Published on Jan 23, 2025
Groundbreaking study undermines arguments in favor of noncompete agreements. One of the main criticisms lobbed at the Federal Trade Commission’s noncompete ban as it wended its way through rulemaking was that the agency lacked sufficient justification for the regulation, which labeled the agreements illegal in virtually all employment contexts.
Noncompetes prevent trade secrets from leaking out more effectively than other measures, the American Hospital Association said. Employees who sign the agreements benefit from increased wages, the U.S. Chamber of Commerce wrote. Rather than banning noncompetes, the rule should require proper disclosure of the terms so workers can make the choice themselves, argued the International Center for Law and Economics. And employees are capable of negotiating the terms of their noncompetes in many cases, Business Roundtable told the agency.
A massive new study of 14,000 workers’ behavior under noncompete agreements throws cold water on those arguments. Although not yet published, the working paper shows compelling evidence that workers aren’t compensated for signing noncompetes and typically don’t negotiate the terms of the agreement. Workers who know they’re signing a noncompete are more likely to break it, compared to workers who weren’t aware of the restriction. And noncompetes provide no benefits in preventing the flow of sensitive information that firms can’t gain with a less-invasive non-disclosure agreement.
Workers who received a job offer with a noncompete made 4.5% less money over the next year on the hiring platform than those who were offered the same job without the restriction. If they weren’t aware of the noncompete, that loss jumped to 21% reduced earnings on the recruiting platform.
“At least in our setting, noncompetes reduced mobility and earnings without reducing the spread of firm secrets,” the authors wrote.
The study, titled “Clause and Effect: Theory and Field Experimental Evidence on Noncompete Clauses,” is the first of its kind to explore the restrictive agreements, which have taken center stage in recent years after reports surfaced that fast-food workers and hairdressers were subject to broad noncompetes. Its authors, University of Maryland economics Professor Evan Starr, Columbia Business School Professor Bo Cowgill, and Brandon Freiberg, a PhD candidate at the school, worked with a pair of finance companies to hire thousands of contract HR recruiters to study how workers behave under a noncompete.
They split the new hires at the first company into three groups: a control group without a noncompete, a group given a contract with the noncompete highlighted and on the first page, and a third group with it hidden partway through the document. The researchers randomized the workers’ hourly pay rates, and were able to track how long each candidate spent on each page of the contract and whether they signed it. After the HR work was completed, the researchers waited for a period, then had a second company contact all of the workers, offering a gig that would violate the terms of the noncompete and could be completed in a shorter period of time if they violated the non-disclosure agreement as well.
They tracked workers’ responses to job ads over the next few months, including after they were reminded of their obligations under the NDA and released from the noncompete.
“The goal of our study was to try to present the first causal evidence of the effects of a firm requiring noncompetes, and the effects of workers signing them,” said Starr in an exclusive interview with The Capitol Forum. The economics professor has become a go-to expert on noncompete agreements, and his work was cited over a hundred times in the FTC’s final rule banning them.
Workers who were offered clearly disclosed noncompetes were about 15% less likely to accept the contract, the researchers found. But there were no differences in acceptance rates between those whose contract contained a hidden noncompete and those whose contract contained none at all. Three quarters of the former spent ten seconds or less reviewing the noncompete, they found, and a full third skipped it entirely.
“Workers who signed noncompetes (even salient ones) are not paid more than workers who signed without a noncompete,” the researchers wrote. “We also find little to no evidence that workers negotiate more on average when asked to sign a noncompete.”
The experiment bucked expectations in other ways, Starr said. The noncompetes the researchers included in their contracts would be unenforceable in many states, such as California, which banned noncompetes in 1872. But those laws ban the enforcement of noncompetes, not the restrictions themselves, so many companies still include them in contracts.
“If companies keep using noncompetes, what’s the effect of that? Our results suggest that noncompetes that are unenforceable—versus enforceable—have the exact same effect on employment mobility,” Starr said. “In other words, the law doesn’t matter.”
Bans may help reduce companies’ willingness to include the contract language, but they don’t change workers’ behavior once the terms are put in front of them, he said.
The FTC’s ban sought to end not just enforcement of noncompetes but the agreements themselves, making it illegal to include the terms in any employment contract.
One of the most surprising results of the study found that workers who were presented with the clearly labeled noncompete were much more likely to break it than those who only found out about it after being reminded.
“The individuals who think that the noncompete is not enforceable or won’t hurt them, they’re the ones who are willing to agree to it,” Starr said. “Because they don’t think it’s going to be enforceable or it’s not going to hurt them, they also don’t demand extra compensation for signing it.”
That finding illustrates the harm noncompetes can cause: workers are at minimum harmed because they don’t receive greater pay for signing, but they can be hurt more seriously by a lawsuit for later breaking the contract after willingly opting into the noncompete, Starr said.
It’s hard to overstate the novelty of the study. Until now, researchers were forced to rely on survey data and so-called “natural experiments,” where they compared worker experiences in states which banned noncompetes to those in states where they were still legal. But beyond its findings, Starr and his coauthors’ work should encourage other researchers to pursue similar projects, he said.
And its findings illustrate much about how workers behave under various contract provisions—evidence that can apply to a host of other clauses in employment documents, he added.
“This is a roadmap for studying the causal effect of those restrictions,” Starr said. “You occupy the role of the employer, and then you see who negotiates and who’s willing to sign it. You cross randomize wages, and then you see who violates it. I think that approach is one that has a lot of promise for people studying contracting.”
The FTC and Department of Justice released new guidelines on employment-related antitrust issues last week, updating the guidance issued in October 2016 with advancements in case law and enforcement approaches. The guidelines delineate the agencies’ views on the legality of practices such as exchanging competitively sensitive wage and employment-related information, franchise no-poach agreements, and restrictive employment terms such as non-disclosure agreements (NDAs) and training repayment agreement provisions (TRAPs).
“This document seems like a real attempt to systematize labor-side antitrust in a very productive way,” said Jonathan Masur, a law professor at the University of Chicago. “Just the fact that this is out in the world can really help sort of guide the FTC and also put a lot of employers on notice about the types of behaviors that they should be more careful about in the future.”
The guidance was part of a flurry of activity in the final moments of the Biden administration, and its future under a conservative-majority commission is unclear. New FTC Chair Andrew Ferguson expressed his opposition to the provisions in a dissent joined by fellow GOP-nominated commissioner Melissa Holyoak. He wrote that issuing the guidelines a few days before the presidential transition was inappropriate and “a senseless waste of Commission resources.”
Marshall Steinbaum, a professor of economics at the University of Utah who studies antitrust enforcement in labor markets, pushed back on Ferguson’s criticism of the guidelines.
The new guidance “is basically the same,” as the old guidance, Steinbaum said, “except there’s a lot more law to stay on the right side of, so I think if there was any objection to this document, it’s not that the document is so outrageous or represents a new departure, it’s that you don’t like the new case law that’s been developed about antitrust and labor in the last just-under 10 years.”
The guidelines could be revised or retracted when conservatives take the majority on the commission, but the document could still influence enforcement efforts through other actors at the state and private level.
“Aside from spelling out what the federal agencies, at least under the Biden administration, thought about these issues, what they do provide is an articulation of the case law on these various issues that can be picked up by state attorneys general and other private plaintiffs enforcers, and used as a theoretical basis for them to pursue actions separate and apart from what the federal agencies might do,” said John Terzaken, a partner at Simpson Thacher and the former director of criminal enforcement at the DOJ Antitrust Division.
The guidelines offer a new perspective on the definition of unlawful competitively sensitive information sharing. Compared to the 2016 guidance, the new guidelines “express a much greater skepticism about information sharing among competitors, even when using third parties, as being potential antitrust violations,” said Alexis Gilman, an antitrust attorney at Crowell & Moring.
The 2016 document outlined guidance on how companies might legally share such information; the updated document drops those provisions, and instead defines information exchanges as potentially unlawful whether or not the anticompetitive effect was intended. The language could be a “powerful tool” to launch prosecution against the sorts of information exchanges about wage and employment terms that were an issue in DOJ’s lawsuit against poultry processors Cargill, Sanderson Farms, and Wayne Farms, alongside the data firm WMS & Co. in 2022, said Masur.
“I could easily imagine that competitors in an industry would engage in some amount of sharing of wage information, and that would be the sort of thing that they thought that they could do lawfully under the antitrust laws, so long as they were not then explicitly coordinating on salaries,” he said. “But here the guidelines make it clear that even the sharing of wage information could be the basis for an antitrust lawsuit.”
The guidance also draws a firm line on no-poach agreements between a franchisor and a franchisee, which Masur described as “an open question of the law.” It’s the first major move against such terms in franchising in years, after the Washington state attorney general settled with hundreds of chains across the country for their use of the agreements starting in 2018.
The guidance leans heavily on a Seventh Circuit Appeals Court ruling in Deslandes v. McDonalds, one of the only ongoing lawsuits over the no-hire agreements. In that lawsuit, the appeals court rebuked the lower court for moving too quickly to dismiss the case, writing that “one problem with this approach is that it treats benefits to consumers (increased output) as justifying detriments to workers (monopsony pricing). That’s not right.”
DOJ filed a statement of interest backing the plaintiffs during the appeal.
“The guidelines say very clearly that any agreement not to hire workers—or to set wages—doesn’t have to be explicit,” Masur said. “And the FTC notes the use of third party technologies like software programs that convey information about wages and things like that as a possible way that employers could end up coordinating without actually having some kind of explicit verbal agreement.”
Experts and practitioners also took note of the section of the guidelines addressing “other restrictive, exclusionary, or predatory employment conditions” that are potentially unlawful. It focuses on employment practices that have been subject to less direct litigation than other practices, but that the agencies see as having the potential to violate the antitrust laws: non-disclosure agreements that prevent workers from reporting anticompetitive conduct, training repayment agreement provisions, non-solicitation agreements, and exit fees.
The guideline could function as “a warning shot that [the FTC] could view these other provisions as potentially falling into a similar bucket as a noncompete,” said Terzaken. He described this as conduct ripe for private plaintiffs seeking to pursue enforcement on labor issues, “because this is an area really where the department and FTC have not spent any time doing any enforcing or taking any actions.”
Other practitioners were more critical of the guidelines. Lisa Phelan, a former criminal enforcement official at the Antitrust Division and a partner in Morrison Foerster’s antitrust practice, felt the guidelines fall short of providing useful guidance for business operators who want to remain within the bounds of antitrust law.
“It’s kind of stunningly unclear where any lines are between what will be considered per se criminal conduct and what, in their discretion, they might instead decide is civil conduct,” she said. “And that’s really hard when you’re advising clients because…they need to understand where those lines are so they understand when they could possibly be crossing them. This guidance doesn’t really give that.”
