From: allin
The Federal Trade Commission (FTC) has voted to ban non-compete agreements across the United States [00:47:36]. This decision marks a significant shift in employment law, with proponents arguing it will foster innovation and increase worker mobility.
The Ruling
The FTC’s vote was 3-2 in favor of the ban [00:47:36]. The ruling mandates that non-compete agreements be entirely banned and requires companies to inform their staff that existing non-competes are unenforceable [00:47:50]. The new rule is set to take effect within 120 days, after which the vast majority of current non-competes will become unenforceable [00:48:21].
Impact and Exceptions
Approximately 18% of the total U.S. workforce, or 30 million people, are currently covered by some form of non-compete agreement [00:47:40]. The FTC anticipates that this ban will lead to the creation of 8,500 new startups annually [00:48:56].
There are a few exceptions to the ban:
- Existing non-competes for senior-level executives are exempted [00:47:55].
- Non-competes formed in the context of the sale of a business are permitted [00:48:00].
The U.S. Chamber of Commerce has stated its intention to sue over the ruling [00:48:52].
Debate and Perspectives
California vs. Other States
Non-compete agreements are generally not enforceable in California, except under specific circumstances [00:48:28]. This has been a significant difference, with such agreements being actively enforced in other regions like Boston and New York, even for professions like hairdressers [00:48:34].
Arguments for the Ban
Rebecca Slaughter, a Democratic FTC Commissioner, described non-competes as “unfree and unfair” [00:48:06].
David Sachs supports the ban, highlighting that California’s lack of non-competes has significantly contributed to the tech industry’s rapid innovation and growth [00:54:25]. He argues that the free flow of talent, unhindered by such agreements, allows venture capitalists and skilled individuals to quickly converge on the best opportunities and platforms [00:54:40]. Sachs believes that imposing non-competes would introduce enormous delays and friction in talent mobility, ultimately hindering innovation [00:55:02]. He views the FTC’s action as a positive step towards maximizing the pace of innovation [00:55:16].
Chamath Palihapitiya believes non-competes have no value in any market, except possibly East Coast financial markets where practices like “Beach leave” or “Garden leave” are common [00:50:57]. He asserts that intellectual property is less valuable than ever, especially with the prevalence of trade secrets over patents, and the increasing trend towards open-source development [00:51:34]. Chamath advises employers to focus on hiring and paying the best people, and firing those who don’t perform, rather than relying on restrictive agreements [00:52:13]. He concludes that dynamic markets that add value are moving past these agreements, and it makes sense for everyone to do the same [00:56:35].
Arguments Against / Concerns
Andrew Ferguson, a Republican FTC Commissioner, expressed concern that the FTC might lack the authority from Congress to make such a sweeping ruling [00:48:14]. Sachs agrees that such a significant change should ideally be made by Congress [00:55:34].
David Friedberg acknowledges both sides of the issue. He notes that in industries outside of tech, such as agriculture and financial services, non-competes are used to protect trade secrets and intellectual property (IP) [00:49:11]. He argues that non-competes allow companies to invest in employees with confidence that their knowledge and information won’t be immediately taken to a competitor [00:50:04]. Friedberg suggests that removing non-competes could lead to less information sharing with employees and potentially lower salaries, as companies might be more fearful of knowledge walking out the door [00:50:27].
Industry Specifics
Non-competes are common in:
- Agriculture and “ag inputs” industries, where new technology is developed [00:49:11].
- Financial services, where they protect trade secrets and proprietary algorithms [00:49:21].
- Media, exemplified by cases like Tucker Carlson and Don Lemon, who had tight non-competes requiring full contract payouts before starting new ventures [00:55:58].
Broader Implications for Business Moats
Sachs argues that while non-competes may no longer be enforceable, businesses can still build strong “moats” through network effects, data scale effects, strong products, and brand loyalty [00:56:52]. He contrasts this with “legal arrangements” like patents and non-competes, which he considers less durable forms of protection [00:57:07].
Talent Mobility and IP Misuse
The tech industry thrives on the free flow of talent, with average employment terms being relatively short (1-2 years, or 36 months) [00:57:48]. Employees are generally allowed to take knowledge gained “in their head” to new companies [00:58:37]. However, it is strictly against the rules to take physical work products, documents, or company data (e.g., thumb drives, old computers, code, CRM databases) [00:58:18]. Companies monitor work computers [00:59:35]. Founders are advised to get permission and a waiver from their employers for side hustles and to use a “clean machine” for any new ventures to avoid IP claims [00:59:18].
[!EXAMPLE] There was a famous instance where Steve Chen, co-founder of YouTube, had early versions of YouTube code on a Facebook laptop, leading to speculation that Facebook could technically “own” YouTube [00:58:44].
[!EXAMPLE] Steve Jobs famously sent an email to Bruce Chisen regarding Apple and Adobe’s “no-poaching” agreement, highlighting the competitive dynamics of talent acquisition [01:00:35]. This led to legal action and a settlement involving Google and Apple agreeing not to poach employees, with Eric Schmidt leaving Apple’s board due to perceived betrayal over Android [01:01:00].
Chamath experienced a direct impact of talent mobility and market speed when his 99-cent music download store at AOL, despite strong performance, was outmaneuvered by iTunes’ launch of a similar store nine months later [01:05:00].