Startups and non-compete agreements
TLDR: As conversations swirl around the use of non-compete agreements in the labor market, it is important that lawmakers consider the effects of these agreements on startup formation and talent acquisition. Instead of protecting legitimate business interests, non-compete agreements are often used to block competition, prohibiting talented Americans from starting their own innovative ventures and from hiring the talent they need to succeed and to be competitive.
What’s happening this week: Startups and advocates are paging through the Workforce Mobility Act—introduced by Sens. Todd Young (R-Ind.) and Chris Murphy (D-Conn.) last week—that would prohibit the use of post-employment non-compete agreements except in a limited number of exceptions, including for senior executives, sale of a business, and dissolution of a partnership.
In a press release following the bill’s introduction, Sen. Young stated that “A complete reform of non-competes will empower our workers and entrepreneurs so they can freely apply their talents where their skills are in greatest demand.”
Why it matters to startups: One of the biggest challenges facing startups today is access to qualified talent. Startups rely on the ability to hire individuals who can take the skills and knowledge they have developed working for other companies to foster innovation and growth for emerging businesses. These companies often only take flight when employees at existing tech companies have the ability to leave and start their own ventures.
The proliferation of non-compete agreements negatively impacts the establishment of new firms and causes those firms that do get off the ground to often do so with inadequate talent, both in number and in skill, because of the widespread use of non-competes across industries. According to a report by the Economic Innovation Group, close to 40 percent of Americans reported to have been bound by a non-compete at some point in their careers. The broad usage of these agreements only serves to stifle innovation, forcing employees to instead remain in roles they have outgrown, rather than challenge the terms of a non-compete agreement.
In contrast, states like California, where courts strictly limit the enforceability of non-compete agreements, often credit their non-compete policies for the success of their startup ecosystem, which allows permits ideas to “naturally flow to whichever company can best put them to use.” On the other hand, states that strictly enforce non-competes have generally been unable to compete with the scale and rapid expansion of the tech industry in Silicon Valley.
While proponents of non-compete agreements continue to argue that they are necessary to protect the intellectual property and sensitive information of a company, this argument is without merit, as trade secrets already enjoy protection under state trade secrets law, the Defend Trade Secrets Act, and through the use of non-disclosure agreements. Non-compete agreements instead serve as a mechanism for established companies to stifle possible competition.
The Workforce Mobility Act represents a step in the right direction towards changing the rules regarding non-competes. While California law represents perhaps the current gold standard for preventing the enforcement of many non-compete agreements across the state, efforts to eliminate or reduce the usage of non-competes on a nationwide scale and avoid a patchwork of state laws are welcome step for startups that already face numerous challenges in getting off the ground.
On the Horizon.
The House Financial Services Committee is holding a legislative hearing tomorrow at 10 am to examine Facebook’s proposed Libra Cryptocurrency. Facebook CEO Mark Zuckerberg is scheduled to testify at the hearing.
The House Homeland Security Committee is planning to mark up legislation at 10 am tomorrow that would establish a commission to study online platforms and extremism, and provide recommendations to Congress about what responses lawmakers should take.
NetChoice is holding a panel discussion on online content moderation and vulnerable communities at 12:30 pm this Thursday, Oct. 24.
The Internet Society, in partnership with the Center for Democracy & Technology, LGBT Tech, and the Open Technology Institute at New America, will be holding a two-part briefing on the technical and human elements of encryption at noon this Friday, Oct. 25. Learn more and RSVP here.
