It’s one of those decisions that goes unnoticed by ordinary people but can change the trajectory of a country and grace the history books decades later. By a narrow vote of 3 votes to 2 at the end of April, the Federal Trade Commission (FTC), the American competition authority, banned non-competition clauses on American soil and removed existing ones. The crowning achievement of a procedure initiated in January 2023 by the controversial president of the FTC, Lina Khan. This law professor was appointed to this crucially important position at the age of 32, and suffered from a few losing battles against tech giants.
The idea that non-competition clauses are harmful to the economy and help to strengthen dominant players has been the subject of fierce debate among economists. The FTC’s modeling is categorical. Their removal will accelerate the creation of new businesses and should give rise to 8,500 additional start-ups every year. The income of the average worker would increase by $524 per year. The study even predicts a drop in health care costs, up to $194 billion over the next decade. A point put forward to remind us that competition policy primarily benefits the average American.
Concretely, these clauses often force workers to keep a job they wish to leave or to move to a lower-paid sector, or even to move. An estimated 30 million workers, or nearly 1 in 5 Americans, are subject to a non-compete clause. Surprising point: they are even widespread in activities such as fast food where 1.4 million workers are subject to them.
It is in the world of technology that their use was most contested. Their removal should strengthen the dominant position of the United States in terms of innovation. The FTC estimates that this measure will lead to the filing of 17,000 to 29,000 additional patents each year. Many believe that if Silicon Valley is the technological leader that it is today, it is partly linked to the fact that Californian judges have long been hostile to this type of clause.
The secret of Silicon Valley
In the 1970s, the technological heart of the United States beat in the Boston area, with computer companies such as Digital Equipment Corporation and Prime Computer, which invented minicomputers – devices the size of a machine to wash. Except that in Massachusetts, non-compete agreements were strictly enforced at the time. Boston manufacturers then missed the microcomputing boat and gave way to Apple and Microsoft. In a noted 1994 book, political scientist AnnaLee Saxenian argues that the regions had different business cultures.
In Boston, engineers were expected to work their entire lives for one company. In the San Francisco Bay Area, it’s common for them to move from company to company, spin off concepts and found new start-ups that compete with their former employers. In 1999, Ronald Gilson linked this cultural trait to non-competition clauses. This attractive thesis is obviously reductive, but it has had a profound impact in the world of ideas. Moreover, in 2018, Massachusetts adopted a law to limit the use of these clauses.
Although the FTC has just voted for a general ban, the United States is nevertheless careful not to turn into the Wild West, which could discourage companies from investing in R&D. On the one hand, Non-compete clauses for senior executives – less than 0.75% of workers – can remain in force in existing contracts. On the other hand, trade secret law and nondisclosure agreements provide employers with various means to protect their sensitive information. The judges pay attention to this. Even though he has since been pardoned by Donald Trump, the case of Anthony Levandowski reminds us of this. In 2020, this former star engineer of Google’s autonomous car division, who founded the start-up Otto before selling it to Uber, was sentenced to eighteen months in prison for theft of commercial secrets.
Robin Rivaton is Managing Director of Stonal and member of the Scientific Council of the Foundation for Political Innovation (Fondapol)
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