Non-compete Agreements Research Articles

The Effects of Non-Compete Agreements on Different Types of Self-Employment: Evidence from Massachusetts and Utah

The economic effects of non-compete agreements have received increasing attention from academics and policymakers. This paper investigates how non-compete policies affect different types of self-employment. We exploit policy reforms in Utah and Massachusetts in 2016 and 2018, which decreased the enforceability of non-compete covenants, as quasi-experiments. We separate self-employment into self-employment with incorporated businesses (as a proxy for entrepreneurship) and self-employment with unincorporated businesses. Using representative individual-level data from the American Community Survey and the Current Population Survey, we estimate the probability of being self-employed with these different types of businesses, as well as entry into self-employment, and how these probabilities changed due to the reforms. Our findings show that the decrease in the enforceability of non-compete agreements in the two states resulted in a higher rate of incorporated self-employment in these states. In contrast, there was no sizable effect on the rate of unincorporated self-employment. Our results imply that states can promote entrepreneurial activity by reducing the enforceability of non-compete agreements.

Exit, Voice & Innovation: How Human Capital Policy Equality (& How Inequality Hurts Growth)

If an employee believes her organization is failing, she can take action using one of two strategies: exit (leaving the company) or voice (advocating change from within). But what happens when both exit and voice are restricted? Change itself–including both innovation and equality–suffers. This article, written for the 24th Annual Frankel Lecture, investigates the connections between fields that are usually kept separate: intellectual property and innovation policy; antitrust law and market competition; employment law and contract norms; and anti-discrimination law and equality policy. In employment, non-disclosure agreements (NDAs), non-compete agreements, innovation assignment clauses, non-disparagement agreements, mandatory arbitration, and secrecy policies all create exit constraints. These restrictive clauses also serve to silence employees, inventors, creators, and entrepreneurs from speaking up and from expressing themselves creatively. These trends impede mobility in the job market while also suppressing voice. The recent steep rise in the use of restrictive clauses has shaped human capital in ways that are harmful to all workers, as well as to industries and innovation at large. Still, the burden of these restrictions is not equally distributed. By integrating economic theory and new empirical research in the field of equality and innovation, this article shows that restricting mobility and voice has negative effects on gender diversity, particularly with respect to women’s opportunities to lead, create, and invent. As a result, industries using these techniques become more concentrated, with less new entry and start-up activity and less gender parity. And because the process operates endogenously, the more an industry is concentrated, the more mobility and equality suffer. The article argues that recent findings on the gender deficit in patenting activity, intellectual property ownership, leadership, and entrepreneurship should be understood in relation to exit and voice policy infrastructure. It concludes with directions for future research and policy recommendations.

Labor Mobility and Capital Misallocation in the Mutual Fund Industry

If capital won’t come to fund managers, fund managers will go to capital. I document that fund managers move across mutual fund firms to manage amounts of capital that better match their skill, which improves the allocative efficiency of capital across fund managers. For causal identification, I exploit exogenous shocks to fund managers’ ability to switch firms due to state-level changes to non-compete laws. In states that strengthen the enforceability of non-compete agreements, the propensity of fund managers to switch mutual fund firms is halved, capital misallocation across managers increases by about 10%, and the sum of monthly value added of managers declines by over $25 million. These results indicate that fund managers’ mobility across firms plays an important role in the efficient allocation of capital within the mutual fund industry.

Low-Wage Workers and the Enforceability of Non-Compete Agreements

We exploit the 2008 Oregon ban on non-compete agreements (NCAs) for hourly-paid workers to provide the first evidence on the impact of NCAs on low-wage workers. We find that banning NCAs for hourly workers increased hourly wages by 2-3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14-21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. While the positive wage effects are found across the age, education and wage distributions, they are stronger for female workers and in occupations where NCAs are more common. The Oregon low-wage NCA ban also improved average occupational status in Oregon, raised job-to-job mobility, and increased the proportion of salaried workers without affecting hours worked.

The Labor Market Effects of Legal Restrictions on Worker Mobility

We analyze how the legal enforceability of Noncompete Agreements (NCAs) affects labor markets. Using newly-constructed panel data, we find that higher NCA enforceability diminishes workers’ earnings and job mobility, with larger effects among workers most likely to sign NCAs. These effects are far-reaching: examining local labor markets that cross state borders reveals that enforceability affects workers’ earnings in different legal jurisdictions. Revisiting a classic model of wage-setting, we find that—in contrast to prior evidence—workers facing high enforceability are unable to leverage tight labor markets to increase their wage. Finally, higher NCA enforceability exacerbates gender and racial wage gaps.

Non-Compete Agreements, Agglomeration, and CEO Compensation

Although the CEO compensation-firm performance literature has primarily drawn from agency theory, researchers have called for the integration of alternative theoretical explanations. To address thi...

Do Ties That Bind Hurt? The Consequences of Noncompete Mobility Constraints

Employee mobility has been an important topic in the management literature. Less familiar are constraints that restrict employees’ inter-firm mobility. This paper examines noncompete agreements tha...

How Firms Competitively Became Anti-competitive: The Diffusion of Noncompete Agreements, 1996-2015

This paper examines organizational-, sub-population, and population-level factors to explain rapid and widespread diffusion of contested practices whose legitimacy and effectiveness are debatable. ...

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.

Geographical differences in intellectual property strategies and outcomes: establishment-level analysis across the American settlement hierarchy

ABSTRACTThe wealth of utility patent data has made this form of intellectual property (IP) protection the primary focus of the economics and geography of innovation. However, in addition to utility patents, the IP expressed in a firm's products or processes may also be protected via design patents, trademarks, copyright, or in non-compete and non-disclosure agreements. Recent research suggests that mixed modes of technological and non-technological innovation are associated with the most rapid firm growth and, thus, mixed-mode IP strategies may provide important insight for understanding the geography of innovation. If non-technological IP is an important complement to technological IP, then analyses focusing solely on the impacts of patents are misspecified. In addition, if the capability for pursuing these various tactics differs across the settlement hierarchy, then our understanding of the geography of IP is similarly distorted by the singular focus on patents. The objectives of this study are to examine how these tactics of protection are combined into IP strategies, how these strategies vary over the settlement hierarchy, how the different strategies are associated with different economic outcomes, and how these different strategic orientations may differentiate entrepreneurial ecosystems across space.

Noncompetes as Tax Evasion

Al Capone famously boasted of his criminal empire: “Some call it bootlegging. Some call it racketeering. I call it a business.” Treasury Agent Frank Wilson and Prosecutor George Johnson put Capone behind bars not by disputing his characterization and pursuing murder or assault or RICO charges, but by accepting it and enforcing its tax implications. Irrespective of their legality, Capone’s businesses were profitable, and Capone had not reported their profits for tax purposes. A simple application of bedrock tax law achieved what other legal routes failed to achieve and sent Capone to Alcatraz. The trick was to see the tax argument. Policymakers should use a similar approach to curtail the excessive, exploitative, and anticompetitive use of employment noncompete agreements. Currently, nearly one in five (or thirty million) American workers is bound by an employment noncompete. Employers claim that they adequately compensate employees for noncompete restrictions with higher wages, bigger raises, and/or more generous bonuses. Policymakers scoff at this claim and use contract law to attack them. Unfortunately, employment noncompetes are like Al Capone in that they have flourished despite the law’s efforts to restrain them. Recently, the largest study of noncompetes in U.S. history paradoxically found that their prevalence is unaffected by their enforceability. In states like California that refuse to enforce employment noncompetes, they are as common as in states that uphold them. Contract law has proved ill-equipped to respond to the pervasive, expanding, and damaging use of noncompetes. This Article is the first to shift the focus and to argue that employment noncompetes, as employers currently use them, constitute tax evasion and should be attacked as such. If employers pay employees for noncompetes through compensation, then by employers’ own account, this compensation is not purely an expense associated with immediate benefits; rather, it is an expenditure associated with future benefits — benefits that the employer will enjoy years after payment. Thus, the IRS should stop allowing employers to fully immediately deduct the compensation they pay to employees subject to noncompetes and instead should require that an adequate portion of total compensation be allocated to the noncompete and amortized over the restricted period, beginning when employment ends.

Closing the Gender Pay Gap: New Approaches to an Old Problem

This article addresses new approaches to address a long-standing employment compensation problem—the gender pay gap. Existing approaches, including the Equal Pay Act and Title VII, are more than 50 years old, and have only been marginally successful in resolving this problem. A pay gap based on gender remains a problem today. New approaches include the potential passage of the Paycheck Fairness Act at the federal level and a variety of laws at the state level. Some states have passed pay equity laws that are more successful than the federal law due to the use of the comparable work concept. Additionally, some states have passed laws regulating the asking of salary history questions, as well as the use of non-compete and no-poaching agreements, all of which have a chilling effect on pay equity. The result of the combination of these actions is a probable reduction of the gender pay gap, although eliminating it remains a distant goal.

Punctuated Entrepreneurship (Among Women)

I propose that the underrepresentation of women among entrepreneurs may be explained in part by the disproportionate impact of post-employment restraints including non-compete agreements. To the ex...

Non-competes and Spinout Creation: A Cross-country Test of the Relationship with Individual Income

The prevailing wisdom in the organizational literature is that spinouts by higher earning employees are more damaging to parent firms than spinouts by lower earning employees. Unfortunately, covenants not to compete (hereafter: non-competes) do not always discriminate between spinouts that could harm the parent firm and those that could help it. The greater human and financial capital of higher-earning employees permits them to overcome barriers created by non-competes. By contrast, lower earning employees may be effectively prevented from creating spinouts in the face of non- competes. In short, our study suggests that non-competes are not serving parent firms’ intended purpose of discouraging the spinouts by higher earning employees. Instead, they have an untended consequence of mainly blocking the wrong types of spawn–that is, spinouts by lower earning employees, which may not harm the parent firms. In fact, these spinouts may actually help the parent firm, and could have a net positive economic and social effect on the economy and society, thereby helping improve lives and well-being of the common people through reducing unemployment and poverty. This is the first international study of the effect of non-compete agreements as all previous studies have been single-country (i.e., U.S.-based).

Incomplete Contracts: An Empirical Approach

The strategic ambiguity hypothesis posits that when some aspects of performance are observable but not verifiable, the optimal contract is deliberately incomplete. I test this result for the first time. Because a direct test is infeasible, I derive an equivalent result: incompleteness is optimal when some terms are legally void. I test this using executive contracts from S&P 500 firms. I find that firms pay severance in discretionary installments to induce their executives to comply with noncompete agreements—but only in California, where noncompetes are void. Outside California, noncompetes are valid and these same firms pay non-discretionary severance upfront. I conclude that firms use strategic ambiguity to circumvent legal constraints.

Conspiracy to Commit Murder? Canadian Newspaper Trades and Closures, 2010-2017

Newspaper companies in both Eastern and Western Canada have engaged in anti-competitive behaviour since 2010 by exchanging titles, increasingly through trades, and then closing them to create more lucrative local monopolies. This phenomenon reached its height in late 2017 when the country’s two largest chains, Postmedia Network and Torstar Inc., traded 41 mostly Ontario titles and closed almost all of them. The chains claimed there was no collusion involved, but a Competition Bureau investigation reportedly found detailed memos and non-compete agreements. The British Columbia chains Black Press and Glacier Media also engaged in this type of consolidation in the first half of the decade without legal consequence. Including non-daily community newspapers, Black Press and Glacier Media closed or merged twenty-four of the thirty-three titles they exchanged from 2010-2014, or a competitor one of them already owned. While this would appear to be classic anti-competitive behaviour, their dealings went without investigation by the Competition Bureau. This points up the laxity of Canada’s antitrust laws in dealing with newspaper mergers and takeovers.

A New Strategy for Regulating Arbitration

Confidential arbitration is a standard precondition to employment. But confidential arbitration prevents a State from ensuring or even knowing whether employees’ economic, civil, and due process rights are respected. Further, employers regularly require employees to waive rights to class proceedings (thereby foreclosing small claims) and to arbitrate under the laws of another jurisdiction (thereby evading mandatory state law). In response, States have tried to regulate arbitration provisions, arbitral awards, and arbitral processes. But these efforts have all failed because the Supreme Court says they are preempted by the Federal Arbitration Act. In this Article, I argue that States can and should adopt a new strategy: Deter parties from forming such contracts in the first place. The Article proceeds in three parts. First, I explain the problem. Over the last fifty years, the Supreme Court systematically immunized arbitration provisions against every plausible contract defense. Yet the Supreme Court continues to insist that, just as the Federal Arbitration Act requires, arbitration agreements are still subject to “generally applicable contract defenses, such as fraud, duress, or unconscionability.” This is false. Second, I present the first large-scale evidence on the pervasiveness of arbitration. The Supreme Court’s arbitration precedents have effect only to the extent private parties agree to arbitrate their disputes. To study this, I use machine-learning protocols to parse millions of filings with the Securities and Exchange Commission and create a database of nearly 800,000 contracts formed by public companies. These contracts include employment agreements, credit agreements, joint ventures, purchases, and others. Employment contracts are by far the most likely to include a mandatory arbitration provision. Finally, I argue that, because the Supreme Court has all but stripped States of their power to enforce contracts, States should adopt policies that deter formation of objectionable contracts. For example, States cannot prohibit forced arbitration of sexual harassment claims. They can, however, prohibit sexual harassment as a subject matter for employment contracts; they can also enforce this with civil penalties and whistleblower rewards. Similarly, States cannot stop an employer from arbitrating under the laws of another jurisdiction, thereby evading mandatory limits on noncompete agreements. But States can declare noncompetes illegal, levy civil fines on employers that form them, and again offer employees whistleblower rewards to report violations. These approaches work because they create a cause of action for a third party - the State - who is not subject to the arbitration agreement. And unlike past efforts, these laws would not be preempted because they do not “derive their meaning from the fact that an agreement to arbitrate is at issue.”

Restrictions on CEO Mobility, Performance-Turnover Sensitivity, and Compensation: Evidence from Non-Compete Agreements

Using hand-collected data on CEO non-compete agreements (NCAs), we find that CEOs are less likely to have NCAs when they face greater employment risk and more likely when firms expect to suffer greater harm if departing CEOs work with competitors in some capacity. Additionally, we find that the performance-turnover sensitivity is significantly stronger when CEOs have NCAs. Finally, we find that total compensation and incentive pay are higher if CEOs have enforceable NCAs. Our identification strategy exploits staggered state-level changes in NCA enforceability. Our findings suggest that restrictions on mobility have important implications for how boards monitor and compensate CEOs.

Restrictions on CEO Mobility, Performance-Turnover Sensitivity, and Compensation: Evidence from Non-compete Agreements

Using hand-collected data on chief executive officer (CEO) non-compete agreements (NCAs), we find that NCAs are less likely when CEOs expect to incur greater personal costs from reduced job mobility and more likely when firms expect to suffer greater economic harm if departing CEOs work for competitors. Additionally, turnover–performance sensitivity is stronger when CEOs have NCAs. Finally, total compensation and incentive pay are higher if CEOs have more enforceable NCAs. Our identification strategy exploits staggered state-level changes in NCA enforceability. Overall, our findings suggest that restrictions on job mobility have important implications for how CEOs are monitored and compensated.

Non-Compete Agreements, Outside Employment Opportunities, and Insider Trading Profits

Non-Compete Agreements, Outside Employment Opportunities, and Insider Trading Profits