Eric Posner Writes About the FTC Rule Banning Non-Compete Clauses

Why Non-Compete Clauses Should Be Banned

Last week, the US Federal Trade Commission issued a rule banning provisions in employment contracts that forbid employees to work for a competitor after they quit or are fired. Within hours, a Texas firm sued to block the rule, and the following day, the US Chamber of Commerce, a business lobby, sued as well.

But the FTC’s rule is based on a mountain of empirical evidence showing that non-compete clauses harm workers, consumers, innovation, and employee mobility. Moreover, they are already regulated in most states, and banned in a few – including California, home of Silicon Valley, the single most innovative place in the world.

Businesses argue that they need non-compete clauses to prevent employees from stealing proprietary information. Suppose a distributor has compiled a list of customers after years of outreach. An employee may be tempted to take the list to another firm and, for a higher wage, use it to poach customers from their previous employer. Businesses also argue that non-compete clauses protect investments in training. Suppose a firm teaches new employees how to use accounting software. If the employees can immediately move to another firm, they can obtain a higher wage because they require no training at the firm that hires them.

Read more at Project Syndicate