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The Harvard University Management Magazine has been published for a century and gathers articles based on research and data. Its authors include the best international management and business experts in a variety of fields, including leadership, negotiation, strategy, marketing, finance and operations. Harvard Business Review articles are translated and published in Globes three times a week: on Mondays, Wednesdays and Thursdays (G Magazine).
About the authors
Mark Lemley is a professor at Stanford Law School, and director of the Stanford Program in Law, Science and Technology. He is also a senior fellow at the Stanford Institute for Economic Policy Research.
Orly Lovell is an author and professor of law at the University of San Diego (USD) School of Law. She is one of the country’s leading experts in labor law
The announcement by the Federal Trade Commission in the US of its intention to prevent employers from prohibiting employees from moving to competing companies (noncompetes) is only a way to protect the latter’s rights, but also helps competition and innovation.
Anti-competition clauses have a detrimental effect on talent mobility, entrepreneurship and equality. They restrict workers from changing employers or starting a competing business on their own. These limitations hurt wages, reduce the degree of entrepreneurship and limit efforts to correct inequality.
In the last decade, various studies have presented evidence of the central role of human capital policy. These studies overwhelmingly show that harming competition does not only harm employees, but also companies and innovation at a regional level. Anti-competition clauses reduce dynamism and hinder the free market at the level of the workforce. They make it difficult to establish new companies and contribute to monopolistic industries controlled by the old companies. Also, they harm employee motivation and knowledge sharing, the building blocks of innovation.
Prohibiting employees from moving from one competitor to another not only harms their external prospects, but also harms the human capital that makes up the organization and the quality of their work, thus reducing the incentives to perform the various tasks in a fundamental way. When talent is stuck in certain jobs, the labor market becomes a “lemon market” – that is, a market where it is difficult to determine the quality, skills and past experience of candidates. In such a market, companies are stuck with dispassionate employees. When companies don’t let employees leave for “greener fields”, the immediate result is “quiet resignations”, angry employees and unsatisfied employers.
An experiment on anti-competition laws
California and Massachusetts in the USA were destined in the early 1970s to become a global high-tech center, as Silicon Valley has become today. While in California the high-tech industry developed and strengthened over the years because it had always resisted the restriction of anti-competition laws, in Massachusetts the industry degenerated around the older generation of companies .
But this is not the end of the story and the difference between the two countries. California as a whole benefits from its comparative policy advantage. The best minds flock to the country, with the world’s most talented people drawn to the freedom it offers. Existing companies also benefit from this, because a free labor market means that more and more quality workers come to them. And at the end, the country itself benefits from the taxes of the strong market economy.
Beyond that, innovation processes that take place in California are also reflected in other industries beyond high-tech, such as the biotechnology and pharma industries, the entertainment and content industries in Southern California – thanks, among other things, to the restriction of the prohibition on employers preventing employees from moving to competitors.
Although this is not a perfect example – there were many other factors that contributed to the rise of Silicon Valley in California – but the decision not to limit competition in the country through laws that stifle innovation and prevent it, contributed to the growth of the economy.
It should be noted that recently in California and Massachusetts we even examined the effects of anti-competition laws as part of an experiment they launched. According to the results, today also in Massachusetts, a ban on competition has been enforced for a long time – and even a few years ago, they passed a law limiting the use of such laws, among other things following the results of the study.
Intellectual property is about balance
A healthy innovation policy needs a balance. For example, the intellectual property law balances the desire to help innovation processes against the risk that excessive restriction will stifle the very creativity that the law is supposed to protect. In anti-competition clauses, however, there is no similar balance. These are tools that comprehensively prevent a person from working in the profession or workplace of his choice, sometimes for a period of many years.
There are better tools for achieving a balance between the ability of employees to change jobs and start companies, and the desire of employers not to see their research and development go out the back door. In California, where anti-competition clauses have never been enforceable, companies have other means of maintaining their independence.
For example, every state protects trade secrets, and in 2016, Congress passed the Trade Secrets Protection Act to provide additional protections for confidentiality at the federal level. Commercial confidentiality strikes the right balance by focusing on narrower restrictions on the use of specific information, rather than the blanket prohibition of competition.
Dinosaurs holding back the economy
Bottom line, anti-competition clauses help no one but dying companies—those that can’t compete to hire the best talent and can’t survive in the innovation market. All others—growing companies, new companies, workers, and the economy—benefit from a free, dynamic labor market where workers can move freely and companies compete for their talent.
Unfortunately, supporters of these dying companies are attacking the FTC’s proposal with vigor, in the pages of the Wall Street Journal and elsewhere. The Federal Trade Commission is right not to allow the dinosaurs of the past to hold back our economy.
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