The non-compete agreement is a lightning rod in the tech industry, with proponents claiming they are necessary to protect valuable trade secrets and critics arguing they hinder worker mobility and startup activity.
A new report from the Brookings Institution’s Hamilton Project seeks to cut through the noise. Compiling the most comprehensive recent studies on non-compete agreements, the report’s author, Matt Marx, has four key policy recommendations for lawmakers who want to promote economic growth.
These are Marx’s suggestions, paraphrased:
- Employers should inform employees if non-compete agreements will be in their contracts before they accept the job. By waiting until an employee has accepted (and presumably turned down other offers) employers take away that hire’s negotiating power.
- If existing employees are asked to renew or sign new non-compete agreements, employers should be required to compensate those workers.
- Allow judges to rewrite overreaching non-compete agreements so that they are in-line with state law. Give attorneys general the power to go after firms that require workers to sign predatory non-competes.
- Bolster non-disclosure agreements so that they make a better substitute for non-competes.
Broad use of non-compete agreements has come under scrutiny in recent years. Traditionally used to protect intellectual property, lower-level employees are increasingly expected to sign them. Still, many in the tech industry believe they are essential to protect firms’ proprietary information.
Marx’s report leans in the other direction, citing studies that show how non-competes hinder entrepreneurial activity and worker mobility. But he does include one analysis that shows strict non-compete enforcement could encourage more startup acquisitions.
Marx is an associate professor for Boston University and previously taught at MIT. He specializes in knowledge workers and the spread of innovative ideas. He compiled the report for the Hamilton Project, an arm of Brookings focused on policies that can grow the U.S. economy.
Read the full report here and continue reading for highlights from Marx’s analysis.
- A 2011 survey of a little over 1,000 randomly selected engineers found 43.3 percent signed non-competes in the past decade.
- A 2016 survey of more than 11,000 people found 15 percent of responders were currently subject to non-competes and 3 percent were unsure whether they had signed one.
- Despite the relatively small number of non-compete lawsuits, workers still reported limited mobility in the studies cited by the Hamilton Project report. That suggests that even if non-competes rarely make it to court, they still have a chilling effect on worker mobility.
- Marx cites a 2011 study that found venture capital dollars go further in the creation of startups, patents, and jobs, in states that don’t have strict non-compete enforcement. The phenomenon holds even when Silicon Valley is excluded from the study, according to the Hamilton Project.
- One study did find an unexpected benefit for entrepreneurs in states with stricter non-compete laws. When Michigan tightened its non-compete laws, startup acquisitions increased. The 2015 study’s authors believe the uptick occurred because acquiring firms had more confidence that a startup’s employees would stay on the team after the acquisition because of their employment contracts.