How Ending Non-Competes Could Turbocharge Innovation

Studies have shown that successful innovation is about information sharing and cross-fertilization. Restricting that process through non competes which limits the ability of people to move around and share ideas may stifle innovation and lead to stagnation. JL

Mike Masnick reports in Tech Dirt:

Non-compete agreements not only stifle sharing of information, but contribute to company stagnation. It goes back to the importance of knowledge and information sharing, rather than hoarding. What studies have shown is that innovation occurs through idea sharing among people working on big breakthroughs. The combination of different viewpoints, and different perspectives, often is what leads to the big breakthrough (at which point competitors can innovate on top of the big new thing). The lack of non-competes is an enabling tool in making that happen, because it allows the cross pollination of these ideas as people switch companies.

For years, I’ve been highlighting the overwhelming evidence that non-compete agreements are horrible for innovation. There are multiple studies on this, which show how much of Silicon Valley’s success can be attributed to an almost accidental interpretation of the California business code that outlawed non-compete agreements, while other studies have strongly suggested that a big part of the collapse of the Detroit auto industry could be pinned on Michigan switching from not allowing non-competes to allowing them.

About a decade ago, I got into a weird sort of circuit, giving presentations to (mostly) European policymakers and execs, trying to explain to them the “secret” to Silicon Valley’s success, and much of the presentation was about the non-compete story. But, of course, the underlying thinking behind it is more important (and more nuanced) than just “non-competes are bad.”

Instead, it goes back to much of what this site has always been about: the importance of knowledge and information sharing, rather than hoarding. What the details of various studies have shown is that innovation occurs through a combination of idea sharing among people all working on big breakthroughs. The combination of different viewpoints, and different perspectives, often is what leads to the big breakthrough (at which point various competitors can innovate on top of the big new thing). The lack of non-competes is just an enabling tool in making that happen, because it allows the cross pollination of these ideas as people switch companies.

Non-compete agreements, however, not only stifle that sharing of information, but they contribute to company stagnation. It limits the important flow of workers from one company to another and generally makes it more difficult to bring in necessary new ideas and perspectives. As I’ve said, they’re the DRM of human capital: trying to lock up information because of a very narrow, scared, protectionist view of the world.

That’s why I was excited a year and a half ago when the Biden Administration released an executive order tasking the FTC to explore banning or limiting non-competes. I was concerned about whether or not the FTC actually has the authority to do this (rather than Congress), but the underlying policy idea is a fantastic one for actual innovation.

So, it’s exciting to see that the FTC has now proposed a rule to ban non-competes. I still think this is something that would be much better if it were done by Congress, but the underlying policy is good:

The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.

I’m less concerned about the wage increases (not saying it’s a bad thing, but it seems secondary to me) as compared to the innovative breakthrough this could lead to instead.

Of course, now it has to go through a comment period, and I’ve already seen some traditionally corporate think tanks claiming this will make companies invest less in workers, but that’s hogwash. Again, California (and some other states) have banned non-competes for ages, and California has been home to so much innovation over the past half century… and that frequently includes worker training. I know of no tech companies that freak out over worker training out of fear that an employee might take that to a competitor.

Instead, it’s often the opposite. Companies know that because employees can go elsewhere, they have to up their game in providing the kinds of tools and services that support their employees’ career growth over time to keep them. In other words, the lack of non-competes can actually create more incentives to invest in worker training as part of a larger effort on retaining employees (I’ll note that my very first job in Silicon Valley was… creating a worker training program to help a large tech company better retain employees through facilitating a clearer career growth path).

Either way, I imagine someone will challenge this rule should it go into effect, and I do fear that the courts today would toss this rule out and say it’s beyond the FTC’s authority. And, relatedly, I do worry that if the FTC thinks it has the authority do promulgate rules like this one, even if for a good reason, it could start to roll out many other such rules, perhaps in support of more problematic policy goals. But, really, that’s even more reason for Congress to act and make this the law of the land, and enable much greater innovation.