\170\ See, e.g., Hassler v. Circle C Res., 505 P.3d 169, 178
(Wyo. 2022). See also Beck Reed Riden Chart, supra note 150 (listing
each state's approach).
---------------------------------------------------------------------------

As noted above, the general language of the test for whether a non-
compete clause is reasonable is fairly consistent from state to state.
However, the specifics of non-compete clause law differ from state to
state. For example, states vary in how narrowly or broadly they define
legitimate interests for using a non-compete clause and the extent to
which courts are permitted to modify an unenforceable non-compete
clause to render it enforceable. As a result, among the 47 states where
non-compete clauses may be enforced, variation exists with respect to
the enforceability of non-compete clauses.\171\
---------------------------------------------------------------------------

\171\ Norman D. Bishara, Fifty Ways to Leave Your Employer:
Relative Enforcement of Non-Compete Clauses, Trends, and
Implications for Employee Mobility Policy, 13 U. Pa. J. Bus. L. 751,
778-79 (2011).
---------------------------------------------------------------------------

Because the enforceability of non-compete clauses varies from state
to state, the question of which state's law applies in a legal dispute
between an employer and a worker can determine the outcome of the case.
Non-compete clauses often contain choice-of-law provisions designating
a particular state's law for resolution of any future dispute.\172\
Some non-compete clauses include forum-selection provisions specifying
the court and location where any dispute will be heard.\173\ The
default rule under conflict-of-laws principles is that the court honors
the parties' choice of law, meaning the burden is typically on the
worker to argue that the law of a different forum should apply.\174\
---------------------------------------------------------------------------

\172\ Gillian Lester & Elizabeth Ryan, Choice of Law and
Employee Restrictive Covenants: An American Perspective, 31 Comp.
Lab. & Pol'y J. 389, 396-402 (2010).
\173\ Id. at 402-04.
\174\ Lester & Ryan, supra note 172 at 394. Cf. Cal. Lab. Code
Sec. 925(a) (stating that employers shall not require an employee
who primarily resides and works in California, as a condition of
employment, to agree to a provision that would either (1) require
the employee to adjudicate outside of California a claim arising in
California or (2) deprive the employee of the substantive protection
of California law with respect to a controversy arising in
California.
---------------------------------------------------------------------------

In addition, there is significant variation in how courts apply
choice of law rules in disputes over non-compete clauses.\175\ As a
result, it can be difficult for employers and workers to predict how
disputes over choice of law will be resolved.\176\ Additionally--aside
from the question of which state's law should apply--employers and
workers may be uncertain about whether the non-compete clause is
enforceable under the state's law. Furthermore, state non-compete law
may change; as described above in Part II.C.1, there have been many
changes in state non-compete law in recent years. The result is that
employers and workers may face considerable uncertainty as to whether

[[Page 3496]]

a particular non-compete clause may be enforced.
---------------------------------------------------------------------------

\175\ Id.
\176\ Id. at 394-95 (``The state of the law is perhaps
characterized more by inconsistency than anything else, so much so
that commentators lament the `disarray' and `mish-mash' of the law,
and criticize courts for their `post-hoc rationalizing of
intuitions' or their use of a `hodgepodge of factors, often with
insignificant explanation of how they decide what weight to give
each.''') (internal citations omitted).
---------------------------------------------------------------------------

Workers may also be subject to arbitration clauses, which require
that legal disputes with the employer--including disputes related to
non-compete clauses--be resolved through binding arbitration rather
than in court. Where such clauses are valid, the Federal Arbitration
Act requires that courts enforce them.\177\
---------------------------------------------------------------------------

\177\ See, e.g., Nitro-Lift Techs. v. Howard, 568 U.S. 17, 21-22
(2012).
---------------------------------------------------------------------------

Most state courts apply different rules to non-compete clauses when
they are entered into between the seller and buyer of a business,
compared with non-compete clauses that arise solely out of the
employment relationship.\178\ The three states in which non-compete
clauses are void in nearly all instances--California, North Dakota, and
Oklahoma--permit enforcement when non-compete clauses are entered into
between the seller and buyer of a business.\179\ In most of the other
states, non-compete clauses between the seller and buyer of a business
are either exempted from the state's non-compete clause statute,
subject to a more lenient test under the statute, or subject to more
lenient standard under the state's case law.\180\ Courts cite several
different reasons for why they accord different treatment to non-
compete clauses between the seller and buyer of a business. These
reasons include the relatively equal bargaining power of both parties
in the context of a business sale, relative to the employer-worker
context, where there is more likely to be unequal bargaining power; the
need to protect the buyer's right to the goodwill for which it has
paid; and the fact that the proceeds from the sale will ensure that the
seller of the business will not experience undue hardship.\181\
---------------------------------------------------------------------------

\178\ Based on a review of the state cases in Malsberger (2017),
supra note 62 and Fenwick & West LLC, Summary of Non-Compete
Clauses: A Global Perspective, <a href="https://assets.fenwick.com/legacy/FenwickDocuments/RS_Summary-of-Covenants.pdf">https://assets.fenwick.com/legacy/FenwickDocuments/RS_Summary-of-Covenants.pdf</a>.
\179\ Cal. Bus. & Prof. Code sec. 16601; N.D. Cent. Code sec. 9-
08-06; Okla. Stat. Ann. tit. 15, sec. 218.
\180\ See, e.g., Colo. Rev. Stat. Ann. sec. 8-2-113(3)(c)
(statutory exemption); Ga. Code Ann. sec. 13-8-57(d) (more lenient
statutory test); Jiffy Lube Int'l, Inc. v. Weiss Bros., Inc., 834 F.
Supp. 683, 691 (D.N.J. 1993) (more lenient standard under case law).
\181\ See, e.g., Woodward v. Cadillac Overall Supply Co., 240 NW
2d 710, 715 (Mich. 1976) (bargaining power); Bybee, 178 P.3d at 622
(Idaho 2008) (goodwill); Centorr-Vacuum Indus., Inc. v. Lavoie, 609
A.2d 1213, 1215 (N.H. 1992) (undue hardship).
---------------------------------------------------------------------------

2. Non-Compete Clauses and Antitrust Law
Non-compete clauses are ``contract[s] . . . in restraint of
trade.'' Therefore, they are subject to Section 1 of the Sherman
Act.\182\ The Commission has identified 17 cases in cases in which
private plaintiffs or the federal government have challenged a non-
compete clause between an employer and a worker under either Section 1
or an analogous provision in a state antitrust statute.\183\ (Three of
these 17 cases concerned non-compete clauses between the seller and
buyer of a business,\184\ and two of these 17 cases were brought under
state antitrust statutes.\185\)
---------------------------------------------------------------------------

\182\ See, e.g., Newburger, Loeb & Co., Inc., 563 F.2d at 1082.
\183\ U.S. v. Am. Tobacco Co., 221 U.S. 106 (1911); Alders v.
AFA Corp. of Fla., 353 F. Supp. 654 (S.D. Fla. 1973) (non-compete
clause between seller and buyer of a business); Bradford v. N.Y.
Times Co., 501 F.2d 51 (2d Cir. 1974); Golden v. Kentile Floors,
Inc., 512 F.2d 838 (5th Cir. 1975); U.S. v. Empire Gas Corp., 537
F.2d 296 (8th Cir. 1976); Newburger, Loeb & Co., Inc. v. Gross, 563
F.2d 1057 (2d Cir. 1977); Lektro-Vend Corp. v. Vendo Co., 660 F.2d
255 (7th Cir. 1981) (non-compete clause between seller and buyer of
a business); Aydin Corp. v. Loral Corp., 718 F.2d 897 (9th Cir.
1983); Consultants & Designers, Inc. v. Butler Serv. Grp., Inc., 720
F.2d 1553 (11th Cir. 1983); Caremark Homecare, Inc. v. New England
Critical Care, Inc., 700 F. Supp. 1033 (D. Minn. 1988); GTE Data
Servs., Inc. v. Elec. Data Sys. Corp., 717 F. Supp. 1487 (M.D. Fla.
1989); DeSantis v. Wackenhut Corp., 793 SW2d 670 (Tex. 1990) (state
antitrust law case); Borg-Warner Protective Servs. Corp. v.
Guardsmark, Inc., 946 F. Supp. 495 (E.D. Ky. 1996); Caudill v.
Lancaster Bingo Co., Inc., 2005 WL 2738930 (S.D. Ohio Oct. 24,
2005); Dallas South Mill, Inc. v. Kaolin Mushroom Farms, Inc., 2007
WL 9712116 (N.D. Tex. Feb. 23, 2007); Cole v. Champion Enters.,
Inc., 496 F. Supp. 2d 613 (M.D.N.C. 2007) (non-compete clause
between seller and buyer of a business) (state antitrust law case);
Signature MD, Inc. v. MDVIP, Inc., 2015 WL 3988959 (C.D. Cal. Apr.
21, 2015). There are also several opinions addressing whether non-
compete clauses between businesses violate Section 1. Courts
generally apply a less restrictive legal standard to non-compete
clauses between businesses. See, e.g., Lumber Liquidators, Inc., 415
F. Supp. 3d at 715-16.
\184\ Alders, 353 F. Supp. 654; Lektro-Vend, 660 F.2d 255; Cole,
496 F. Supp. 2d 613.
\185\ DeSantis, 793 SW2d 670; Cole, 496 F. Supp. 2d 613.
---------------------------------------------------------------------------

In two of these 17 cases, the parties challenging the non-compete
clause were successful to some degree. In the early antitrust case of
United States v. American Tobacco Co., the Supreme Court held that
several tobacco companies violated both Section 1 and Section 2 of the
Sherman Act because of the collective effect of six of the companies'
practices, one of which was the ``constantly recurring'' use of non-
compete clauses.\186\ This is the only case the Commission has
identified in which a court analyzed the collective, rather than
isolated, use of non-compete clauses.
---------------------------------------------------------------------------

\186\ Am. Tobacco Co., 221 U.S. at 181-83. Section 2 of the
Sherman Act, 15 U.S.C. 2, prohibits monopolization or attempted
monopolization.
---------------------------------------------------------------------------

More recently, a federal district court denied a motion to dismiss
a plaintiff's claim that a non-compete clause between a concierge
medicine firm and physicians violated Section 1. The court held that
while the reasonableness of the non-compete clause ultimately would be
a factual determination, the plaintiff stated a valid claim under
Section 1 where it alleged the firm ``includes post-contract non-
compete clauses with an unreasonably large liquidated damage provision
in its employment contracts,'' in addition to other practices.\187\
---------------------------------------------------------------------------

\187\ Signature MD, Inc., 2015 WL 3988959 at *7.
---------------------------------------------------------------------------

In the other 15 Sherman Act cases, the challenge to the individual
non-compete clause was unsuccessful. These claims failed for three main
reasons. First, in several of these cases, the parties challenging the
non-compete clause argued solely that the non-compete clause they were
challenging should be per se unlawful under Section 1. Courts rejected
these arguments, reasoning that non-compete clauses may serve
legitimate business interests in some instances \188\ and that courts
have had insufficient experience with non-compete clauses to warrant a
per se categorization under Section 1.\189\
---------------------------------------------------------------------------

\188\ See, e.g., Lektro-Vend, 660 F.2d at 265.
\189\ See, e.g., Aydin, 718 F.2d at 900.
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The second main reason these challenges have been unsuccessful is
that, in the vast majority of these 15 cases, the party challenging the
non-compete clause did not allege the non-compete clause adversely
affected competition, which is an essential element of a Section 1
claim in rule of reason cases.\190\ In only one case did the plaintiff
appear to allege facts related to anticompetitive effect beyond the
effect on the person bound by the non-compete clause. In that case, the
court dismissed the plaintiff's claim because the plaintiff did not
sufficiently allege ``the amount of competition foreclosed by
defendant.'' \191\
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\190\ See, e.g., Ohio v. Am. Express Co., -- U.S.--, 138 S. Ct.
2274, 2284 (2018).
\191\ GTE Data Servs., 717 F. Supp. at 1492.
---------------------------------------------------------------------------

Third, courts have also rejected challenges to non-compete clauses
based on reasoning that a corporation is not capable of conspiring with
its employees as a matter of law.\192\
---------------------------------------------------------------------------

\192\ See, e.g., Borg-Warner, 946 F. Supp. 499; Dallas South
Mill, 2007 WL 9712116 at *3.
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Plaintiffs have also challenged non-compete clauses between
employers and workers under Section 2 of the Sherman Act, which
prohibits monopolization or attempted monopolization.\193\ The
Commission is not aware of a case in which a Section 2 claim relating
to an

[[Page 3497]]

employer's use of a non-compete clause has been successful.
---------------------------------------------------------------------------

\193\ 15 U.S.C. 2. See, e.g., BRFHH Shreveport, LLC. v. Willis
Knighton Med. Ctr., 176 F. Supp. 3d 606, 616-26 (W.D. La. 2016).
---------------------------------------------------------------------------

3. Federal and State Enforcement Activity Related to Non-Compete
Clauses
In recent years, state attorneys general in Illinois, New York, and
Washington have sued companies for unlawfully using non-compete
clauses. As of January 2020, state attorneys general have publicly
announced settlements with seven companies regarding the use of non-
compete clauses.\194\ In February 2022, the Antitrust Division filed a
statement of interest in a state non-compete clause case brought by
private plaintiffs.\195\
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\194\ See Public Comments of 19 State Attorneys General in
Response to the Federal Trade Commission's January 9, 2020 Workshop
on Non-Compete Clauses in the Workplace at 6 n.23 (listing the
settlements).
\195\ Statement of Interest of the United States, Beck v.
Pickert Med. Grp., No. CV21-02092 (Nev. Dist. Ct. Feb. 25, 2022).
---------------------------------------------------------------------------

The Antitrust Division and the Commission have also taken steps in
recent years to address other types of contractual provisions that
restrict competition in labor markets. The Antitrust Division has
brought civil enforcement actions under Section 1 against several
technology companies for entering into no-poach agreements with
competitors. These enforcement actions ended with consent judgments
against the companies.\196\ In addition, the Antitrust Division has
brought criminal charges for wage-fixing and no-poach agreements
against companies and individuals.\197\ The Commission too has brought
civil enforcement actions against companies related to competition for
employment, which ended in consent judgments against the
companies.\198\ In addition, the attorney general of the State of
Washington has entered into settlement agreements with over 200
companies in which the companies have agreed to stop using no-poach
clauses.\199\
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\196\ See Antitrust Guidance for Human Resource Professionals,
supra note 37 at 3-4 (citing cases).
\197\ U.S. v. Neeraj Jindal and John Rodgers, No. 4:20-cr-358-
ALM-KPJ (E.D. Tex. Dec. 9, 2020); U.S. v. Surgical Care Affiliates,
LLC and SCAI Holdings, LLC, No. 3:21-cr-011-L (N.D. Tex. Jan. 5,
2021); U.S. v. Ryan Hee and VDA OC, LLC, formerly ADVANTAGE ON CALL,
LLC, No. 2:21-cr-00098-RFB-BNW (D. Nev. Mar. 26, 2021); U.S. v.
DaVita, Inc. and Kent Thiry, No. 21-cr-00229-RBJ (D. Colo. Nov. 3,
2021); U.S. v. Patel, et al., 3:21-cr-220-VHB-RAR (D. Conn. Dec. 15,
2021); U.S. v. Manahe, et al., 2:22-cr-00013-JAW (D. Me. Jan. 27,
2022). The defendants in the Jindal case were found not guilty of
the wage-fixing charge, and the defendants in the DaVita cases were
found not guilty of all charges. Jindal, Jury Verdict (E.D. Tex.
Apr. 14, 2022); DaVita, Verdict (D. Colo. Apr. 15, 2022). However,
both courts found that the conduct alleged in the indictment
properly fell within the confines of the per se rule. Jindal,
Memorandum Opinion and Order, 2021 WL 5578687 (E.D. Tex. Nov. 29,
2021) at *4-*8; DaVita, Order Denying Defendants' Motion to Dismiss,
2022 WL 266759 (D. Colo. Jan. 28, 2022) at *4-*8. The court in
Manahe likewise recently denied a motion to dismiss, holding the
indictment charged a recognized form of per se illegal conduct. 2022
WL 3161781, at **7, 9 (D. Me. Aug. 8, 2022).
\198\ See Antitrust Guidance for Human Resource Professionals,
supra note 37 at 4 (citing cases).
\199\ Office of the Att'y Gen. of the State of Wash., Press
Release, AG Report: Ferguson's Initiative Ends No-Poach Practices
Nationally at 237 Corporate Franchise Chains (June 16, 2020).
---------------------------------------------------------------------------

The Commission seeks comment on all aspects of its description, in
this Part II.C, of the law currently governing non-compete clauses. The
Commission specifically seeks comment on the extent to which employers
use choice-of-law provisions to evade the laws of states where non-
compete clauses are relatively less enforceable. The Commission also
seeks comment on the extent to which a uniform federal standard for
non-compete clauses would promote certainty for employers and workers.

D. The Commission's Work on Non-Compete Clauses

This rulemaking represents the culmination of several years of
activity by the Commission related to non-compete clauses and their
effects on competition. This activity has included extensive public
outreach and fact-gathering related to non-compete clauses, other
restrictive employment covenants that may harm competition, and
competition in labor markets generally. The Commission has also
analyzed non-compete clauses in connection with its enforcement,
research, and merger review work.
The Commission first began focusing on non-compete clauses in the
mid-2010s, as a growing body of empirical research raised concerns
about the anticompetitive effects of non-compete clauses. In 2018 and
2019, the Commission held several ``Hearings on Competition and
Consumer Protection in the 21st Century.'' \200\ The Commission invited
public comment on a wide range of topics, including ``the use of non-
competition agreements and the conditions under which their use may be
inconsistent with the antitrust laws.'' \201\ Participants addressed
non-compete clauses at two of the hearings.\202\
---------------------------------------------------------------------------

\200\ Fed. Trade Comm'n, Hearings on Competition and Consumer
Protection in the 21st Century, <a href="https://www.ftc.gov/enforcement-policy/hearings-competition-consumer-protection">https://www.ftc.gov/enforcement-policy/hearings-competition-consumer-protection</a>.
\201\ Fed. Trade Comm'n, Notice, Hearings on Competition and
Consumer Protection in the 21st Century, 83 FR 38307, 38309 (Aug. 6,
2018).
\202\ Fed. Trade Comm'n, Transcript, Competition and Consumer
Protection in the 21st Century (Oct. 16, 2018), <a href="https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_2_10-16-18_1.pdf">https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_2_10-16-18_1.pdf</a>; Fed. Trade
Comm'n, Transcript, Competition and Consumer Protection in the 21st
Century (June 12, 2019), <a href="https://www.ftc.gov/system/files/documents/public_events/1519667/ftc_hearings_session_14_transcript_6-12-19_0.pdf">https://www.ftc.gov/system/files/documents/public_events/1519667/ftc_hearings_session_14_transcript_6-12-19_0.pdf</a>.
---------------------------------------------------------------------------

Also in 2019, the Open Markets Institute, 19 labor and public
interest organizations, and 46 individual advocates and scholars
petitioned the Commission to initiate a rulemaking to prohibit non-
compete clauses.\203\
---------------------------------------------------------------------------

\203\ Open Markets Inst. et al., Petition for Rulemaking to
Prohibit Worker Non-Compete Clauses (March 20, 2019).
---------------------------------------------------------------------------

As evidence mounted regarding the anticompetitive effects of non-
compete clauses, the Commission's focus on this issue increased. On
January 9, 2020, the Commission held a public workshop on non-compete
clauses. At the workshop, speakers and panelists addressed topics
including statutory and judicial treatment of non-compete clauses; the
Commission's authority to address non-compete clauses; the economic
literature regarding the effects of non-compete clauses; and whether
the Commission should initiate a rulemaking on non-compete
clauses.\204\ In connection with the workshop, the Commission sought
public comment on a wide range of topics related to a potential
rulemaking on non-compete clauses. The Commission received 328 comments
addressing these topics from researchers, advocates for workers,
employers, trade associations, attorneys, members of Congress, state
and local officials, unions, other organizations, and individual
members of the public.\205\
---------------------------------------------------------------------------

\204\ Fed. Trade Comm'n, Non-Competes in the Workplace:
Examining Antitrust and Consumer Protection Issues, <a href="https://www.ftc.gov/news-events/events/2020/01/non-compete">https://www.ftc.gov/news-events/events/2020/01/non-compete</a> clauses-
workplace-examining-antitrust-consumer-protection-issues.
\205\ Fed. Trade Comm'n, Docket FTC-2019-0093, Workshop on Non-
Compete Clauses Used in Employment Contracts, <a href="https://www.regulations.gov/document/FTC-2019-0093-0001/comment">https://www.regulations.gov/document/FTC-2019-0093-0001/comment</a>.
---------------------------------------------------------------------------

In addition, on August 5, 2021, the Commission issued a
solicitation for public comment on contract terms that may harm
competition, including ``non-compete clauses that prevent workers from
seeking employment with other firms.'' The Commission received 280
comments on this solicitation from a wide range of stakeholders.\206\
On December 6-7, 2021, the Commission and the Antitrust Division held a
workshop entitled ``Making Competition Work: Promoting Competition in
Labor Markets.'' The Commission sought

[[Page 3498]]

comment from the public in connection with this event and received 27
comments.\207\
---------------------------------------------------------------------------

\206\ Fed. Trade Comm'n, Solicitation for Public Comments on
Contract Terms that May Harm Competition (Aug 5, 2021), <a href="https://www.regulations.gov/document/FTC-2021-0036-0022">https://www.regulations.gov/document/FTC-2021-0036-0022</a>.
\207\ Fed. Trade Comm'n, Docket FTC-2021-0057, Making
Competition Work: Promoting Competition in Labor Markets, <a href="https://www.regulations.gov/docket/FTC-2021-0057/comments">https://www.regulations.gov/docket/FTC-2021-0057/comments</a>.
---------------------------------------------------------------------------

As it has developed this proposed rule, the Commission has closely
considered the views expressed at these forums and the public comments
it has received through these engagement efforts. The comments have
informed the Commission's understanding of the evidence regarding the
effects of non-compete clauses; the law currently governing non-compete
clauses; and the options for how the Commission may seek to restrict
the unfair use of non-compete clauses through rulemaking, among other
topics.
The Commission has also focused on non-compete clauses in
connection with its enforcement, merger review, and research work. With
respect to enforcement, in 2021, the Commission initiated
investigations into the use of non-compete clauses by manufacturers of
glass containers used for food and beverage packaging. On December 28,
2022, the Commission accepted, subject to final approval, consent
agreements with two manufacturers in the industry.\208\ The glass
container industry is highly concentrated and is characterized by
substantial barriers to entry and expansion. Among these barriers, it
is difficult to identify and employ personnel with skills and
experience in glass container manufacturing.\209\
---------------------------------------------------------------------------

\208\ Fed. Trade Comm'n, Decision and Order, In re O-I Glass,
Inc. et al, Matter No. 211 0182 (December 28, 2022); Fed. Trade
Comm'n, Decision and Order, In re Ardaugh Group S.A. et al, Matter
No. 211 0182 (December 28, 2022).
\209\ Fed. Trade Comm'n, Analysis of Agreements Containing
Consent Order to Aid Public Comment, In re O-I Glass Inc. et al., In
re Ardaugh Group S.A. et al, Matter No. 211 0182 (December 28, 2022)
at 2.
---------------------------------------------------------------------------

The complaints allege the manufacturers required employees across a
variety of positions--including employees who work with the glass
plants' furnaces and forming equipment and in other glass production,
engineering, and quality assurance roles--to enter into non-compete
clauses. The complaints allege this conduct has a tendency or
likelihood to impede rivals' access to the restricted employees' labor,
to limit workers' mobility, and thus to harm workers, consumers,
competition, and the competitive process. As such, the complaints
allege each company has engaged in an unfair method of competition in
violation of Section 5 of the FTC Act.\210\ The proposed consent orders
would prohibit each manufacturer from ``entering or attempting to
enter, maintaining or attempting to maintain, or enforcing or
attempting to enforce a Non-Compete Restriction with an Employee, or
communicating to an Employee or a prospective or current employer of
that Employee that the Employee is subject to a Non-Compete
Restriction.'' \211\
---------------------------------------------------------------------------

\210\ Id. at 1-2.
\211\ Id. at 7.
---------------------------------------------------------------------------

In 2021, the Commission also initiated investigations into the use
of non-compete clauses in the security guard services industry. On
December 28, 2022, the Commission accepted, subject to final approval,
a consent agreement with Prudential Security, Inc., Prudential Command
Inc., and the firms' co-owners (collectively ``Prudential
Respondents''). Prudential Security, Inc. and Prudential Command Inc.
provided security guard services to clients in several states.
The Commission's complaint alleges the Prudential Respondents' use
of non-compete clauses is an unfair method of competition under Section
5 because it is restrictive, coercive, and exploitative and negatively
affects competitive conditions.\212\ The complaint further alleges the
Prudential Respondents' imposition of non-compete clauses took
advantage of the unequal bargaining power between Prudential
Respondents and their employees, particularly low-wage security guard
employees, and thus reduced workers' job mobility, limited competition
for workers' services, and ultimately deprived workers of higher wages
and more favorable working conditions.\213\ Under the terms of the
proposed order, Prudential Respondents--including any companies the co-
owners may control in the future--must cease and desist from entering,
maintaining, enforcing, or attempting to enforce any non-compete
clause.\214\
---------------------------------------------------------------------------

\212\ Fed. Trade Comm'n, Analysis of Agreement Containing
Consent Order to Aid Public Comment, In re Prudential Sec., Inc. et
al., Matter No. 211 0026 at 1, 5-7 (December 28, 2022).
\213\ Id. at 1.
\214\ Id.
---------------------------------------------------------------------------

These consent orders have been placed on the public record for 30
days in order to receive comments from interested persons. After 30
days, the Commission will again review the consent agreements and the
comments received and will decide whether it should make the proposed
orders final or take other appropriate action.\215\
---------------------------------------------------------------------------

\215\ Id. at 1-2; Glass Container Analysis to Aid Public
Comment, supra note 209 at 1.
---------------------------------------------------------------------------

In addition, as part of a 2020 settlement with the Commission,
three national rent-to-own companies agreed to refrain from enforcing
non-compete clauses that were entered into in connection with
reciprocal purchase agreements.\216\
---------------------------------------------------------------------------

\216\ Fed. Trade Comm'n, Press Release, Rent-to-Own Operators
Settle Charges that They Restrained Competition through Reciprocal
Purchase Agreements (Feb. 21, 2020), <a href="https://www.ftc.gov/news-events/news/press-releases/2020/02/rent-own-operators-settle-charges-they-restrained-competition-through-reciprocal-purchase-agreements">https://www.ftc.gov/news-events/news/press-releases/2020/02/rent-own-operators-settle-charges-they-restrained-competition-through-reciprocal-purchase-agreements</a>.
---------------------------------------------------------------------------

With respect to merger review, on August 11, 2015, the Commission
approved a final order settling charges that Zimmer Holdings, Inc.'s
acquisition of Biomet, Inc. would have eliminated competition between
the companies in the markets for certain orthopedic medical products.
Among other things, the order requires Zimmer to ``remove any
impediments or incentives'' that may deter workers from accepting
employment with the divested businesses, including non-compete
clauses.\217\
---------------------------------------------------------------------------

\217\ Fed. Trade Comm'n, In the Matter of Zimmer Holdings, Inc.
et al., No. C-4534, Decision and Order (Aug. 11, 2015), <a href="https://www.ftc.gov/system/files/documents/cases/150820zimmerdo.pdf">https://www.ftc.gov/system/files/documents/cases/150820zimmerdo.pdf</a>.
---------------------------------------------------------------------------

On November 10, 2021, the Commission approved a final order
settling charges that 7-Eleven's acquisition of Marathon Petroleum
Corporation's Speedway subsidiary violated federal antitrust laws.
Among other things, the order prohibits 7-Eleven from enforcing any
non-compete clauses against any franchisees or employees working at or
doing business with the divested assets.\218\
---------------------------------------------------------------------------

\218\ Fed. Trade Comm'n, Press Release, FTC Approves Final Order
Requiring Divestitures of Hundreds of Retail Gas and Diesel Fuel
Stations Owned by 7-Eleven, Inc. (Nov. 10, 2021), <a href="https://www.ftc.gov/news-events/news/press-releases/2021/11/ftc-approves-final-order-requiring-divestitures-hundreds-retail-gas-diesel-fuel-stations-owned-7">https://www.ftc.gov/news-events/news/press-releases/2021/11/ftc-approves-final-order-requiring-divestitures-hundreds-retail-gas-diesel-fuel-stations-owned-7</a>.
---------------------------------------------------------------------------

On January 10, 2022, the Commission approved a final order settling
charges that dialysis service provider DaVita, Inc.'s acquisition of
University of Utah Health's dialysis clinics would reduce competition
in vital outpatient dialysis services in the Provo, Utah market. As
part of the order, DaVita was required to remove certain non-compete
clauses and prohibited from enforcing or entering into non-compete
clauses with certain parties.\219\ And on August 9, 2022, the
Commission issued a final consent order in which ARKO Corp. and its
subsidiary GPM agreed to roll back a sweeping non-compete clause they

[[Page 3499]]

imposed on a company to which they sold 60 gas stations.\220\
---------------------------------------------------------------------------

\219\ Fed. Trade Comm'n, In the Matter of Davita Inc. and Total
Renal Care, Inc., No. C-4752, Decision and Order (Jan. 10, 2022) at
12-14, <a href="https://www.ftc.gov/system/files/documents/cases/211_0056_c4752_davita_utah_health_order.pdf">https://www.ftc.gov/system/files/documents/cases/211_0056_c4752_davita_utah_health_order.pdf</a>.
\220\ Fed. Trade Comm'n, Press Release, FTC Approves Final Order
Restoring Competitive Markets for Gasoline and Diesel in Michigan
and Ohio (Aug. 9, 2022), <a href="https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-approves-final-order-restoring-competitive-markets-gasoline-diesel-michigan-ohio">https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-approves-final-order-restoring-competitive-markets-gasoline-diesel-michigan-ohio</a>.
---------------------------------------------------------------------------

With respect to research, in September 2021, the Commission issued
a study analyzing acquisitions by five large technology companies that
were not reported to the Commission and the U.S. Department of Justice
under the Hart-Scott-Rodino Act.\221\ The study found 76.7% of
transactions included non-compete clauses for founders and key
employees of the acquired entities. The study also found that higher-
value transactions were more likely to use non-compete clauses.\222\
The study does not explain why the companies used non-compete clauses
or analyze the effects of these particular non-compete clauses on
competition.
---------------------------------------------------------------------------

\221\ Fed. Trade Comm'n, Non-HSR Reported Acquisitions by Select
Technology Platforms, 2010-2019: An FTC Study (September 2021) at 1.
\222\ Id. at 21-22. The table states that the figure is 77.3%.
The reason for this discrepancy is not clear.
---------------------------------------------------------------------------

The Commission seeks comment on its description, in this Part II.D,
of the Commission's work on non-compete clauses prior to this NPRM.

III. Legal Authority

Section 5 of the FTC Act declares ``unfair methods of competition''
to be unlawful.\223\ Section 5 further directs the Commission ``to
prevent persons, partnerships, or corporations . . . from using unfair
methods of competition in or affecting commerce.'' \224\ Section 6(g)
of the FTC Act authorizes the Commission to ``make rules and
regulations for the purpose of carrying out the provisions of'' the FTC
Act, including the Act's prohibition of unfair methods of
competition.\225\ Taken together, Sections 5 and 6(g) provide the
Commission with the authority to issue regulations declaring practices
to be unfair methods of competition.\226\
---------------------------------------------------------------------------

\223\ 15 U.S.C. 45(a)(1).
\224\ 15 U.S.C. 45(a)(2).
\225\ 15 U.S.C. 46(g).
\226\ Nat'l Petroleum Refiners Ass'n v. Fed. Trade Comm'n, 482
F.2d 672, 697-98 (D.C. Cir. 1973).
---------------------------------------------------------------------------

Courts have made clear Section 5's prohibition of unfair methods of
competition encompasses all practices that violate either the Sherman
or Clayton Acts.\227\ However, courts have long held the scope of
Section 5 is not confined to the conduct that is prohibited under the
Sherman Act, Clayton Act, or common law.\228\ Section 5 reaches
incipient violations of the antitrust laws--conduct that, if left
unrestrained, would grow into an antitrust violation in the foreseeable
future.\229\ Additionally, Section 5 reaches conduct that, while not
prohibited by the Sherman or Clayton Acts, violates the spirit or
policies underlying those statutes.\230\
---------------------------------------------------------------------------

\227\ See, e.g., Fed. Trade Comm'n v. Cement Inst., 333 U.S.
683, 693 (1948) (holding practices that violate the Sherman Act are
unfair methods of competition); Fashion Originators' Guild of Am. v.
Fed. Trade Comm'n, 312 U.S. 457, 464 (1941) (holding practices that
violate the Clayton Act are unfair methods of competition).
\228\ See, e.g., Fed. Trade Comm'n v. Motion Picture Advert.
Serv. Co., 344 U.S. 392, 394-95 (1953) (``The `Unfair methods of
competition', which are condemned by [Section] 5(a) of the [FTC]
Act, are not confined to those that were illegal at common law or
that were condemned by the Sherman Act. Congress advisedly left the
concept flexible to be defined with particularity by the myriad of
cases from the field of business.'') (internal citations omitted).
\229\ See, e.g., Cement Inst., 333 U.S. at 708 (``A major
purpose of [the FTC] Act was to enable the Commission to restrain
practices as `unfair' which, although not yet having grown into
Sherman Act dimensions would most likely do so if left
unrestrained.''); Fashion Originators' Guild, 312 U.S. at 466;
Triangle Conduit & Cable Co. v. Fed. Trade Comm'n, 168 F.2d 175, 176
(7th Cir. 1948).
\230\ See, e.g., Fashion Originators' Guild, 312 U.S. at 463
(stating that ``[i]f the purpose and practice of the combination of
garment manufacturers and their affiliates runs counter to the
public policy declared in the Sherman and Clayton Acts, the Federal
Trade Commission has the power to suppress it as an unfair method of
competition''); E.I. du Pont de Nemours & Co. v. Fed. Trade Comm'n
(Ethyl), 729 F.2d 128, 136-37 (2d Cir. 1984) (finding that the
Commission may bar ``conduct which, although not a violation of the
letter of the antitrust laws, is close to a violation or is contrary
to their spirit''). On November 10, 2022, the Commission issued a
policy statement describing the key principles of general
applicability concerning whether conduct is an unfair method of
competition under Section 5. Fed. Trade Comm'n, Policy Statement
Regarding the Scope of Unfair Methods of Competition Under Section 5
of the Federal Trade Commission Act (Nov. 10, 2022).
---------------------------------------------------------------------------

IV. The Commission's Preliminary Determination That Non-Compete Clauses
Are an Unfair Method of Competition

The Commission preliminarily determines it is an unfair method of
competition for an employer to enter into or attempt to enter into a
non-compete clause with a worker; maintain with a worker a non-compete
clause; or represent to a worker that the worker is subject to a non-
compete clause where the employer has no good faith basis to believe
the worker is subject to an enforceable non-compete clause.\231\ This
preliminary determination is the basis for this proposed rule, which
would provide that each of these practices is an unfair method of
competition under Section 5.\232\ This Part IV sets forth a series of
preliminary findings that provide the basis for this preliminary
determination. The Commission's preliminary determination and each of
these preliminary findings are subject to further consideration in
light of the comments received and the Commission's additional
analysis. The Commission seeks comment on all aspects of this Part
IV.\233\
---------------------------------------------------------------------------

\231\ For ease of reference, this Part IV employs the term ``use
of non-compete clauses'' as a shorthand to refer to this conduct.
\232\ See proposed Sec. 910.2(a).
\233\ The Commission intends for this Part IV to satisfy the
requirements in Section 22 of the FTC Act that, in an NPRM, the
Commission issue a preliminary regulatory analysis that contains ``a
concise statement of the need for, and the objectives of, the
proposed rule.'' 15 U.S.C. 57b-3.
---------------------------------------------------------------------------

A. Non-Compete Clauses Are an Unfair Method of Competition Under
Section 5

1. Non-Compete Clauses Are Unfair
Courts have held conduct is an ``unfair method of competition''
under Section 5 where the conduct is facially unfair. In Atlantic
Refining Co. v. FTC and FTC v. Texaco, Inc., the Court held the
Commission established an unfair method of competition where an oil
company used its economic power over its gas stations to coerce them
into buying certain tires, batteries, or accessories only from firms
that paid the oil company a commission.\234\ In Texaco, the Court held
the conduct was an unfair method of competition even though Texaco's
conduct was not overtly coercive, reasoning that Texaco's conduct was
``inherently coercive'' because its ``dominant economic power was used
in a manner which tended to foreclose competition.'' \235\ In FTC v.
R.F. Keppel & Bro., the Court held the Commission established an unfair
method of competition where a manufacturer exploited the inability of
children to protect themselves in the marketplace by marketing inferior
goods to them through use of a gambling scheme.\236\ In E.I. du Pont de
Nemours & Co. v. FTC (Ethyl), the U.S. Court of Appeals for the Second
Circuit reaffirmed that coercive conduct is quintessentially covered by
Section 5's prohibition of unfair methods of competition.\237\
---------------------------------------------------------------------------

\234\ Atl. Refin. Co., 381 U.S. at 369-70; Texaco, Inc., 393
U.S. at 228-29.
\235\ 393 U.S. 223 at 228-29 (1968). See also Shell Oil Co. v.
Fed. Trade Comm'n, 360 F.2d 470, 487 (5th Cir. 1966) (``A man
operating a gas station is bound to be overawed by the great
corporation that is his supplier, his banker, and his landlord.'').
\236\ 291 U.S. 304, 313 (1934).
\237\ 729 F.2d 128, 140 (2d Cir. 1984) (``In short, in the
absence of proof of a violation of the antitrust laws or evidence of
collusive, coercive, predatory, or exclusionary conduct, business
practices are not ``unfair'' in violation of Sec. 5 unless those
practices either have an anticompetitive purpose or cannot be
supported by an independent legitimate reason.'').
---------------------------------------------------------------------------

The Court has also held that, for coercive conduct to constitute
unfair

[[Page 3500]]

method of competition, it must burden commerce. In Atlantic Refining,
the Court determined ``a full-scale economic analysis of competitive
effect'' was not required; due to the nature of the conduct at issue,
the Commission merely needed to show the conduct burdened ``a not
insubstantial portion of commerce.'' \238\
---------------------------------------------------------------------------

\238\ 381 U.S. at 370-71. See also Texaco, Inc., 393 U.S. at 230
(finding that the practice unfairly burdened competition for a not
insignificant volume of commerce); R.F. Keppel & Bro., 291 U.S. at
309 (``A practice so widespread and so far reaching in its
consequences is of public concern if in other respects within the
purview of the statute.'').
---------------------------------------------------------------------------

In the cases described above, courts condemned conduct under
Section 5 based on the facial unfairness of the conduct. In other
cases, however, courts have condemned restrictive or exclusionary
conduct under Section 5 based not on the facial unfairness of the
conduct, but on the impact of the conduct on competition. For example,
in FTC v. Motion Picture Advertising Service Co., the Court held an
exclusive dealing arrangement violated Section 5 where there was
``substantial evidence'' the contracts ``unreasonably restrain
competition.'' \239\ Similarly, in L.G. Balfour Co. v. FTC, the U.S.
Court of Appeals for the Seventh Circuit held a firm's exclusive
dealing contracts violated Section 5 where such contracts were ``anti-
competitive.'' \240\ As the U.S. Court of Appeals for the Sixth Circuit
stated in Hastings Manufacturing Co. v. FTC, the Section 5
jurisprudence has established that ``acts [that are] not in themselves
illegal or criminal, or even immoral, may, when repeated and continued
and their impact upon commerce is fully revealed, constitute an unfair
method of competition within the scope of the Commission's authority to
regulate and forbid.'' \241\
---------------------------------------------------------------------------

\239\ 344 U.S. 392, 395-96 (1953).
\240\ 442 F.2d 1, 14 (7th Cir. 1971).
\241\ 153 F.2d 253, 257 (6th Cir. 1946).
---------------------------------------------------------------------------

For the reasons described below, the Commission preliminarily finds
the use by employers of non-compete clauses is an ``unfair'' method of
competition under Section 5. The Commission's preliminary findings
differ based on whether the worker is a senior executive. For workers
who are not senior executives, the Commission preliminarily finds the
use by employers of non-compete clauses is ``unfair'' under Section 5
in three independent ways. First, non-compete clauses are restrictive
conduct that negatively affects competitive conditions. Second, non-
compete clauses are exploitative and coercive at the time of
contracting while burdening a not insignificant volume of commerce.
Third, non-compete clauses are exploitative and coercive at the time of
the worker's potential departure from the employer while burdening a
not insignificant volume of commerce.
For workers who are senior executives, the Commission preliminarily
finds the use by employers of non-compete clauses is ``unfair'' under
Section 5 because such non-compete clauses are restrictive conduct that
negatively affects competitive conditions. As described below in Part
IV.A.1.a.ii, the Commission preliminarily concludes non-compete clauses
for senior executives may harm competition in product markets in unique
ways. The second and third preliminary findings described above--that
non-compete clauses are exploitative and coercive at the time of
contracting and at the time of a worker's potential departure--do not
apply to workers who are senior executives.\242\
---------------------------------------------------------------------------

\242\ As described below in Part VII.B.1.a.iv, the Commission
estimates that, when non-compete clauses are more enforceable, CEO
earnings are reduced. This may result from the negative effects on
competitive conditions that non-compete clauses have on labor
markets (discussed in greater detail below in Part IV.A.1.a.i)
rather than from exploitation or coercion.
---------------------------------------------------------------------------

The Commission seeks comment on whether this different unfairness
analysis should apply to other highly paid or highly skilled workers
who are not senior executives. Furthermore, in Part VI.C below, the
Commission seeks comment on how this category of workers--whether
``senior executives'' or a broader category of highly paid or highly
skilled workers--should be defined, and whether different regulatory
standards should apply to this category of workers.
The Commission seeks comment on its preliminary finding that non-
compete clauses are an ``unfair'' method of competition under Section
5.
a. Non-Compete Clauses Are Restrictive Conduct That Negatively Affects
Competitive Conditions
First, the Commission preliminarily finds non-compete clauses are
an ``unfair'' method of competition under Section 5 because they are
restrictive conduct that negatively affects competitive conditions.
As noted above, courts have condemned restrictive or exclusionary
conduct under Section 5 based not on the facial unfairness of the
conduct, but on the impact of the conduct on competition.\243\ Non-
compete clauses are restrictive conduct. By their express terms, non-
compete clauses restrict a worker's ability to work for a competitor of
the employer--for example, by accepting a job with a competitor or
starting a business that would compete against the employer. Non-
compete clauses also restrict rivals from competing against the
employer to attract their workers. Because non-compete clauses facially
restrain competition in the labor market, courts have long held they
are restraints of trade and proper subjects for scrutiny under the
antitrust laws.\244\ Furthermore, as described in detail in this NPRM,
there is considerable empirical evidence showing non-compete clauses
negatively affect competition in labor markets and product and service
markets.\245\ This evidence is summarized below.
---------------------------------------------------------------------------

\243\ See supra Part IV.A.1.
\244\ See, e.g., Am. Tobacco Co., 221 U.S. at 181-83 (holding
several tobacco companies violated Sections 1 and 2 of the Sherman
Act due to the collective effect of six of the companies' practices,
one of which was the ``constantly recurring'' use of non-compete
clauses); Newburger, Loeb & Co., Inc., 563 F.2d at 1082 (``Although
such issues have not often been raised in the federal courts,
employee agreements not to compete are proper subjects for scrutiny
under section 1 of the Sherman Act. When a company interferes with
free competition for one of its former employee's services, the
market's ability to achieve the most economically efficient
allocation of labor is impaired. Moreover, employee-noncompetition
clauses can tie up industry expertise and experience and thereby
forestall new entry.'')
\245\ See supra Part II.B.
---------------------------------------------------------------------------

i. Non-Compete Clauses Negatively Affect Competitive Conditions in
Labor Markets
As described in greater detail above in Part II.B.1, non-compete
clauses negatively affect competitive conditions in labor markets by
obstructing the sorting of workers and employers into the strongest
possible matches. Labor markets function by matching workers and
employers. In a well-functioning labor market, a worker who is seeking
a better job--more pay, better working conditions, more enjoyable work,
or whatever the worker may be seeking--can enter the labor market by
looking for work. Employers who have positions available compete for
the worker's services. The worker's current employer may also compete
with these prospective employers by seeking to retain the worker--for
example, by offering to raise the worker's pay or promote the worker.
Ultimately, the worker chooses the job that best meets their
objectives. In general, the more jobs available--i.e., the more options
the worker has--the greater the possibility the worker will find a
strong match.
Just as employers compete for workers in a well-functioning labor
market,

[[Page 3501]]

workers compete for jobs. In general, the more workers who are
available--i.e., the more options the employer has--the stronger the
match the employer will find. Through these processes--employers
competing for workers, workers competing for jobs, and employers and
workers matching with one another--competition in the labor market
leads to higher earnings for workers, greater productivity for
employers, and better economic conditions.
In a perfectly competitive labor market, if a job that a worker
would prefer more--for example, because it has higher pay or is in a
better location--were to become available, the worker could switch to
it quickly and easily. However, this perfectly competitive labor market
exists only in theory. In practice, labor markets substantially deviate
from perfect competition. Non-compete clauses, in particular, impair
competition in labor markets by restricting a worker's ability to
change jobs. If a worker is bound by a non-compete clause, and the
worker wants a better job, the non-compete clause will prevent the
worker from accepting a new job within the scope of the non-compete
clause. These will often be the most natural alternative employment
options for a worker: jobs in the same geographic area and in the
worker's field of expertise. The result is less competition among
employers for the worker's services. Since the worker is prevented from
taking these jobs, the worker may decide not to enter the labor market
at all, or the worker may enter the labor market but take a job outside
of their field of expertise in which they are less productive.
Non-compete clauses affect competition in labor markets through
their use in the aggregate. The effect of an individual worker's non-
compete clause on competition in a particular labor market may be
marginal or may be impossible to discern statistically. However, the
use of a large number of non-compete clauses across a labor market
demonstrably affects the opportunities of all workers in that market.
By making it more difficult for many workers in a labor market to
switch to new jobs, non-compete clauses inhibit optimal matches from
being made between employers and workers across the labor force. As a
result, where non-compete clauses are prevalent in a market, workers
are more likely to remain in jobs that are less optimal with respect to
the worker's ability to maximize their productive capacity. This
materially reduces wages for workers--not only for workers who are
subject to non-compete clauses, but other workers in a labor market as
well, since jobs that would otherwise be better matches for an
unconstrained worker are filled by workers subject to non-compete
clauses.
The Section 5 analysis as to whether conduct negatively affects
competitive conditions does not require a showing that the conduct
caused actual harm.\246\ However, whether conduct causes actual harm
can be relevant to whether it is an unfair method of competition.\247\
There is significant empirical evidence that non-compete clauses cause
actual harm to competition in labor markets, and that these harms are
substantial.
---------------------------------------------------------------------------

\246\ See Fed. Trade Comm'n v. Sperry & Hutchinson Co., 405 U.S.
233, 244 (1972) (explaining that ``unfair competitive practices
[are] not limited to those likely to have anticompetitive
consequences after the manner of the antitrust laws''); In re Coca-
Cola Co., 117 F.T.C. 795, 915 (FTC 1994) (rejecting argument that
Section 5 violation requires showing ``anticompetitive effects'').
\247\ See Ethyl, 729 F.2d at 138 (evidence of actual harm can be
``a relevant factor in determining whether the challenged conduct is
unfair'').
---------------------------------------------------------------------------

As described above in Part II.B.1.a, the Commission estimates at
least one in five American workers--or approximately 30 million
workers--is bound by a non-compete clause. The proliferation of non-
compete clauses is restraining competition in labor markets to such a
degree that it is materially impacting workers' earnings--both across
the labor force in general, and also specifically for workers who are
not subject to non-compete clauses. The available evidence indicates
increased enforceability of non-compete clauses substantially reduces
workers' earnings, on average, across the labor market generally or for
specific types of workers.\248\ The Commission estimates the proposed
rule, which would prohibit employers from using non-compete clauses,
would increase workers' total earnings by $250 to $296 billion per
year.\249\
---------------------------------------------------------------------------

\248\ See supra Part II.B.1. While there is evidence that
increased enforceability of non-compete clauses increases the rate
of earnings growth for physicians, Lavetti, Simon, & White, supra
note 53 at 1051, the Commission estimates that the proposed rule may
increase physicians' earnings, although the study does not allow for
a precise calculation. See infra Part VII.B.1.a.ii.
\249\ See infra Part VII.B.1 (describing the Commission's
assessment of the benefits of the proposed rule).
---------------------------------------------------------------------------

In addition to the evidence showing non-compete clauses reduce
earnings for workers across the labor force, there is also evidence
non-compete clauses reduce earnings specifically for workers who are
not subject to non-compete clauses.\250\ One study finds when the use
of non-compete clauses by employers increases, that drives down wages
for workers who do not have non-compete clauses but who work in the
same state and industry. This study also finds this effect is stronger
where non-compete clauses are more enforceable. This study shows the
reduction in earnings (and also reduced labor mobility) is due to a
reduction in the rate of the arrival of job offers.\251\ Another study
finds similarly that changes in non-compete clause enforceability in
one state have negative impacts on workers' earnings in bordering
states and that the effects are nearly as large as the effects in the
state in which enforceability changed (though the effect tapers off as
the distance to the bordering state increases).\252\ The authors
conclude that, since the workers across the border are not directly
affected by the law change--because contracts that they have signed do
not become more or less enforceable--this effect must be due to changes
in the local labor market.\253\
---------------------------------------------------------------------------

\250\ See supra Part II.B.1.c.
\251\ Starr, Frake, & Agarwal, supra note 76 at 4.
\252\ Johnson, Lavetti, & Lipsitz, supra note 63 at 51.
\253\ Id. at 30.
---------------------------------------------------------------------------

The Commission preliminarily concludes non-compete clauses
negatively affect competitive conditions in labor markets regardless of
the worker's income or job function. Whether a worker is a senior
executive or a security guard, non-compete clauses block the worker
from switching to a job in which they would be better paid and more
productive--restricting that worker's opportunities as well as the
opportunities of other workers in the relevant labor market. The
available data do not allow the Commission to estimate earnings effects
for every occupation. However, the evidentiary record indicates non-
compete clauses depress wages for a wide range of subgroups of workers
across the spectrum of income and job function. The Commission
therefore estimates the proposed rule would increase earnings for
workers in all of the subgroups of the labor force for which sufficient
data is available.\254\
---------------------------------------------------------------------------

\254\ See infra Part VII.B.1.a.
---------------------------------------------------------------------------

The Commission seeks comment on its preliminary finding that non-
compete clauses negatively affect competitive conditions in labor
markets.
ii. Non-Compete Clauses Negatively Affect Competitive Conditions in
Markets for Products and Services
The adverse effects of non-compete clauses on product and service
markets largely result from reduced labor mobility. Several studies
show the use of non-compete clauses by employers

[[Page 3502]]

reduces labor mobility. All of these studies have found decreased rates
of labor mobility, as measured by job separations, hiring rates, job-
to-job mobility, implicit mobility defined by job tenure, and within-
and between-industry mobility.\255\ The Commission does not view
reduced labor mobility from non-compete clauses--in and of itself--as
evidence that non-compete clauses negatively affect competition in
product and service markets. Instead, reduced labor mobility is best
understood as the primary driver of the effects in product and service
markets the Commission is concerned about.
---------------------------------------------------------------------------

\255\ See supra Part II.B.2.
---------------------------------------------------------------------------

Reduced labor mobility from non-compete clauses negatively affects
competitive conditions in product and service markets in several
respects. First, there is evidence non-compete clauses increase
consumer prices and concentration in the health care sector. There is
also evidence non-compete clauses increase industrial concentration
more broadly. Non-compete clauses may have these effects by inhibiting
entrepreneurial ventures (which could otherwise enhance competition in
goods and service markets) or by foreclosing competitors' access to
talented workers.\256\
---------------------------------------------------------------------------

\256\ See supra Part II.B.2.a.
---------------------------------------------------------------------------

Second, non-compete clauses foreclose the ability of competitors to
access talent by effectively forcing future employers to buy out
workers from their non-compete clauses if they want to hire them. Firms
must either make inefficiently high payments to buy workers out of non-
compete clauses with a former employer, which leads to deadweight
economic loss, or forego the payment--and, consequently, the access to
the talent the firm seeks. Whatever choice a firm makes, its economic
outcomes in the market are harmed, relative to a scenario in which no
workers are bound by non-compete clauses. There is evidence of this
mechanism in the market for CEOs.\257\
---------------------------------------------------------------------------

\257\ See supra Part II.B.2.b.
---------------------------------------------------------------------------

Third, the weight of the evidence indicates non-compete clauses
have a negative impact on new business formation. New business
formation increases competition first by bringing new ideas to market,
and second, by forcing incumbent firms to respond to new firms' ideas
instead of stagnating. Non-compete clauses restrain new business
formation by preventing workers subject to non-compete clauses from
starting their own businesses. In addition, firms are more willing to
enter markets in which they know there are potential sources of skilled
and experienced labor, unhampered by non-compete clauses.\258\
---------------------------------------------------------------------------

\258\ See supra Part II.B.2.c.
---------------------------------------------------------------------------

Fourth, the weight of the evidence indicates non-compete clauses
decrease innovation. Innovation may directly improve economic outcomes
by increasing product quality or decreasing prices, or may promote
competition because successful new products and services force
competing firms to improve their own products and services. Non-compete
clauses affect innovation by reducing the movement of workers between
firms, which decreases knowledge flow between firms. Non-compete
clauses also prevent workers from starting businesses in which they can
pursue innovative new ideas.\259\
---------------------------------------------------------------------------

\259\ See supra Part II.B.2.d.
---------------------------------------------------------------------------

As noted above in Part II.B.2.e, there is also evidence non-compete
clauses increase employee training and other forms of investment. The
Commission considers this evidence below in Part IV.B as part of its
analysis of the justifications for non-compete clauses.
The Commission believes non-compete clauses for senior executives
may harm competition in product markets in unique ways, to the extent
that senior executives may be likely to start competing businesses, be
hired by potential entrants or competitors, or lead the development of
innovative products and services. Non-compete clauses for senior
executives may also block potential entrants, or raise their costs, to
a high degree, because such workers are likely to be in high demand by
potential entrants. As a result, prohibiting non-compete clauses for
senior executives may have relatively greater benefits for consumers
than prohibiting non-compete clauses for other workers. The Commission
seeks comment on this analysis as well as whether this reasoning may
apply to highly paid and highly skilled workers who are not senior
executives.
The Commission seeks comment on its preliminary finding that non-
compete clauses negatively affect competitive conditions in markets for
products and services.
b. Non-Compete Clauses Are Exploitative and Coercive at the Time of
Contracting
The Commission preliminarily finds non-compete clauses for workers
other than senior executives are exploitative and coercive because they
take advantage of unequal bargaining power between employers and
workers at the time the employer and worker enter into the non-compete
clause.
As noted above, courts have held conduct that is exploitative and
coercive can violate Section 5 where it burdens a not insignificant
volume of commerce.\260\ Courts have long recognized bargaining power
between employers and workers is unequal and, as a result, workers are
vulnerable to exploitation and coercion through the use of non-compete
clauses at the time of contracting. Courts have expressed this concern
since at least the early eighteenth century. In the foundational
English case Mitchel v. Reynolds, the court cited ``the great abuses
these voluntary restraints are liable to . . . from masters, who are
apt to give their apprentices much vexation'' by using ``many indirect
practices to procure such bonds from them, lest they should prejudice
them in their custom, when they come to set up for themselves.'' \261\
As another court stated, more recently:
---------------------------------------------------------------------------

\260\ See supra Part IV.A.1.
\261\ 1 P. Wms. at 190.
---------------------------------------------------------------------------

The average, individual employee has little but his labor to sell
or to use to make a living. He is often in urgent need of selling it
and in no position to object to boiler plate restrictive covenants
placed before him to sign. To him, the right to work and support his
family is the most important right he possesses. His individual
bargaining power is seldom equal to that of his employer. . . . Under
pressure of need and with little opportunity for choice, he is more
likely than the seller to make a rash, improvident promise that, for
the sake of present gain, may tend to impair his power to earn a
living, impoverish him, render him a public charge or deprive the
community of his skill and training.\262\
---------------------------------------------------------------------------

\262\ Arthur Murray Dance Studios of Cleveland v. Witter, 105
NE2d 685, 703-04 (Ohio Ct. Com. Pl. 1952). See also Restatement
(Second) of Contracts (1981) sec. 188 cmt. g (``Postemployment
restraints are scrutinized with particular care because they are
often the product of unequal bargaining power and because the
employee is likely to give scant attention to the hardship he may
later suffer through loss of his livelihood.'').
---------------------------------------------------------------------------

Indeed, courts have cited the imbalance of bargaining power between
workers and employers as a central reason for imposing stricter
scrutiny on non-compete clauses between employers and workers than on
non-compete clauses between businesses or between the seller and buyer
of a business.\263\
---------------------------------------------------------------------------

\263\ See, e.g., Alexander & Alexander, Inc. v. Danahy, 488 NE2d
22, 29 (Mass. App. Ct. 1986); Diepholz v. Rutledge, 659 NE 989, 991
(Ill. Ct. App. 1995); Palmetto Mortuary Transp., Inc. v. Knight
Sys., Inc., 818 SE2d 724, 731 (S.C. 2018).
---------------------------------------------------------------------------

The imbalance of bargaining power between employers and workers
results from several factors. Many of these

[[Page 3503]]

factors relate to the nature of the employer-worker relationship in the
United States generally. Most workers depend on income from their jobs
to get by--to pay their rent or mortgage, pay their bills, and keep
food on the table. For these workers, particularly the many workers who
live paycheck to paycheck, loss of a job or a job opportunity can
severely damage their finances.\264\ For these reasons, the loss of a
job or an employment opportunity is far more likely to have serious
financial consequences for a worker than the loss of a worker or a job
candidate would have for most employers. In addition, employers
generally have considerable labor market power, due to factors such as
concentration and the difficulty of searching for a job.\265\ The
considerable labor market power of employers has significantly
diminished the bargaining power of U.S. workers.\266\
---------------------------------------------------------------------------

\264\ See, e.g., Jennie E. Brand, The Far-Reaching Impact of Job
Loss and Unemployment, 41 Ann. Rev. of Socio. 359 (2015);
CareerBuilder, Living Paycheck to Paycheck is a Way of Life for
Majority of U.S. Workers, According to New CareerBuilder Survey
(Aug. 24, 2017), <a href="https://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey">https://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey</a> (reporting that 78% of
American workers live paycheck to paycheck); Jeff Ostrowski,
Bankrate, Survey: Fewer than 4 in 10 Americans could pay a surprise
$1,000 bill from savings (Jan. 11, 2021), <a href="https://www.bankrate.com/banking/savings/financial-security-january-2021/">https://www.bankrate.com/banking/savings/financial-security-january-2021/</a>.
\265\ Treasury Labor Market Competition Report, supra note 41 at
i-ii.
\266\ Id. at ii (``As this report highlights, a careful review
of the credible academic studies places the decrease in wages at
roughly 20 percent relative to the level in a fully competitive
market'').
---------------------------------------------------------------------------

Several additional factors contribute to the imbalance of
bargaining power between employers and workers generally. These include
the decline in union membership, which forces more workers to negotiate
with their employers individually; \267\ increased reliance by
employers on various forms of outsourcing, which allows employers to
fill persistent vacancies without having to raise wages or improve
conditions for incumbent workers; \268\ and the proliferation of no-
poaching agreements, which limit the mobility of workers and, as a
result, their bargaining power.\269\
---------------------------------------------------------------------------

\267\ See, e.g., Alan Krueger, Luncheon Address: Reflections on
Dwindling Worker Bargaining Power and Monetary Policy at 272 (Aug.
24, 2018), <a href="https://www.kansascityfed.org/Jackson%20Hole/documents/6984/Lunch_JH2018.pdf">https://www.kansascityfed.org/Jackson%20Hole/documents/6984/Lunch_JH2018.pdf</a>.
\268\ Id.
\269\ Id. at 273.
---------------------------------------------------------------------------

While the employer-worker relationship is defined by an imbalance
of bargaining power generally, the imbalance of bargaining power is
particularly acute in the context of negotiating employment terms such
as non-compete clauses, for several reasons. First, as courts have long
recognized, employers are repeat players who are likely to have greater
experience and skill at bargaining, in the context of negotiating
employment terms, than individual workers.\270\ Second, and relatedly,
workers are not likely to seek the assistance of counsel in reviewing
employment terms,\271\ while employers are more likely to seek the
assistance of counsel in drafting them.
---------------------------------------------------------------------------

\270\ See, e.g., Samuel Stores, Inc. v. Abrams, 108 A. 541, 543
(Conn. 1919).
\271\ In one survey, only 7.9% of workers with non-compete
clauses reported consulting a lawyer in connection with the non-
compete clause. Starr, Prescott, & Bishara, supra note 42, at 72.
---------------------------------------------------------------------------

Third, research indicates consumers exhibit cognitive biases in the
way they consider contractual terms,\272\ and the same may be true of
workers. Consumers rarely read standard-form contracts.\273\ Consumers
also tend to focus their attention on a few salient terms of the
transaction, such as price and quantity, and tend to disregard other
ter

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