Non-compete Agreements Research Articles

Noncompete Agreements and the Welfare of Consumers

Employee spin-offs harm incumbent firms by increasing competition (benefiting consumers) and preventing firm owners from making beneficial investments in workers who may later spin off (harming consumers). We model noncompete agreements (NCAs) as solutions for the firm and analyze the resulting trade-off for consumers. We show that market structure and the nature of investment play large roles. Counterintuitively, increased investment benefits have the potential to harm consumers such that industries where firms value NCAs the most are those where harm is greater. Finally, we draw two analogies between NCAs and antitrust and show how those areas inform NCA policy. (JEL D42, D43, J41, K21, L26, M13, M53)

Do Firms Value Court Enforceability of Noncompete Agreements? A Revealed Preference Approach

Abstract Do firms value court enforceability of their workers' noncompete agreements (NCAs)? We leverage a 2020 Washington law that made NCAs unenforceable for workers earning less than $100k per year. If firms value the ability to enforce NCAs in court, then they should give just-below threshold workers raises to reach the threshold, resulting in excess mass just above the threshold. Using administrative data, we find no evidence of bunching, even where efficiency arguments are most plausible. A survey of Washington employment attorneys suggests little bunching because firms rarely need to enforce NCAs and because firms can use other, less restrictive alternatives.

Drawing the Line Between a Trade Secret and the Skill of an Employee

Chapter 30, Section 5 of the Finnish Criminal Code, prohibits, inter alia, an employee from unlawfully using or disclosing a trade secret to another person during the course of employment. The prohibition remains also in force for two years after the employment has ended. However, the use of one's professional skill is excluded from the prohibition. This article addresses the ambiguous distinction between a skill and a trade secret. Following a legislative change concerning non-compete agreements, the significance of the protection of trade secrets under criminal law has increased and the ambiguity identified in case law has become even more important to resolve. The Supreme Court of Finland has not issued a precedent concerning the matter. The article analyses Court of Appeal rulings with legal dogmatics in order to reduce the ambiguity surrounding the topic. Forty-three rulings from various Courts of Appeal have been reviewed as groundwork for the article. In addition, the aim is to use legal comparison to examine foreign jurisprudence surrounding the topic. The article critically examines a so-called primary rule of interpretation, according to which information exported in stored form is in principle a trade secret. This premise is outdated and problematic and should not be used as the core premise of the evaluation. Instead, the evaluation should focus on an objective analysis of the information itself. The primary starting point in drawing the line between a trade secret and skill should be the employee's experience and ability to independently produce the information claimed to be a trade secret. It would also be reasonable to make the confidentiality criterion for trade secrets stricter by requiring employers to place more emphasis on the confidentiality of the information.

Labor market reform as an external enabler of high-growth entrepreneurship: A multi-level institutional contingency perspective

We investigate the impact of friction-reducing labor market reforms on regional high-growth entrepreneurship (HGE) through the effects of reduced legal enforceability of noncompete agreements (NCAs). We draw on new institutional economic theory and the external enablement framework, with insights from the theory of market-preserving federalism, to explore how these reforms enable (disable) HGE within the context of other, concurrent institutional changes at different governance levels. We assemble a novel multi-level longitudinal dataset and employ staggered difference-in-differences estimation to assess causal effects. Our findings suggest that while reducing the enforceability of NCAs can foster regional HGE, the effectiveness of such reforms is heavily influenced by concurrent federal and local institutional changes. In sectors facing significant federal regulatory expansion, the benefits brought by the reduction of NCA enforceability are negated. However, local pro-market institutional changes can counteract the disabling effects of federal regulatory expansion. This highlights the need to consider how the evolving institutional environment influences potential enablers of HGE, cautioning against claims that these labor market reforms (or other exogenous environmental changes) universally yield positive entrepreneurship outcomes.

Strategic restraint: When do human‐capital‐intensive companies choose (not) to use noncompete agreements?

AbstractResearch SummaryExtant work in strategic management has focused on the role of noncompete agreements (NCAs)—a form of restrictive legal lever used by firms when managing human capital—and conceptualized them as being advantageous to firms. Challenging this notion, we highlight a novel downside of using NCAs and show how their use by some firms creates differentiation opportunities for rival firms. We analyze a unique survey dataset to examine the heterogeneity in the firms' actual use of NCAs conditional on industry and state. We find that the nonuse of NCAs is more common among firms that rely more heavily on talent and are also not the industry leaders, and such firms are more likely not to use NCAs with the goal of attracting skilled employees.Managerial SummaryNoncompete agreements (NCAs) have long been regarded as effective tools for firms managing human capital. Our research challenges this conventional wisdom. We show that NCAs are not uniformly beneficial to all firms even when looking at competitors within the same industry. By analyzing a unique survey dataset, we find that firms relying heavily on talent and not leading their industries are more inclined to forgo NCAs. Their strategic intent? Attracting skilled employees. This study sheds light on the delicate balance between legal constraints and talent attraction and is particularly salient in the context of the policy efforts to ban NCAs.

Employment restrictions on resource transferability and value appropriation from employees

AbstractResearch SummaryWe examine the joint adoption of four employment restrictions that limit firm resource outflows—nondisclosure (NDA), non‐solicitation, non‐recruitment, and noncompete agreements—and their associations with value appropriation from employees. Using novel individual‐ and firm‐level survey data, we find that when firms adopt restrictions, they tend to adopt either all four restrictions or only an NDA. Adoption of all four restrictions is more likely when workers have access to valuable resources, noncompetes are more enforceable, and states adopt the inevitable disclosure doctrine. Employees with all four restrictions earn 5.4% less than employees with only NDAs, and this effect is driven by workers with low bargaining power. Analyses of earnings and a single restriction (e.g., only noncompetes) yield opposite results from those considering joint adoption, likely because of selection.Managerial SummaryValuable firm resources are often embedded in employees. We study whether and when firms adopt four employment restrictions that could protect such resources—agreements not to disclose information, not to solicit clients or coworkers, and not to join or start a competitor—and examine the extent to which they are associated with value capture from employees. Using novel firm and worker‐level surveys, we find that firms mostly adopt either all four restrictions together, only an NDA, or use no restrictions. Workers are more likely to have all four restrictions when they have access to valuable resources, when noncompetes are more enforceable, and when states adopt the inevitable disclosure doctrine. Finally, all four restrictions are associated with 5.4% lower earnings on average relative to workers with only an NDA, driven by workers with low‐bargaining power.

Noncompete agreements in a rigid labor market: the case of Italy

Abstract Noncompete agreements limiting the mobility of workers have been found to be widespread in the United States, a flexible and lightly regulated labor market. We explore the use of noncompete agreements in a rigid and highly regulated labor market, where labor mobility is low, and the labor market is highly regulated via legislation and collective bargaining. Based on a novel survey of Italian workers and an analysis of the regulatory framework, our study shows how trends and patterns in the use of noncompete agreements are not specific to a flexible labor market. Even in a rigid and highly regulated labor market, noncompete agreements are widespread, and often do not comply with the minimum legal requirements, and yet workers are not aware of their enforceability. This suggests that institutions and labor market regulations are not enough per se, especially when targeted groups are not properly informed, and incentives to comply are minimal.

How does worker mobility affect business adoption of a new technology? The case of machine learning

AbstractResearch SummaryWe investigate how worker mobility influences the adoption of a new technology using state‐level changes to the enforceability of noncompete agreements as an exogenous shock to worker mobility. Using data on over 153,000 establishments from 2010 and 2018, we find that changes that facilitate worker movements are associated with a significant decline in the likelihood of adoption of machine learning. Moreover, we find that the magnitude of decline depends upon the size of the establishment, the extent of predictive analytics adoption in its industry, and the number of large establishments in the same industry‐location. These results are consistent with the view that increases in outward worker mobility increase costs for adoption of a new technology that involves significant downstream investments in the early years of its diffusion.Managerial SummarySuccessful business adoption of new technologies such as machine learning requires skilled workers with experience in implementing those technologies. In the early years of technology diffusion workers in early adopting businesses typically acquire these skills through on‐the‐job learning that is paid for by the adopter. So, if such early adopters face an increased risk of those skilled workers quitting, then their incentives to adopt the technology decrease. We examine this possibility using changes in noncompete enforceability as a proxy for changes in worker mobility and find that the likelihood of adopting machine learning decreases as the risk of worker mobility increases, particularly for larger establishments, establishments in industries where adoption may be more beneficial and in locations with many large competing establishments.

On the inefficiency of non‐competes in low‐wage labour markets

We study the efficiency of non‐compete agreements (NCAs) in an equilibrium model of labour turnover. The model is consistent with empirical studies showing that NCAs reduce turnover and average wages for low‐wage workers. The model also predicts that, by reducing turnover, NCAs raise recruitment and employment. We show that optimal NCA policy: (i) is characterized by a Hosios‐like condition that balances the benefits of higher employment against the costs of inefficient congestion and poaching; (ii) depends critically on the minimum wage; and (iii) alone cannot always achieve the constrained‐efficient allocation—a result that also holds for optimal minimum wage policy—yet with both policies, efficiency is always attainable. To guide policymakers, we derive a sufficient statistic in the form of an easily computed employment threshold above which NCAs are necessarily inefficiently restrictive, and show that employment levels in current low‐wage US labour markets typically exceed this threshold. Finally, we calibrate the model and show that Oregon's 2008 NCA ban for low‐wage workers increased welfare modestly (by roughly 0.1%), and that if policymakers had also raised the minimum wage to its optimal level conditional on the enacted NCA ban (a 30% increase), then welfare would have increased more substantially—by over 1%.

Non-Compete Agreements and the Market for Corporate Control

Non-Compete Agreements and the Market for Corporate Control

Breaking Barriers or Breaking Bad? The FTC’s Proposed Ban on Noncompete Agreements in Employment Contracts

Breaking Barriers or Breaking Bad? The FTC’s Proposed Ban on Noncompete Agreements in Employment Contracts

A Competition Perspective on Physician Non-compete Agreements.

Physician non-compete agreements may have significant competitive implications, and effects on both providers and patients, but they are treated variously under the law on a state-by-state basis. Reviewing the relevant law and the economic literature cannot identify with confidence the net effects of such agreements on either physicians or health care delivery with any generality. In addition to identifying future research projects to inform policy, it is argued that the antitrust "rule of reason" provides a useful and established framework with which to evaluate such agreements in specific health care markets and, potentially, to address those agreements most likely to do significant damage to health care competition and consumers.

Non-compete agreements: actual problems of Ukrainian legislation

This article is devoted to the study of non­competition agreements (prohibition of competition) in Ukrainian legislation, their legal regulation. This mechanism is used to regulate the relationship between the employer and the employee in order to protect the legitimate interests of the employer. The most common scientific approaches used to determine the legal nature of non-competition agreements in the legal doctrine, and they are evaluated. The authors established that, in essence, non-competition agreements are obligations with a negative content, despite that they are not provided for by the Civil Code of Ukraine.
 The article analyzes the legislation of Western countries concerning non-compete agreements, in particular France, Italy and the USA. The authors came to the conclusion that the provisions of the legislation of these countries are similar and establish the following requirements for contracts of this type: 1) to be in writing; 2) remuneration for the employee; 3) the duration of the obligation which is mainly in several years, the applicable territory and activities that are prohibited to perform. If one of the conditions is missing, then this is the basis for declaring an agreement invalid.
 Ukrainian legislation was analyzed, in particular the Law of Ukraine "On stimulating the Development of Digital Economy in Ukraine”, which provides for the concluding of non-compete agreements of Diya City residents. The authors came to the conclusion that, in general, Ukrainian labor legislation and civil legislation do not allow the conclusion of non­competition agreements, expect those provided for by the specified Law, because they violate human rights to work and entrepreneurial activity, and there are no laws that can limit these rights.
 An analysis of judicial practice is carried out, which is diametrically opposite, to some extent contradictory, because it is at the stage of formation. Since non-competition agreements exist in practice, the authors come to the conclusion that this topic is subject to further research.

Economics at the FTC: Spatial Demand, Veterinary Hospital Mergers, Rulemaking, and Noncompete Agreements

Economics at the FTC: Spatial Demand, Veterinary Hospital Mergers, Rulemaking, and Noncompete Agreements

Medicolegal Sidebar: The End May Be Near for Noncompete Agreements.

Medicolegal Sidebar: The End May Be Near for Noncompete Agreements.

The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

Abstract This paper examines how labor mobility restrictions like noncompete agreements affect firms’ investment decisions. Using matched employee-employer data from LinkedIn, I show that increases in the enforceability of noncompete agreements lead to widespread declines in employee departures, specifically in knowledge-intensive occupations. Established firms that rely more on these knowledge-intensive occupations increase their investment rate in physical capital. However, new firm entry in corresponding sectors declines. I provide evidence for different mechanisms to explain these patterns. Together, the findings show that labor frictions play an important role in investment decisions. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

A Call for Advocacy: The Case Against Noncompete Agreements in Psychiatric Practice

A Call for Advocacy: The Case Against Noncompete Agreements in Psychiatric Practice

Protect or Prevent? Non-Compete Agreements and Innovation

Protect or Prevent? Non-Compete Agreements and Innovation

Non-Compete Agreements in a Rigid Labour Market: The Case of Italy

Non-Compete Agreements in a Rigid Labour Market: The Case of Italy

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)