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I write a lot about the problem of concentration. Today I have something that you can actually *do* about it.
One thing I keep hearing over and over from people in different businesses is a sense of fear. Roughly 80% of the interviews I do start with ‘you’re not going to use my name, right?’ This is as true of conversations with cheer coaches as it is of tech engineers, printers, artists in Hollywood, office supply vendors, and software entrepreneurs. People are terrified of retaliation, and this fear is pervasive across the political economy.
Well today I’m going to explain one mechanism inducing this fear, and a way that you can actually push the Federal Trade Commission to block it. It’s known as a non-compete contract, and it’s a specific employment contract or clause in a contract that prohibits you from choosing to work for someone else in the same or a similar industry for a period of time. For the last six years, there’s been a debate over the nature and legality of these arrangements, and regulators and legislators are beginning to take action.
Now you can, as well.
I’m going to. And the reason is because, at its heart, a non-compete contract is a favorite toy of the Bob’s.
The extent of non-competes is so extreme that it’s likely holding down wage growth and preventing the formation of new companies. The stories are endless. Doctors and nurses who are fired can’t tell their patients what happened, and they can’t open up practices near where they worked. Journalists can’t move to a different outlet. One scholar found that a high-end steakhouse prohibited employees from working at “any restaurant that featured steaks, chops, seafood or derived more than 25 percent of their revenue from the sale of beef.”
These agreements empower every mini-Napoleon in American life. Take this observation from Jane Flanagan the Chief of the Workplace Rights Bureau within the Illinois Attorney General's Office.
I remember speaking to one employee of a small spa and hair salon whose employer had enforced a non-compete against one former employee and would “brag” about that or sort of wave around the temporary restraining order she’d obtained to prevent other workers or dissuade other workers from looking for competitive offers. And, interestingly, those workers expressed that they felt this not only limited their outside options but it limited their ability to then complain about things like low wages or bad work schedules at that job that they felt stuck in.
These agreements are a big deal; roughly 20% of Americans in the workforce have a non-compete agreement, and 40% have signed a non-compete at some point in their careers. The argument for these contracts is that you may have some unique knowledge about a business, and you shouldn’t just be able to take that unique knowledge developed by someone else’s capital to a competitor. Traditionally these kinds of agreements bleed into trade secrets law, and were usually applied to top engineers with very specialized knowledge.
But today non-competes extend over huge swaths of the economy, everyone from camp counselors to check-cashing workers to hair stylists to cheer coaches to doctors. So that argument about trade secrets doesn’t hold. There are also serious problems with this theory on the merits; increasingly scholars are recognizing that California’s advantage in technology comes in part because it doesn’t allow non-competes to be enforced. As a result, engineers often their jobs to start or work at different companies, creating the weird ecosystem known as Silicon Valley.
This isn’t to say that employees leaving and going to a competitor can’t be a legal problem, such as when an employee is stealing customer lists or trade secrets. But non-competes aren’t solving for those problems, but for the problem of having to treat people with basic respect for fear they’ll leave the employment and get another job. Non-disclosure agreements and trade secret laws can handle such cases, we don’t need to have a legal regime verging on indentured servitude.
On a very basic level, non-competes strike me as obviously illegal. We have antitrust laws designed to foster competition, yet the literal nickname of these contracts is non-COMPETE. They remind me a bit of a time I was working on the financial crisis and someone said the ‘liar loans segments are defaulting at exceptionally high rates,’ and I asked, ‘wait there’s a segment of mortgages known in the industry as LIAR loans?!?’ (This is yet another example of antitrust and regulatory legal babble being divorced from reality.)
Fortunately, there are a lot of ways to address this dynamic. The Federal Trade Commission has authority to ban “unfair methods of competition,” so it can just make these agreements illegal with a rule. Congress can also pass laws, and there are a bunch of bills co-sponsored by members of both parties. State attorneys general have some authority, and states can and do legislate against the practice.
Here’s how you can have an impact. Last month, finally, the FTC held a workshop on non-competes, and is considering taking action. And they are soliciting feedback from the public. If you want to weigh in, you can offer your views to the FTC here: https://www.regulations.gov/docket?D=FTC-2019-0093
It’s particularly useful if you’ve had experience with non-competes, but that’s not necessary. Here are some questions to answer when you send your feedback.
How did a non-compete affect your ability to look for work, accept a new job, or start a business?
Have you ever seen a useful application of a non-compete? What is the best way to distinguish between a useful application and a coercive one?
Did a non-compete ever prevent you from leaving an abusive, discriminatory, or unsafe work environment?
What, if any, ability and opportunity did you have to negotiate over your non-compete or the terms of it?
You can offer comments anonymously, or with your name attached. And the FTC really does take comments from the public seriously. I know it’s hard to believe this is the case, but it is. FTC staff and commissioners have flown under the radar for decades, and they love it that Congress and the public pays zero attention to their wretched track record. That started changing a few years ago. Now Congress regularly upbraids them for being incompetent; the FTC has responded with both immense internal defensiveness and irritation, and engaging in slightly more aggressive action. They don’t like your comments, but they listen to them.
And if you want to send me your comments as well, I’ll publish a few of them. Just send it to me by hitting reply to this email.
Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. I’m looking into a number of different industries, from ticketing to podcasts to corporate relocation services to regulated medical waste. If you know of a monopoly or a market with interesting characteristics well, let me know.
P.P.S. I thought this was a good quote from a reader about the Microsoft piece.
I recall a '90s conversation with an Accenture consultant then working at Microsoft. I parroted the line that Microsoft was using its monopoly in OSs and apps to stifle innovation in the market, which it was, of course. My conversation partner observed that the stifling of innovation within Microsoft to protect cash cows was even greater.