Employee Non-compete Agreements Research Articles

Are Employee Noncompete Agreements Coercive? Why the FTC's Wrong Answer Disqualifies It from Rulemaking (For Now)

Are Employee Noncompete Agreements Coercive? Why the FTC's Wrong Answer Disqualifies It from Rulemaking (For Now)

Don't Abolish Employee Noncompete Agreements

Don't Abolish Employee Noncompete Agreements

Employee Non-compete Agreements, Gender, and Entrepreneurship

I contribute to the literature on institutions, gender, and entrepreneurship by showing that macrolevel institutional policies that do not explicitly target women nonetheless discourage them from leveraging prior professional experience—their own and that of others—in founding new ventures. Most ventures fail, but chances of success are greater if founders can bring to bear their professional expertise. However, employee non-compete agreements enjoin workers from leaving their employer to found a rival business in the same industry. Thus, non-competes add legal risk to business risk. To the extent that women exhibit greater risk aversion, the threat of litigation from their ex-employer may act as a sharper brake on startup activity than for men. Examining all workers who were employed exclusively within 25 states and the District of Columbia from 1990 to 2014, I find that women subject to tighter non-compete policies were less likely to leave their employers and start rival businesses. Non-competes increase the risk of entrepreneurship by making it harder to hire talent with relevant experience, shifting women away from higher potential ventures. A review of thousands of filed lawsuits suggests that firms do not target women in non-compete cases. Rather, it appears that non-competes disproportionately discourage women from leveraging their professional networks in hiring the sort of talent necessary for high-growth startups to succeed.

Firm Performance After California’s Refusal to Enforce Out-of-State Employee Non-Compete Agreements

We empirically exploit a quasi-natural experiment of the California Supreme Court’s decision to stop enforcing out-of-state employee non- compete agreements. Applying resource-based theory, we conceptualize this legal change as allowing unique access to a strategic factor market for human capital (i.e., out of state employees subject to non-compete agreements). This access results in California firms experiencing a mean cumulative abnormal returns of 2.53% in the three days immediately following the court decision. Moreover, this increase is strongly influenced by both labor market and firm-level factors. Specifically, firms currently facing high in-state labor market competition particularly benefit from this newly available labor pool. Firms already employing large numbers of knowledge workers and those with high research and development intensity also experience increased stock market returns.

The Case for Ethical Non-compete Agreements: Executives Versus Sandwich-Makers

Human capital, the knowledge, skills, and abilities of employees, can be a powerful driver of firm performance, yet the mobility of human capital raises questions over how to protect it. Employee non-compete agreements, which limit an employee’s ability to start or join a rival firm, have received recent attention. While past research considers whether non-competes are effective tools at limiting employee mobility, few have considered if non-competes should be used. Filling this gap, I propose a normative schema for when employee non-competes can be considered ethical. A review of the limited existing literature on the ethics of employee non-competes finds that prior research has mostly focused on questions of property rights, which I propose as being nested within other ethical constructs. Analysis of two real-world illustrative examples of employee non-competes (an executive at Amazon and a Jimmy John’s sandwich-maker) leads to a three-prong approach to evaluating non-competes based on ethical dimensions of power, autonomy, and fairness. I end by proposing—although further research is warranted—a measure of employee-level absorptive capacity, which is closely coupled with an employee’s pre-employment human capital, as an employee-level attribute independent of, although likely coincidental with, the tripartite requirements of power/autonomy/fairness for ethical employee non-compete agreements.

The Evolving Antitrust Treatment of Labor-Market Restraints: From Theory to Practice

With mounting macroeconomic evidence of increased concentration and higher markups, and large firms occupying several important, “winner-takes-most” markets, the threats posed by powerful buyers in the economy have become more pronounced. In particular, experts and enforcers have been paying closer attention to the effects of market power and excessive bargaining leverage on the buyer side of the labor market, which implicates competition among employers to hire and retain workers. Although buyer power in labor markets has received relatively little antitrust attention historically, the status quo has shifted. Over the last several years, in an initiative begun by the Obama Administration and continued during the Trump Administration, the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have moved to criminalize naked no-poaching and no-hiring agreements among competing employers. At the same time, state enforcers and the private plaintiffs’ antitrust bar have focused resources and enforcement efforts on collusive buyer restraints harming workers, including employees or individual sellers in the agricultural, nursing, high-tech, fast-food, and other sectors. And in merger cases, the government has advanced theories of harm predicated on depressed input prices paid to small sellers of products and services, although not yet on depressed wages. In addition to these important developments, scholars and policy experts have been exploring the nature and extent of labor-market power, as well as possible solutions. This white paper explores the past, present, and future antitrust treatment of mergers and conduct that have anticompetitive effects in labor markets. After considering possible explanations for past failures to adequately address buyer power in labor markets, the paper catalogues and summarizes recent scholarly literature on the intersection of antitrust and labor policy. The paper concludes by analyzing emerging themes and questions from the recent literature and making recommendations to policymakers and enforcers to facilitate the translation of new insights into effective antitrust enforcement. Some of the major takeaways from the analysis include the following: Before real progress can be made in policing mergers on the basis of anticompetitive labor-market effects, practitioners of antitrust merger law – including antitrust lawyers and economists – must begin to identify and resolve the practical challenges associated with litigating and remedying actual merger fact patterns. If enforcers are not yet able to adequately measure and predict employee substitution in labor markets, enforcers may wish to begin by focusing on employer mergers among labor-market rivals which have previously been parties to a no-poaching agreement, or where there is other direct evidence that a transaction threatens to create or enhance buyer labor-market power. Although the Clayton Act declares that “the labor of a human being is not a commodity or article of commerce,” this language is designed to protect worker restraints, not employer restraints. Enforcers should not be concerned that the labor exemption or the “affecting commerce” requirement prevent merger enforcement on the basis of anticompetitive labor-market effects, notwithstanding an absence of, or inability to prove, downstream product-market harms. The Antitrust Division should continue to aggressively pursue criminal prosecutions to deter naked no-poaching and wage-fixing agreements, and the plaintiffs’ antitrust bar and state attorneys’ general should continue to seek deterrence and compensation for victims through investigations and civil suits, including treble damages class actions. Given the practical difficulties of challenging vertical and putatively ancillary no-poaching and employee non-compete agreements, policy advocates should support state or federal legislative reform as a matter of sound competition policy, particularly when such agreements are imposed on low-skill, low-wage workers in concentrated, high-turnover industries. The FTC and DOJ should hire in-house labor economists, and Congress should increase the resources available to the agencies accordingly. The agencies should assimilate the new labor-antitrust literature, conduct their own policy studies on the connection between labor and product market concentration and wages, and update the Horizontal Merger Guidelines once they are institutionally prepared to police mergers on the basis of threatened anticompetitive labor-market effects. Effective policing of mergers and conduct on the basis of anticompetitive labor-market effects does not require legislative reform or eliminating the consumer welfare standard.

The Case for Ethical Non-Compete Agreements: Executives versus Sandwich-makers

The implied tone of the majority of management articles on the topic that non-compete agreements are “bad,” and some scholars even use the term unethical (e.g., Bishara & Westermann-Behaylo, 2012). But are such agreements actually unethical? I assert that the noncompete agreements themselves are ethical, but acknowledge that there are circumstances under which a noncompete may be unethical. A employee non-competition agreement is, in my opinion, ethical when it is reasonable based on the specificity of the terms of the agreement, including (i) who qualifies as a competitor; (ii) what activities would be considered competitive; (iii) where such competitive activity should be prohibited; (iv) when competitive activity will be prohibited; and (v) how the parties reached such an agreement. This criteria loosely matches that for determining when noncompetes will be legally enforceable. I start this normative analysis with a definition of noncompetes and a brief legal introduction to the topic of employee noncompete agreements. Next, I compare and contrast two situations in which the ethicality of noncompete agreements appears to differ, to develop an overarching theory of what constitutes an ethical employee noncompete agreement. I then highlight the normative ethical principles affected by non-compete agreements and close with a brief discussion of open issues and future avenues for research.

Employee Mobility, Noncompete Agreements, Product-Market Competition, and Company Disclosure

This study explores the impact on companies’ disclosures of U.S. states’ different propensities to enforce noncompete agreements. I find a negative association between a state’s enforcement of noncompete agreements and disclosure activities of firms headquartered in that state. Companies that face local rivals drive some results. Analyses that focus on several state-level changes in enforcement level of noncompete agreements confirm this association. Overall, the findings are consistent with a higher enforcement of noncompete agreements increasing proprietary costs of disclosure, because companies in high-enforcement settings are less informed about each other due to reduced information leakage from employee transfers across competitors. The results suggest that the overall environment for information spillovers surrounding a firm impacts its degree of disclosure to the capital markets and that state-specific enforcement of noncompete agreements can be used as a novel measure of the proprietary costs of disclosure.

Founder Replacement and Startup Performance

We provide causal evidence that venture capitalists (VCs) improve the performance of their portfolio companies by replacing founders. Augmenting a database of U.S.-based, VC-backed startups from 1995-2008 with hand-collected information regarding turnover, we exploit shocks to the supply of outside executives via state-level changes in the enforceability of employee non-compete agreements. Although naive regressions of startup performance on founder replacement would suggest a negative correlation, this may be due to selection as founders are likely to leave or be pushed out of poorly-performing startups. Indeed, instrumented regressions reverse the sign of this effect, suggesting that replacing founders improves the performance of venture-backed entrepreneurial firms. Replacement helps more when founders hold CXO roles and when the incoming replacement has substantial work experience. The evidence points to the replacement of founders as a specific mechanism by which VCs add value.

The Value of Employee Retention: Evidence From a Natural Experiment

We estimate the firm‐level returns to retaining employees using difference‐in‐differences analysis and a natural experiment where the enforcement of employee noncompete agreements was inadvertently reversed in Michigan. We find that noncompete enforcement boosted the short‐term value of publicly traded companies by approximately 9%. The effect is increasing in local competition and growth opportunities, and offset by patenting.

Regional disadvantage? Employee non-compete agreements and brain drain

A growing body of research has documented the local impact of employee non-compete agreements, but their effect on interstate migration patterns remains unexplored. Exploiting an inadvertent policy reversal in Michigan as a natural experiment, we show that non-compete agreements are responsible for a “brain drain” of knowledge workers out of states that enforce such contracts to states where they are not enforceable. Importantly, this effect is felt most strongly on the margin of workers who are more collaborative and whose work is more impactful.

The Firm Strikes Back

This study explores how firms shape labor markets and career paths using employee non-compete agreements. The sociology of work has overlooked non-competes, but data indicate that nearly half of technical professionals in the United States are asked to sign such employment contracts. Fearing loss of investments in talent and trade secrets, firms use non-competes to “strike back” against technical professionals’ increased mobility following the decline of internal labor markets. In-depth interviews with 52 randomly sampled patent holders in a single industry, coupled with a survey of 1,029 engineers across a variety of industries, reveal that ex-employees subject to non-competes are more likely to take career detours—that is, they involuntarily leave their technical field to avoid a potential lawsuit. Moreover, firms strategically manage the process of getting workers to sign such contracts, waiting for workers’ bargaining position to weaken. These findings inform our understanding of the social organization of work in the knowledge economy.

Regional Disadvantage? Non-Compete Agreements and Brain Drain

We construct inventor career histories using the U.S. patent record from 1975 to 2005 and demonstrate a brain drain among patenting inventors from states that enforce employee non-compete agreements to those that do not. Non-compete enforcement appears to drive away inventors with greater human and social capital. We address causality-related concerns with a difference-in-differences study design based on an inadvertent reversal of Michigan's non-compete enforcement policy.

Good Work If You Can Get It...Again: Non-Compete Agreements, Occupational Detours, and Attainment

In this multi-method study, I explore how the institutional sanction of employment contracts shapes the process of individual attainment. In particular, I examine the implications of employee non-compete agreements, which are ostensibly used to protect trade secrets. Field data from interviews and a survey reveal that individuals respond to such post-employment restraints by taking “occupational detours” in order to avoid violating the non-compete, or by “seeking shelter” with large firms who can reliably indemnify those at risk of legal action. These constructs are subsequently verified using large-sample analysis that exploits an inadvertent reversal of non-compete enforcement policy in Michigan. The results advance our understanding of how individual attainment is shaped by institutional factors, fill a gap in the intellectual property literature regarding trade secrecy, and identify mechanisms by which the state may (unwittingly) deter entrepreneurial activity.

Mobility, Skills, and the Michigan Non-Compete Experiment

Whereas a number of studies have considered the implications of employee mobility, comparatively little research has considered institutional factors governing the ability of employees to move from one firm to another. This paper explores a legal constraint on mobility—employee non-compete agreements—by exploiting Michigan's apparently inadvertent 1985 reversal of its non-compete enforcement policy as a natural experiment. Using a differences-in-differences approach, and controlling for changes in the auto industry central to Michigan's economy, we find that the enforcement of non-competes indeed attenuates mobility. Moreover, non-compete enforcement decreases mobility more sharply for inventors with firm-specific skills and for those who specialize in narrow technical fields. The results speak to the literature on employee mobility while offering a credibly exogenous source of variation that can extend previous research on the implications of such mobility.

Physician Employee Non-Compete Agreements on the Examining Table: The Need to Better Protect Patients' and the Public's Interests in Indiana

Physician Employee Non-Compete Agreements on the Examining Table: The Need to Better Protect Patients' and the Public's Interests in Indiana

The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach

The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach

Strategic innovation and technology adoption in an evolving industry

We introduce a racing model with multiple product generations, product innovation, spin-outs, and licensing. Industry conditions and innovation characteristics affect who wins the race and who markets the resulting product. Small firms market their innovations when they pioneer a new generation or improve quality in a young generation and license their innovations in mature generations. If old generation leaders ever market improvements in young generation goods, they do so early on. Leadership in mature generations persists. Tests on the rigid disk drive industry (1977–1997) provide empirical support. The results have implications for antitrust policies and policies governing employee non-compete agreements.