FTC announces rule banning noncompetes

I've always thought of that as representing a stifling of innovation.

The short lifetime of patents and the requirement that you publish detailed information about the invention significantly mitigates this. If they were measuring innovation by the number of copyrights filed, then I might agree with you.

leading to an estimated average increase of 17,000 to 29,000 more patents each year

Insane to me that they use this as a measure of innovation, when almost by definition it is the antithesis of innovation.

I've always thought of that as representing a stifling of innovation.

Sadly, over my long career as a tech startup entrepreneur, my experience has been that your assumption is correct the vast majority of the time. Now when I teach or mentor young tech entrepreneurs I'm often explaining why they probably don't want to prioritize filing patents as part of their startup strategy. While there are certain exceptions, especially in pharma, biotech, materials science or medical fields, the years it takes for a patent to become enforceable and then the upfront cost + further years required to actually get a judgement, make patents largely ineffective in most startup contexts. There's also substantial uncertainty as to whether a startup can get the patent granted at all. After that, there's the challenge of getting it granted in a form which remains defensible and can't be easily worked around. Many people don't realize patent examiners can refuse to grant a patent unless the applicant narrows the claims.

Conversely, as a tech startup these days you do need to worry about patents potentially being used against you. The majority of tech patent cases are giant vs giant fighting over turf, a large incumbent trying to kneecap an emerging startup competitor (usually filing suit to make the startup unattractive to investors for a year and never intending to actually go to court) or patent troll vs everyone. Personally, I had both a giant trying to stop my startup's Series A funding and several patent trolls. Despite having no actual merit, the giant's suit did freeze our Series A and we nearly died. After seven months we'd demonstrated we could survive without a Series A so they dropped the suit (of course) but by then they'd cost us more than half our cash in just defending an obviously sham claim. As one investor told me, "Yes, it's clearly a bullshit claim but it will still cost serious money and a lot of founder attention over the next 18 months to get it thrown out and that, unfortunately, tips this deal over our risk threshold." And responding to the constant patent trolls just burns up startup founder attention and scarce cash in nuisance legal fees.

Despite the old-school trope of "garage inventor patents invention, makes fortune", frankly, from the perspective of fostering typical tech startups, you'd probably prefer a world where there were no patents outside of pharma, medical, bio, etc.

Both things - that the number of patents measures innovation, and that they serve to stifle it, can be true at the same time. Under a fixed patent regime, the more innovation there is, the more individual patents are necessary to stifle it. Of course, if we allow the patent regime to vary, then if it changes to make patents easier to acquire then that means less innovation.

However, it's true that this property - of being a valid measure, but interventions to change it having the opposite effect on the inferred variable - is a very unfortunate one in a metric.

Text of the rule itself starts on page 561, "XIII. Other Matters"

FRED has a good blog post on measuring innovation.

https://www.stlouisfed.org/open-vault/2021/june/how-to-measu....

Wonder ultimately how this will be handled once the Chevron Deference case is ruled on by the Supreme Court. The interpretations I've seen from other sources is that this will be overturned if the courts decide against the principle

I'd say the number of patents filed and granted by practicing entities of small to mid-size would be a pretty good measure of innovation. I think patent fees and complexity should be progressive, esp if you have working hardware and don't just flip the patent to a troll.

I feel like, much like BMI, patent volume can be used to measure a population.

Sure, for any individual‘s fitness or a company’s “innovativeness” they are useless, but in aggregate they can be revealing.

They do stifle innovation when one company locks up a huge portfolio of them. Forcing the employees who came up with the patentable ideas to sign non-compete agreements prevents them from working on anything related to those inventions elsewhere.

FTC doesn't really have the ability to do this, since contract law is part of state law

The federal government can absolutely regulate both employment and contract law. (Merger agreements are contracts. The FTC was established to block bad mergers.)

Whether the FTC can do this is untested. But that’s more a Chevron issue than a federal powers one.

Ask your attorney friends if a farmer growing food on their own land to feed to their own animals is "interstate commerce", and ask them to explain that to you.

What I'm referring to here is Wickard v Filburn in which the Supreme Court ruled that a farmer growing food on his own land to feed to his own animals was participating in "interstate commerce" and could thus be regulated by the federal government.

This is a big part of why the federal government can control things like which plants you are allowed to grow in your home.

But when the FTC tries to regulate something like non-competes and protect average workers the corporate attorneys come out of the woodwork, "oh no, the federal government can't do that!"

Interstate commerce is broadly recognized to include just about anything.

Options are also contracts and the FTC seems to have succeeded in regulating those.

The federal government has the constitutional right to regulate interstate commerce, and 100 years ago it discovered that all commerce is now interstate commerce, followed by the supremacy clause which is selectively applied (ie. not for scheduled drugs, but for everything else)

This Supreme Court could be friendly to invalidating that expansive interpretation though

so, big mismatch from the executive branch / agencies with the judicial branch which could completely warp our relationship with the Federal Government and what we find familiar in our way of life

But I dont think its as simple as saying “contract law is part of state law”

I’m not a constitutional scholar, but I’ll say this —- there’s a reason this one is debated. It seems to me (with around 70% probability) that there are many possible constructions that could emerge which would more or less conform to the (rather contingent) bar for Supreme Court decisions.

I say contingent because the history of the Supreme Court is far from a deductive process of pure interpretation.

I recognize the utility of the Supreme Court while dismissing any grandiose claims of objective morality or obvious legality. It is a body of people after all.

It is a good question. I am glad that the FTC is testing it.

Your friend may recall that the FTC occasionally acts against "deceptive" conduct in the marketplace. If you read the relevant law, it also can act against "unfair" conduct.[1] Sometimes people forget there are two words there separated by "or".

This would be an example of an "unfair" practice, which mostly are about predation in the context of unequal bargaining position when litigated under "Little FTC Acts"[2]. I don't know offhand whether these similar laws have been used to achieve the same thing state-by-state, but the FTC rule meets the straight face test for sure. So, regardless of what happens next at the Federal level, this is about to become a white-hot area of litigation under state "Little FTC Acts".

[1] https://www.law.cornell.edu/uscode/text/15/57a

[2] https://litigationcommentary.org/2021/06/15/a-fresh-look-at-...

It may have the ability to, but it's not really anything to do with trade.

If a noncompete agreement between a former employer, and a person who resides in a particular state, purports to prevent that person from taking up an employment contract with another employer - including by one who is located in a different state… well that seems like that could be an unfair restraint on interstate commerce.

Not agreeing, but just posting the other side of the argument from the US Chamber of Commerce. Not a fan of legislation by fiat, maybe this will prompt Congress to do something. USCoC said they will sue...

https://www.uschamber.com/finance/antitrust/chamber-comments...

The Chamber and its membership are strongly opposed to the Proposed Rule. It would categorically ban nearly all noncompete agreements—regardless of individual circumstances, such as a worker’s skill, job responsibilities, access to competitively sensitive and proprietary information, bargaining power, or compensation—and require that organizations rescind all existing agreements and provide notice to affected workers of such rescission. Such a proposal fails to recognize that noncompete agreements can serve vital procompetitive business and individual interests—such as protecting investments in research and development, promoting workforce training, and reducing free-riding—that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements. For centuries, courts have recognized the procompetitive benefits of noncompete agreements and balanced those benefits against any negative costs imposed by particular noncompete agreements. As perhaps acknowledged by the Commission’s request for comments on narrower alternatives, the Commission’s categorical ban would sweep in millions of noncompete agreements that pose no harm to competition, and in fact benefit the U.S. business community, economy, workers, and consumers.

https://www.uschamber.com/finance/antitrust/u-s-chamber-to-s...

The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.

It is both true that the FTC's mandate is broad enough to include this and that this might get successfully challenged in the courts.

If growing food for your own use is interstate commerce, contract law is interstate commerce.

I was subject to one as well, but it was just on my base, not total comp, which was not the majority of my compensation. And while my base was fine, it was more or less explicitly stated that this was meant to make it painful for employees to leave and had almost zero to do with any special information the employee had.

I know non-compete rules personally held me back at a previous tech job.

Yeah. Remember this when you go to vote in November. Elections matter.

Page 83-84 provides some guidance on garden leave and suggests that it will still be allowed under the new rule:

With respect to garden leave agreements, as noted previously, commenters used the term “garden leave” to refer to a wide variety of agreements. The Commission declines to opine on how the definition of non-compete clause in § 910.1 would apply in every potential factual scenario. However, the Commission notes that an agreement whereby the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis would not be a non-compete clause under the definition, because such an agreement is not a post-employment restriction. Instead, the worker continues to be employed, even though the worker’s job duties or access to colleagues or the workplace may be significantly or entirely curtailed. Furthermore, where a worker does not meet a condition to earn a particular aspect of their expected compensation, like a prerequisite for a bonus, the Commission would still consider the arrangement “garden leave” that is not a non-compete clause under this final rule even if the employer did not pay the bonus or other expected compensation. Similarly, a severance agreement that imposes no restrictions on where the worker may work following the employment associated with the severance agreement is not a non-compete clause under § 910.1, because it does not impose a post-employment restriction.

I am currently on one of those deals by working for an HFT, then taking a competitor's offer. It is really very nice. From a wealth-accumulation POV, I am losing out a lot of earning each month I'm not working, but I am still paid a very cushy six-figure salary that covers a comfortable lifestyle for my family plus decent savings. I value my time at prime working age much more than the net worth I potentially lost. I have been able to travel, hone hobbies, start and finish personal projects, just help out my wife, and much more. Honestly I don't want it to end.

I was denied a job I was well qualified for because, (paraphrased, besides the quoted part): Our CEO and your CEO have a "gentleman's agreement" not to hire people that work at eachother's company.

I have no idea why the recruiter was willing to put this in writing, and thankfully, I was able to find other work instead.

I know it's not a non-compete, but there are other ways that companies can illegally form cartels to suppress labor.

I personally believe that lack of non-competes was one ingredient for Silicon Valley becoming what it is.

I know people who were forced to take a year off between jobs (although they were compensated the whole time). Always thought that would be a pretty sweet deal.

If a company wants to pay someone not to work for a year, they're free to do that whenever they want. Maybe without noncompetes, they'll have to pay more to make it worth it for the guy being paid to sit around!

Yes, this is a huge win for labor from a very pro-labor administration.

I'm wondering whether EU will decide to adopt similar laws

It's worth noting that the so-called "garden leave" you're describing usually doesn't come with things like bonuses. That may even be a majority of your compensation depending on the role.

I suspect this won’t survive a challenge in front of the current Supreme Court, unfortunately.

Total aside, but I think it is ridiculous that CoC larps as a quasi governmental organization. When in actuality it is a Union of Capitalists.

I thought that non-governmental business association was pro-competition; guess not.

Edit: it was a dig to the pro-competition façade some pro-business people put forward.

Because we have a Democratic administration that is taking this stuff seriously.

Because excesses finally became so ridiculously over the top that it was finally politically viable to address it. Remember, chain restaurants have started using non-competes to ban servers and cooks from moving to another employer. The situation is finally in the eyes of the general public.

Election year

Lina has been pretty busy, but she's been making progress on a large backlog of bad corporate behavior.

What were these guys up to? https://www.ftc.gov/about-ftc/commissioners-staff/former-com...

Political will.

Lina Khan

Why not now?

The executive branch can unilaterally revoke these regulations

The US Constitution + amendments delineates the powers of the branches. Is the situation you describe possibly a window in time when executive branch constitutional overreach has not been yet challenged?

[ edit : great explanations below -> sincere thanks ]

completely abandoned its duty to pass laws

That's the duty of the legislature? To make more rules?

While your points are good, on the other hand, Congress at this point is totally broken, it’s hard to imagine it becoming unbroken (since it would require an amendment which is usually passed by Congress and they have no desire to make things harder for themselves), and it’s beholden to special interests in a way that the executive branch often isn’t.

So at least this way, things can get done.

This has been a problem for decades. Congress' focus is more on self-preservation than good policy. For example, granting abortion rights through case law was always incredibly tenuous and now that's been proven.

I predict this will be kicked around the executive branch and bounced in courts. Even if it stands, like you point out, future administrations can just revoke it. All the while, Congress should be taking action and codifying this.

Going off of the press release, it doesn't go into effect until 120 days after publication and doesn't apply to current senior executives which are defined as "workers earning more than $151,164 annually and who are in policy-making positions." I would also imagine that it will immediately be challenged in court.

Instead, under the final rule, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future. To aid employers’ compliance with this requirement, the Commission has included model language in the final rule that employers can use to communicate to workers.

Under the final rule, existing noncompetes for senior executives can remain in force. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

The final rule will become effective 120 days after publication in the Federal Register.

I wonder if she applies this maxim selectively, or if she would also oppose other impositions on economic liberty, such as minimum wage laws.

""" Under the final rule, existing noncompetes for senior executives can remain in force. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions. """

Given in tech industry / FANG, most people earn above the $151,164 I wonder how they define "policy-making positions" ?

As I read the above sentence I understand that this is a binary and and not an either you earn that much or are in policy making positions?

"same total annual compensation and benefits"

This would be a game changer. My experience with garden leaves was that the base salary remained but since the bonus and benefits were gone, the total comp was severely affected

I suspect that "policy-making positions" is a term of art that is more narrowly defined than it looks and that it'll actually be difficult or impossible to abuse it enough to made it apply to SWEs. Most likely big 4 accounting firms have a definition of what that means and it is part of accounting and auditing standards. At any rate they'd need to first abuse it to apply to managers who are below VP levels.

Unlikely they are in a policy making position.

Yep, this would impact basically any dev at Microsoft, Apple, Facebook, etc. From my own point of view (at MS), policy making decision do basically happen at my/our level too, unless policy is on the tier of "buyout Infection.AI talent". Any kind of planning research/work could be considered policy. Decisions like what kind of framework or listing to use? Policy!

I'd imagine that would be considered a role change and a new non-compete, and thus forbidden. That's definitely how I'd approach it if someone told me I was suddenly an exec. "Sweet, sounds good. Send over the new employment contract, then! With a 10% raise, of course."

New policy: no more non-competes

It's not bad when people are copying you, it signals that California is ahead of the curve on the issue and - upon further examination - others too like decriminalization of cannabis including removing it from background checks and drug testing for most employment, as well as certain tenant and landlord rights other states don't have.

Some of those non-competes were ridiculous with their "in perpetuity throughout the ends of the Universe" type wordplay, I'm surprised governments haven't been more vigilant on things like the stifling of entrepreneurial mobility, since it only helps their economies in the long run to do so.

Make it possible to disrupt, design economies for entrepreneurs as much as for corporations, and reap the benefits IMO. Let those big evil uglies get disrupted if they can't stay relevant or retain top talent.

I'd guess it will have the opposite effect as companies have one less big reason to avoid CA.

Eh.... any impact will play out over a long period of time. Everything interesting happens on the margin, so I do agree with you that CA's laws around non-competes has had a beneficial impact on new business formation, and contributed to CA's economic growth. If this gets fully implemented, it will level the playing field with other states, but it will take some time (a decade would be my bet) for the impact to be fully felt.

It's not. California isn't the only municipality to have banned NCAs.

https://natlawreview.com/article/state-law-restrictive-coven...

Yeah, this is a big one. How'd that happen in the first place?

It's one less tool for abuse from employers in an otherwise imperfect system

This would be such a game changer for worker mobility and entrepreneurship.

I've often wondered how often noncompetes get enforced/litigated.

I had to sign a noncompete once, in order to get a severance package when the company was going out of business. I asked a lawyer about it, who said don't worry about it, there isn't going to be anyone who will ever enforce it.

You already cannot use trade secrets from your last job at a new role. That's in pretty much every single employment agreement, spelled out clearly. That does not mean you cannot go work for a competitor and do something new there.

Removing the risk of legal consequence simply for changing who you sell your labor to is a big change for many people.

Noncompete clauses have often been used by employers to scare their employees into thinking they'll be sued just for simply finding a new job at a different company.

Yes, as this eliminates the threat of lawsuit I've had made against me for just changing jobs (multiple times).

Tipping culture stays because consumers don't want to pay what the product is worth. You reduce salaries and suddenly the food looks cheaper, and the "tip" is what they took out of the salaries. When restaurants end tipping, consumers revolt at the real prices.

You can ban tipping culture for yourself if you want. The government doesn't need to get involved.

CA already makes non-competes unenforceable and aren't most FAANG employees in CA?

Quite the opposite, I suspect one of the reasons FAANGs are successful is the lack of non-compete in CA.

Folks can easily hop around, ask for higher wages and take their skills to a new company that directly competes with the old.

There's a heavy competition among the tech companies both for talent and for their businesses

Using investment strategies developed at Company A to make money for Company B would likely be a violation of your NDA. Even if you didn't use anything you learned at Company B, you might still expect a trade secrets lawsuit if they really suspect you did (printing out docs, storing docs off network, etc.) There already is plenty that companies can do to protect trade secrets from leaving with employees that don't require you to find a new career field. Like maybe Company A can better separate the work so that every software engineer doesn't need to have access to the secret sauce or simply making the job more attractive so that the ones with the secret sauce don't feel the need to leave at all. Why would a company bother to work hard to retain you if they know that leaving would involve taking a pay cut, relocating, or having to restart your career elsewhere? Employers may offer more initially when hiring non-compete workers but there's little incentive to grow their wages. As for training costs, many companies already require extra years of service for educational assistance. Simply make the employee pay back any training costs if they voluntarily leave for a new job within 6 months after initial training is concluded.

I see the point, but wouldn't this new rule also force employers to pay more to prevent workers from leaving in the first place? Employees won't leave if they are well compensated.

You can have training repayment and non-disclosure clauses in contracts, leaving cost recovery and legal remedies for employers.

Takee your investment industry example - a non-compete could prevent you from taking a lucrative position in a competitor of your current employer, doing completely unrelated work like writing software for their settlement system. I would rather have the freedom to choose where I work.

    > My noncompete prevents me from leaving and immediately taking a job at company that invests in the same markets. That is a reasonable way for the company to protect its intellectual property. 

Hogwash! I demand a free market for my business, but a closed market for my assets.

I do too and it feels to some extent that its about sending a message. I worked at Citadel, and they had these posters about Integrity, Winning and being a meritocracy and all that but their ever more constraining non-competes completely flew in the face of it and it was upon them putting one of those agreements on me that I started to become disillusioned with the firm (around the same time that I found that Ken Griffin was donating to Trump's campaign).

I tried to negotiate to get them to at least agree making the non-compete periods pay out my full comp and not just base, but they absolutely refused to budge an inch. Some people I knew there had non-competes locked in at their base salary when they started, which in some cases was 10+ years ago, meaning that it was a relatively paltry amount. They also had a clause in them that stipulated that it was 100% at the discretion of the firm as to whether they would enforce it or not- meaning that it wasn't even a guaranteed paycheck if you left... they would decide- and only after you left or were fired- if they were going to enforce it, leaving you in limbo until they made their decision.

F non-competes. Mine worked out okay, my wife got burned hard on them and it took her career at least 2 years to recover from hers.

I didn't know the FTC was this savage lol

How is Senior Executive defined? C-Level only? Named Executive Officers on the 10-K?

whoa, that existed? sheesh

A case that isn't even a tech company: Prudential Security enforced non competes against minimum wage security guards[0]

[0]: https://www.cbsnews.com/news/noncompete-agreement-feds-sue-3...

https://appleinsider.com/articles/23/09/25/rivos-countersues...

Phillip Shoemaker. https://www.theverge.com/2019/5/29/18643868/apple-app-store-...

Unfortunately, what you, I, or any non-billionaire voter thinks is reasonable or not is impertinent to the "free speech" of super PAC corporate lobbyists and $5 ideological fringe zealots near total monopolization of legislative output. No amount of grassroots action, voting, or dumb insurrections can break through entrenched corruption that is in the tank for billionaires, Russia, QAnon, and militant evangelical Christian white suprematists.

Mistral (or even Mixtral) + RAG + txt/pdf files of law is nowhere close to usable to replace lawyers, and probably wouldn’t even provide reliable legal tooling.

(A decent LLM + RAG + LexisNexis or Westlaw’s proprietary extremely extensively human annotated datasets of constutitons, statutes, case law, precedent, and scholarship, OTOH, would likely be ingredients from which a powerful professional tool could be built.)

I think its pretty clearly a ploy by the biden regime. It follows the same playbook as the student debt cancelation plot.

Use gray areas in the law to do things that it was obviously not intended for, then advertise how you did the thing, and then when it inevitably gets shut down because its not legal you blame the other side for killing it.

He is just playing with voters.

This is past the NPRM stage, if I am reading correctly, so final rule is getting published in the federal register. That is as baked as regulations get.

Trade secrets and NDAs can still be enforced.

Would you mind linking to some of examples of their prior decisions that makes you think that? I am curious.

Many companies already try this approach

No. It explicitly does not do that.

"The Commission declines to extend the reach of the final rule to restraints on concurrent employment. Although several commenters raised this issue, the evidentiary record before the Commission at this time principally relates to post-employment restraints, not concurrent employment restraints. The fact that the Commission is not covering concurrent-employment restraints in this final rule does not represent a finding or determination as to whether these terms are beneficial or harmful to competition. The Commission relatedly clarifies that fixed-duration employment contracts, i.e., contracts between employers and workers whereby a worker agrees to remain employed with an employer for a fixed term and the employer agrees to employ the worker for that period, are not non-compete clauses under the final rule because they do not restrain post-employment conduct."

Lina Khan, AI, and China.

Apple+ is like MSNBC: they only want incrementalist pseudo-agitators rather than those who speak truth to power. (MSNBC has a history of firing hosts who Washington king makers or Comcast executives disapprove of.)

Anyone can have a “strong economy” if they can print $2T a year. The question is for how long.