Matt Marx
POLICY PROPOSAL 2018-04 | FEBRUARY 2018
Reforming Non-Competes to Support Workers
The Hamilton Project seeks to advance America’s promise
of opportunity, prosperity, and growth.
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MISSION STATEMENT
The Hamilton Project • Brookings 1
Reforming Non-Competes to Support Workers
Matt Marx
Boston University
is policy proposal is a proposal from the author(s). As emphasized in e Hamilton Project’s original
strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to
put forward innovative and potentially important economic policy ideas that share the Project’s broad goals
of promoting economic growth, broad-based participation in growth, and economic security. e author(s)
are invited to express their own ideas in policy papers, whether or not the Project’s sta or advisory council
agrees with the specic proposals. is policy paper is oered in that spirit.
FEBRUARY 2018
2 Reforming Non-Competes to Support Workers
Abstract
is report describes evidence from empirical research on non-compete agreements and recommends policies to balance the interests
of rms and workers. Firms use non-competes widely in order to minimize recruiting costs, safeguard investments, and protect
intellectual property more easily than is achieved via non-disclosure agreements. But these benets come at a cost to workers, whose
career exibility is compromised—oen without their informed consent.
4 Reforming Non-Competes to Support Workers
Introduction
T
he American Industrial Revolution arguably saw its
inception in Pawtucket, Rhode Island, at the Slater Mill
on the Blackstone River. is was the rst place in the
New World where cotton was spun into thread by machine.
Samuel Slater, founder of the eponymous mill, had emigrated
from England where he had worked on the Arkwright spinning
machine (Simonds 1990). However, Slater’s homeland had
taken steps to prevent him from developing his business in the
United States.
Among the reasons underlying England’s rapid rise to
industrial power was its aggressive policy of recruiting skilled
laborers by granting national monopolies (i.e., an exclusive
right to produce goods using a particular technology) to those
who pirated technologies from other countries (Ben-Atar
2004). At the same time, England adopted restrictions that
forbade skilled artisans—including those who had imported
stolen technologies—from leaving the country. Essentially,
Samuel Slater was subject to a ban on leaving the country
to practice his profession in any other country: he was not
allowed to compete against England. Fortunately for Slater,
his slight stature enabled him to disguise himself as a young
farm boy and slip past emigration controllers in 1789 to board
a ship for the New World.
Although revered in the United States as the father of the
American Industrial Revolution, Slater is oen referred to in
the United Kingdom as Slater the Traitor for having purloined
British textile technology. Had England’s restrictions
successfully bound him to his home country, the American
Industrial Revolution would surely have been delayed. e
Slater story highlights several controversial aspects of laws that
seek to prevent workers from leaving their current workplace
to take their expertise elsewhere. Almost certainly, Slater
would have led a less distinguished career if he had remained
bound by England’s prohibition against the departure of
skilled artisans. Moreover, it seems that America’s gain was
England’s loss.
When considering the state enforcement of barriers to the
mobility of skilled workers, similar trade-os apply today
between the interests of workers, incumbent rms, and new
or even not-yet-founded rms. e balance between these
interests is not straightforward, which could explain why,
at least in the United States, states have taken very dierent
approaches regarding post-employment covenants not to
compete (hereaer, non-competes).
WHAT ARE NON-COMPETES AND HOW OFTEN ARE
THEY USED?
A non-compete is a section of an employment contract in
which the worker pledges not to join or found a rival company
for a certain period of time aer leaving the company. e use
of non-competes dates back to 1414, when a former apprentice
was sued for having set up shop in the same city despite having
promised not to do so aer his training was complete. e
judge in the case is said to have not only thrown out the lawsuit
but also to have threatened the plainti with jail time. e
recent decimation by bubonic plague of the northern England
labor supply had motivated the passage of the Ordinance of
Labourers, which essentially outlawed unemployment for the
able-bodied (Marx and Fleming 2012). However, this legal
approach did not last in most jurisdictions, and today non-
competes are widely used in a variety of industries.
Non-compete agreements between employers and their
employees limit workers’ labor market opportunities
aer leaving a rm. Although the details of non-compete
contracts—as well as their enforceability under state law—
vary considerably, they generally prohibit exiting workers
from either joining or founding a business that competes with
the previous employer. is prohibition is time-limited, and
is typically also limited by region and industry, though the
scope of the contract is sometimes quite broad.
In an increasingly knowledge-based economy, the most
important assets of rms are not property, plant, and
equipment. Rather, they are lodged in the minds of workers
who walk out the door every night. Firms must either win or
force workers’ loyalty, lest they incur the time and costs of
replacing those workers. Moreover, ex-employees who found
or join a rival rm pose additional problems for their former
employer. If the former employer has in eect prescreened
qualied workers who are then poached by rivals, those rivals
have lowered the cost and risk of their own recruitment. To
the extent that the former employer increased those workers’
value by investing in their training, that investment is lost.
The Hamilton Project • Brookings 5
And if the ex-employee were granted access to condential
information, this information could leak to the new employer.
Today, non-competes are widely used in a variety of
occupations, especially among knowledge workers and
executives. Prescott, Bishara, and Starr (2016) estimate
that 18 percent of respondents to an online survey across a
broad set of occupations had signed a non-compete for their
current job. Looking specically at engineers, Marx (2011)
nds that 43 percent of workers had signed a non-compete
in the past 10 years. Executives were even more likely to have
signed: Garmaise (2011) nds that at least 70 percent of senior
executives in public companies were bound by a non-compete.
THE CHILLING EFFECT
Another way to study the role of non-competes is to count
lawsuits. If one assumes that non-competes are meaningful
only insofar as employers seek injunctive relief against ex-
employees, then counts of lawsuits ought to be a useful metric
for understanding their impact. Jay Shepherd of the Shepherd
Law Group reports that there were 1,017 published non-
compete decisions in 2009 (Shepherd 2010). e Bureau of
Labor Statistics (BLS) reported that there were 154,142,000
workers in the United States in that same year (BLS 2009).
If the eect of non-competes were limited to the courtroom,
simple math would suggest that 0.0007 percent of workers
were aected by non-competes, according to this denition.
Given the high fraction of workers who are asked to sign non-
competes, the eect of these contracts is unlikely to be limited
to judicial proceedings alone.
Rather, non-competes exert a chilling eect on workers even
in the absence of a lawsuit. None of the interviewees in Marx’s
(2011) study who altered their career direction due to a non-
compete were sued. Some received threatening letters or phone
calls from their ex-employers, however, including one woman
whose former boss called her for months to ask where she was
working. Others, even if they were not directly threatened,
assumed that if they were sued, they would lose due to the expense
of defending themselves. Additional evidence for a chilling
eect can be found in the estimate from Prescott, Bishara, and
Starr (2016) that non-compete agreements are signed at roughly
the same rate in the few states where they are unenforceable as
in states where they can be upheld in court. Although part of
this pattern could be an artifact of standardized, nationwide
human resource policies whereby multistate rms require every
employee in any state to sign, it is also possible that single-state
rms hope to capitalize on the chilling eect for their employees
who are unaware of state policy.
SUMMARY OF POLICY RECOMMENDATIONS
e benets of non-competes accrue primarily to employers
and at the expense of employees. Moreover, the process by
which these parties agree to such contracts only rarely includes
a true negotiation. Rather, employees are routinely strong-
armed into signing the contract without carefully considering
its implications, suggesting ve avenues for reform:
1. End abusive practices including ambushing employees
by not informing them about the requirement to sign a
non-compete until aer they have accepted the job oer
and possibly turned down other oers, thus losing their
negotiation leverage.
2. End the widespread practice whereby rms are not
required to compensate existing employees in any way for
signing a new or revised non-compete. (Rather, continued
employment is said to be sucient consideration for the
requirement to sign.) Workers should have the right to
refuse to sign an updated contract without retaliation.
3. End the non-compete enforcement practice whereby, rather
than rule that a non-compete is valid or invalid according
to state law, a judge can rewrite an overbroad or egregious
contract to bring it in line with state guidelines.
4. Empower state attorneys general via unfair-employment-
practice statutes to obtain settlements with rms that
require workers to sign predatory, unenforceable non-
competes. is is particularly important given that much of
the impact of non-competes is attributable not to lawsuits
but instead to the chilling eect of both enforceable and
unenforceable contracts.
5. Institute mechanisms to make non-disclosure agreements
(NDAs) easier to enforce, allowing them to better substitute
for non-competes.
6 Reforming Non-Competes to Support Workers
The Challenge
EVIDENCE ON THE ANTECEDENTS AND
CONSEQUENCES OF NON-COMPETE AGREEMENTS
Although legal scholars have discussed the potential impacts
of post-employment covenants not to compete, empirical work
on the impacts of non-competes has been scarce until recently.
In the past een years several scholars have attempted to link
non-competes to outcomes for workers, rms, and regions.
Much of this work falls into two general categories:
1. Surveys that collect data on workers who have signed non-
competes. ese surveys oer insight into the prevalence
of non-competes and the process by which employers get
employees to sign them. Some studies take an additional step
by providing correlations between presence of a non-compete
and other outcomes of interest, although this analysis
cannot identify the causal impact of non-competes on such
outcomes. But an understanding of how non-competes are
used is critical to assessing their costs and benets, including
implications of non-competes for the careers of individual
workers and their eects on businesses.
2. Analyses based on state-level dierences in whether and
how non-competes are enforceable. ese studies typically
leverage changes over time in laws or court decisions. ey
do not incorporate survey data on who has or has not
signed an agreement, data that are currently only available
at a single point in time. However, these studies can help
answer questions about the likely consequences of state
policy reforms, including eects on regional productivity,
entrepreneurship, and economic growth.
ese types of studies have been conducted in four general
areas. First, how and how oen are non-competes used and
among which types of employees; moreover, what is the
process by which employee signatures are obtained? Second,
what are the implications of non-competes for individual
careers? ird, do rms benet from non-competes? Fourth,
and abstracting from employers and employees, what are
the more general implications of non-competes for regional
productivity, entrepreneurship, and economic growth?
Source: Marx 2011.
Note: Results are from a survey of the Institute of Electrical and Electronics Engineers with 1,029 respondents.
FIGURE 1.
Share of Non-Compete Agreements, by Duration
Percent of non-competes
Less than 1 year Between 1 and 2 years Between 2 and 5 years Greater than 5 years
0
20
40
60
80
The Hamilton Project • Brookings 7
PREVALENCE AND PROCESS
Four papers have gathered data regarding the prevalence of
non-compete agreements. First, Schwab and omas (2006)
reviewed employment contracts from 865 respondents to a
survey of chief executive ocers (CEOs) from the S&P 500,
S&P MidCap 400, and S&P SmallCap 600. Of those executives,
67.5 percent of respondents had a non-compete. e majority of
those agreements were two years in duration (31.5 percent); 21.3
percent of them were one year. ese results closely parallel the
70.2 percent rate of non-competes in the employment contracts
of Execucomp executives found by Garmaise (2011).
Of course, CEOs represent only a tiny segment of the labor
market and are moreover a unique subset of employees. Marx
(2011) conducted a broader survey of the Institute of Electrical
and Electronics Engineers (IEEE), with 1,029 of 5,000
randomly selected members responding. Of these engineers
working in several industries, 43.3 percent said that they had
signed a non-compete within the past 10 years. Most survey
respondents indicated that their non-compete lasted no
longer than one year, but more than one-third of respondents
claimed that the non-compete they signed was longer than
one year (see gure 1).
ough more numerous than CEOs, engineers also constitute
a small, highly educated segment of the labor market. In
2014 Prescott, Bishara, and Starr (2016) conducted an online
survey of more than 700,000 people registered to ll out
online surveys. eir 1.5 percent response rate yielded 11,505
responses. Approximately 15 percent of respondents replied
that they were currently subject to a non-compete, and it
is estimated that an additional 3 percent of respondents
who were not sure whether they had signed a non-compete
probably had, for a total of 18 percent of all workers. During
their entire career, 43 percent said that they had signed one,
similar to the result in Marx’s survey, but for a much wider
variety of occupations. ese estimates are shown in gure 2.
For those workers who are bound by non-competes, the process
by which employers obtain signatures from employees is
potentially very important. One key nding is that this process
bears little resemblance to “negotiat[ing] contracts of mutual
benet,” as some have sought to portray it (Regan 2014). In
Marx’s (2011) survey of engineers, more than two-thirds of
respondents who signed a non-compete (69.5 percent) reported
that the request for them to sign a non-compete came aer the
oer letter. Note that aer accepting an oer of employment
(and turning down other oers, if any), the new hire loses
negotiating leverage. Nearly one-quarter of respondents (24.5
percent) were asked to sign the non-compete on their rst day
at work (see gure 3). e lack of notice contributes to the fact
that only one in ten (12.6 percent) of those who signed a non-
compete sought legal advice before doing so; in fact, fewer
than one in twenty (4.6 percent) of those who signed the non-
compete on their rst day of work sought legal advice. Of those
who did not seek legal advice, nearly half reported that they felt
time pressure to sign or that they were told the non-compete
was nonnegotiable.
FIGURE 2.
Share of Workers with a Non-Compete Agreement, Selected Occupations
Source: Marx 2011; Prescott, Bishara, and Starr 2016; Schwab and Thomas 2006.
Percent of workers with a non-compete
All occupations Engineers Executives of
public companies
0
20
40
60
80
8 Reforming Non-Competes to Support Workers
e disadvantages to workers during the signing process are
exacerbated for those who are younger or less experienced.
Younger workers are less than one-third as likely as their
more-experienced counterparts to seek legal advice on their
non-compete, perhaps due in part to the fact that they receive
a non-compete with a job oer even less oen than more-
senior colleagues. ey are less than half as likely to refuse to
sign a non-compete, whether measured by age (11.2 percent
of older workers refuse, compared with only 3.7 percent of
younger workers) or years of experience (10.4 percent of more-
experienced workers versus 5.0 percent of less-experienced
workers).
WORKERS
Non-competes are common and the circumstances of their
signing are oen troubling. What eects do these non-
competes have on workers? ree important questions include
how non-competes aect mobility, wages, and on-the-job
motivation.
Mobility
Perhaps the most well-established eect in the non-compete
literature is that such employment agreements discourage
workers from changing jobs. Fallick, Fleischman, and Rebitzer
(2006) were the rst to show suggestive evidence along these
lines: they found much higher levels of job mobility among
workers in the California computing industry. at said, the
authors were careful to note that the correlations they noticed
might be explained instead by dierences in culture or other
factors between California and other states. Other scholars
have built on this work by exploiting state-level changes in
non-compete policy—looking at the same places over time—to
identify the causal eects of non-competes and non-compete
enforceability on job-hopping.
Marx, Strumsky, and Fleming (2009) leverage an inadvertent
change in Michigan’s non-compete policy, showing that
Michigan’s unexpected switch from a California-style ban
to allowing non-compete enforcement resulted in a drop in
job mobility of 8.1 percent. Moreover, this result is not driven
by Michigan’s large automotive industry. Furthermore, non-
competes have dierential eects on workers, with larger
impacts on those who have specialized skills.
Garmaise (2011) also nds non-competes to be a brake on
mobility. He takes advantage of non-compete policy reversals
in Florida, Louisiana, and Texas to show that executives at
large, publicly traded corporations are materially less likely
to change jobs when those states tighten enforcement of non-
competes. When they do change jobs, moreover, they are more
likely to move to a dierent industry.
Marx (2011) also nds evidence of such career detours among
52 randomly sampled interviewees in the speech recognition
industry. During these career detours, interviewees reported
lower compensation because they were unable to use some of
their skills. One worker observed that the non-compete was
particularly damaging to her because it precluded use not only
of training from the rm where she signed the agreement,
but also of all her prior relevant expertise: “I’ve been in this
industry for 20 years. I have a PhD in the eld. I walked in
the door with an enormous amount of experience, and while
I worked there for a year in a half they added maybe, what, 2
percent to that? And now they want to prevent me from using
any of what I know?” (Marx 2011, 705).
To some extent, the ndings regarding non-competes and
mobility are unsurprising. If employers are asking employees to
covenant not to join a rival aer leaving the rm, the two principal
implications of that request are that workers change jobs less oen
Source: Marx 2011.
Note: Results are from a survey of the Institute of Electrical and Electronics Engineers with 1,029 respondents and restricted to workers who have signed a
non-compete agreement.
FIGURE 3.
Share of Non-Compete Agreements, by Time of Signing
Percent of non-competes
0 20 40 60 80 100
With oer
After oer,
before starting
First day of work After starting
The Hamilton Project • Brookings 9
and, when they do, they tend to go to non-rivals. However, if one
were to assume that non-competes have their impact primarily
via lawsuits, the results are surprising: with only a small number
of non-compete lawsuits, the observed mobility impact of non-
competes should not occur. is observation reinforces the view
that a non-compete chilling eect is important.
Wages
If non-compete agreements discourage workers from changing
jobs, this restriction circumscribes the eective market for their
skills. With fewer rms to bid for their labor, they might receive
fewer and less-attractive job oers. Although workers bound by
non-competes could be more valuable to their employer than
other workers, whether their employer rewards them for that
increased value might depend on the existence and credibility
of external oers from other companies. Captive employees
with limited outside options—even those with high value to
their employers—might be paid less than others.
To date, the only published paper to investigate the impact of
non-compete agreements on wages is Garmaise (2011). He nds
that executives are paid less in states that have adopted stricter
non-compete policies. Garmaise compares compensation in
Florida, Louisiana, and Texas before and aer non-compete
policies were changed. Unfortunately, the literature currently
has less evidence to oer on the impact of non-competes on
the wages of lower-ranked employees. Although it would seem
that similar arguments should apply to those who do not hold
executive positions—perhaps more strongly, in fact—this is a
topic of ongoing investigation.
Motivation
If non-compete agreements constrain mobility and wages—
and if they do not provide clear benets for workers—one
might wonder whether such contracts adversely aect
employee performance and/or motivation. at said, the
potential eect is ambiguous. On the one hand, employees might
be demoralized by the constraint represented by non-competes. On
the other, if their only job option using their current skillset is with
their existing employer, they could be highly motivated to perform
well and avoid termination (especially because some non-compete
agreements continue to bind workers who are red).
ese opposing eects might help to explain the results of Buenstorf
et al. (2016). Recognizing that it is dicult to obtain data on employee
motivation, they instead conduct a laboratory experiment in which
two subjects are told that one will employ the other to work on an
uncertain innovation project. In one treatment, the worker is not
allowed to quit and take his or her skills to another rm; in the control,
the worker is allowed to move to another rm. e experiment
yields no dierence in eort between the treatment and control,
perhaps suggesting that non-competes do not inuence workplace
motivation. Of course, there could be substantial dierences between
the laboratory setting and the workplace.
FIRMS
Given the deleterious eects of non-competes on workers, it might
follow that rms benet from non-competes. Two papers indicate
that this is the case. First, Younge and Marx (2016) examine how
non-competes aect Tobin’s q (i.e., the market value of assets
divided by their replacement cost). ey nd that, compared to
states where non-compete laws did not change, the ability to block
employee mobility increased Tobin’s q by 9.75 percent aer Michigan
abandoned its ban on non-compete agreements. e eect is larger
in more highly competitive industries and is somewhat attenuated
by patent protection.
Conti (2014) also nds that rms can prot from non-competes, as
measured by the ability to pursue riskier research and development
(R&D) projects. He nds that a 1996 tightening of non-compete
laws in Florida increased both positive and negative extreme R&D
outcomes (dened as patents with either zero forward citations or
patents with citations in the top 1 percent), whereas the loosening of
non-compete laws in Texas during 1994 decreased extreme outcomes.
Moreover, the ability to retain sta and pay them less, as described
in the previous section, also benets rms. One might claim that it is
dicult to operate a business and invest in R&D without employee non-
compete agreements, yet one need look no further than California’s
Silicon Valley or San Diego biotech cluster for counterexamples to
the notion that a thriving innovation system cannot exist without
non-competes. If non-competes were truly essential to R&D, one
would have long since expected an exodus of technology rms from
California. Furthermore, some of the most vigorous opponents of
non-compete reform maintain extensive operations in California
(Borchers 2014). us, although non-compete agreements may confer
an advantage to existing rms, it certainly cannot be said that they are
essential to the operation of rms.
REGIONS
Non-competes might have important implications for overall
regional development, in addition to their eects on worker and
rm outcomes. Key regional considerations include the ow of
knowledge and talent as well as entrepreneurial activity. ese
channels potentially allow for substantial non-compete eects
on overall economic growth.
Flows of Knowledge and Talent
As previously discussed, talent ows less within states with
tighter non-compete laws. Researchers have also examined
labor ows across states. Marx, Singh, and Fleming (2015)
nd that Michigan’s rule change providing for enforcement
of non-compete agreements resulted in a brain drain of talent
out of the state. Specically, technical workers le for other
states with less-strict enforcement of non-competes.
1
Worse,
this brain drain due to non-compete agreements is greater for
the most highly skilled workers.
To the degree that knowledge is not always codied (as in a
patent), but oen resides in the minds of workers, it follows
that circumscribed mobility of workers might likewise
impede the ow of knowledge. Belenzon and Schankerman
10 Reforming Non-Competes to Support Workers
(2013) analyze the diusion of knowledge from the academy
to industry, examining citations to both university patents
and also to academic papers. Although their primary nding
is that the diusion of academic discoveries is constrained
by state borders, they nd that this is especially true in states
that have tighter non-compete laws. is suggests that non-
compete agreements may hamper the ow of information.
Although the restricted ow of talent and information likely
serves the interests of existing rms, throttling information
ow could have negative externalities for entrepreneurs and
a negative impact on overall economic performance. For
example, as discussed in the next section, it might be more
dicult for business start-ups to emerge and succeed.
Entrepreneurship
Non-competes act as a brake on entrepreneurial activity,
both by blocking the emergence of new companies and by
making it harder for them to grow. To the former point, Stuart
and Sorenson (2003) show that the spawning of new start-
ups following events like IPOs or acquisitions is attenuated
where non-competes are enforceable. Samila and Sorenson
(2011) follow up this study to show that a dollar of venture
capital goes further in creating start-ups, patents, and jobs
when spent in states that do not strictly enforce non-compete
agreements. Venture capital creates two to three times as much
growth in regions where non-competes are unenforceable.
eir nding is not just a Silicon Valley eect, but also holds
when Silicon Valley is excluded entirely from the analysis.
Starr, Balasubramanian, and Sakakibara (2017) likewise nd
that non-competes act as a brake on entrepreneurial entry,
although this eect is limited to intra-industry spin-os in
which employees of one company leave to found a rival in
the same industry. Workers founding start-ups in dierent
industries are unaected.
Non-competes not only make it more dicult to start a
company, but also make it harder to grow a start-up. Once the
company is incorporated, the founders must hire employees
with relevant skills to expand the business. Unless sucient
workers can be found among fresh college graduates or the
unemployed, existing rms are a primary source of potential
hires—especially for rms with specic expertise needs. Yet
start-ups could nd themselves at a disadvantage in labor
markets where non-competes are prevalent, both because
they might lack the legal and nancial resources to defend
themselves and also because potential hires’ mobility could
be chilled by non-competes they have signed. One of the
randomly selected interviewees with a non-compete in Marx’s
(2011) article stated that they were unlikely to accept a job
oer at a small rm: “I consciously excluded small companies
because I felt I couldn’t burden them with the risk of being
sued. [ey] wouldn’t necessarily be able to survive the lawsuit
whereas a larger company would.”
Ewens and Marx (2017) show the deleterious eect of non-
competes on start-up performance. Investigating venture-
capital-backed start-ups founded from 1995 through 2008 and
tracking their performance through the rst quarter of 2017,
they nd that the success of start-up companies oen requires
the hiring of new executives. Although some founders remain
as the CEO for decades, in many cases founders are seen
as incapable of leading the company as it scales beyond the
start-up phase. Enforceable non-compete agreements make
it more dicult to nd replacement executives with relevant
talent, which limits venture-capital-backed start-ups’ ability
to succeed.
Interestingly, there is one respect in which non-competes can
facilitate the market for start-up acquisition. Younge, Tong, and
Fleming (2015) show that acquisition activity was accelerated
in Michigan aer non-compete laws tightened. ey credit this
eect to the ability of acquiring rms to count on employees of
the target rm to stay on, given that employment contracts are
typically (but not always) acquired along with the purchase of
the rm. If this eect on acquisitions also applies to smaller
companies—which were not examined in this research—then
non-competes might help start-ups through this channel.
Given these ndings, it is not dicult to see why established
companies generally implement non-competes when they
are allowed to do so. Non-competes make it easier to retain
employees and to pay them less, and they reduce the threat
from new entrants within the industry. Moreover, when
acquiring start-ups incumbent rms more easily hold on
to talent. Yet these benets to rms come at the expense of
workers and start-ups.
The Hamilton Project • Brookings 11
A New Approach
T
he debate over employee non-compete agreements oen
centers around whether and how such contracts should
be enforced. A starting point for these discussions is oen
California’s longstanding refusal to enforce non-competes, based
on its Business and Professions Code 16600: “Every contract by
which anyone is restrained from engaging in a lawful profession,
trade, or business of any kind is to that extent void” (Gilson 1999,
616). Michigan’s Public Act 321 of 1905 instituted an enforcement
regime similar to California’s, which endured until March of
1985, when the state’s policy became more aligned with most
other states. Hawaii adopted a California-style policy in 2015 for
the information technology industry, rendering non-competes
unenforceable for that sector. Table 1 summarizes recent changes
in state law.
Determining the ideal enforcement policy is hardly
straightforward. Non-competes might help existing rms,
but they do so at the expense of workers and would-be
entrepreneurs. us policymakers are tasked with balancing
the interests of these parties, some of whom are more vocal
than others. In Massachusetts, for instance, rms as well
as trade associations have spent nearly six gures lobbying
state legislators against reforming non-compete governance
(Borchers 2014). Workers, by contrast, do not have organized
representation in these debates. Almost by denition, start-
ups not yet founded do not have a voice, except perhaps to the
extent that venture capitalists can advocate for their interests.
Even with all interests represented in the policy discussion,
dierent states could come to dierent conclusions regarding
the ideal enforcement policy. States that choose to enforce
non-competes can do so more or less strictly, as explained in
box 1.
However, whether courts should enforce non-compete
agreements is not the only—and not necessarily the most
important—aspect of non-compete governance. Below, I
propose a series of reforms to both the use and the enforcement
of non-competes.
NOTICE AND NEGOTIATION
Apart from enforcement policy, the process by which employees
sign non-competes deserves careful examination. Because
a non-compete is a contract between an employer and an
employee, employers must obtain signatures from employees.
Ideally, workers would bargain over the terms of a potential
non-compete with various potential employers at the same time
TABLE 1.
Selected Recent State-Level Policy Changes
State Date Details
Illinois August 2016 The Illinois Freedom to Work Act bans the use of non-competes for workers earning less than the $13.50
minimum wage, and states that any such term in an employment agreement is void (Illinois Freedom to
Work Act 2016).
Idaho March 2016 House Bill 487 stipulates that key employees (among the 5 percent most highly paid) “must show that
[they have] no ability to adversely affect the employer’s legitimate business interests” or else a non-
compete of up to 18 months in duration is presumptively enforceable (Idaho House Bill 487 2016, para. 5).
Utah March 2016 The Utah Post-Employment Restrictions Act restricts non-competes to one year and requires an ex-
employer whose non-compete suit is not upheld to pay its ex-employee’s legal expenses (Utah Post-
Employment Restrictions Act 2016).
Hawaii June 2015 Hawaii Act 158 voids any “non-compete clause or a non-solicit clause in any employment contract
relating to an employee of a technology business” (Hawaii Act 158 2015, sec. 2 (d)).
12 Reforming Non-Competes to Support Workers
that salaries and other terms of employment are negotiated.
Workers would have access to the terms (or even text) of the
proposed agreement and obtain the advice of legal counsel.
However, as described previously, the process by which
employees covenant not to compete with their employers
frequently resembles an ambush more than a negotiation.
Most employees are not asked to sign until aer they have
accepted the job oer, and oen not until they have started
the job. Having already turned down other job oers, workers
lack leverage by which they can productively negotiate the
terms of their non-compete. ey are frequently told that the
contract is nonnegotiable or that they must sign quickly (thus
not allowing time for legal review of a document they might
not fully understand without counsel).
I propose that employers—in advance of hiring—be required
to inform workers that they intend to seek a non-compete
agreement as is currently required in Oregon. A reasonable
amount of time must be provided for workers to adequately
review the proposed contract.
COMPENSATION
A related issue with the timing and transparency of non-
competes concerns their use with employees who have long
since been hired. In some states it is permissible for employers to
require existing employees to sign aerthought non-competes.
at is, as a condition of retaining their existing job, employees
must sign a (revised) non-compete without obtaining any
compensation or other consideration for doing so. Although
workers are free to quit their job rather than sign the new non-
compete, doing so can be nancially destabilizing, and it may
be less advantageous to look for a new job once unemployed.
All of these practices are contrary to the notion that employees
should be bound by employment agreements that they enter
into willingly and to mutual benet.
I therefore propose that, in exchange for current employees
signing a new or revised non-compete, rms be required to
compensate those workers in some manner beyond simply
continuing their employment. In addition, current employees
should have the right to refuse to sign an updated contract
without retaliation, including loss of employment.
JUDICIAL MODIFICATION
In the summer of 2010 citizens of Georgia were asked to vote
on a constitutional amendment with the following wording:
“Shall the Constitution of Georgia be amended so as to make
Georgia more economically competitive by authorizing
legislation to uphold reasonable competitive agreements?”
(Georgia House Resolution 187 2010, section 2).
e proposed amendment passed with 68 percent of the
popular vote.
2
Little did voters realize that they were voting
to authorize a practice that gives rms additional control in
their use of non-competes. Georgia’s provision enables judges
to change the terms of a non-compete contract, rather than
invalidate it entirely, when the original terms are found to be
unenforceable under state law.
For instance, if state law restricted non-competes to a duration
of one year, and the contract in a particular case specied a
two-year term, a judge would previously have been required
to strike down the contract. Under Georgia’s new enforcement
regime, a court can simply rewrite the contract to be one
year in duration and then enforce the modied contract. A
BOX 1.
What Are the Different Ways Non-Competes Are Enforced?
Non-competes are enforced according to state laws—usually the common law but sometimes statutes—that vary considerably
across states. Under the most stringent, business-friendly type of enforcement, courts can rewrite unreasonable provisions in a
non-compete agreement so that the contract conforms to standards, then enforce the modied contract. A related enforcement
doctrine allows courts to strike the unreasonable terms of a non-compete agreement and enforce the remainder of the contract.
In either case, businesses have a diminished incentive to be cautious in the draing of their non-competes, because they face little
prospect of having an overly broad agreement invalidated during a legal proceeding.
So-called red-pencil doctrine is less strict from a worker’s perspective. Courts implementing red-pencil doctrine will neither revise
nor eliminate any provisions—rather, courts will nullify the entire non-compete agreement if any provision does not comply with
state law. Under this standard, employers have a stronger incentive to write non-compete contracts so as to comply with state law
and avoid overbroad provisions.
Of course, a few states do not enforce non-competes, generally speaking. California is the most notable example, having eliminated the
enforcement of non-competes according to its Business and Professions Code 16600 in 1872 (Gilson 1999). Figure 4 shows how non-
compete enforcement varies across the states.
The Hamilton Project • Brookings 13
majority of states (41 out of 50) currently allow some degree of
modication by the courts, as shown in gure 4.
Modifying a non-compete might seem to be a boon for
employees, but in fact the opposite is the case, for three reasons.
1. e practice of judicial modication enables non-competes
to be enforced that would otherwise be struck down (albeit
with reduced scope).
2. e ability of judges to x non-competes could encourage
negligence on the part of rms, which would otherwise
be more careful in draing non-competes that would be
struck down if they do not conform to state law.
3. Firms might even intentionally dra non-compete
contracts with broader scope than is permitted by law. Even
if the non-compete is too broad—say, two years instead of
one—the worst that can happen is that a judge could reduce
the scope and then enforce the contract. But in the absence
of a lawsuit, the employee might continue to believe that
the non-compete would be enforced as written (even with
its overbroad terms, the legality of which the employee
might not fully comprehend).
I therefore propose that states abandon the practice of
allowing judges to modify non-compete agreements. Under
this doctrine, courts would throw out non-competes that
contain one or more unenforceable provisions under state law.
THE CHILLING EFFECT
e possibility for employer negligence and abuse aorded
by courts’ ability to modify and enforce non-competes is
another opportunity for deployment of the chilling eect. As
noted above, very few non-compete lawsuits are even led.
is suggests that the eect of non-competes is experienced
less through the courtroom and more through workers’
expectation that they might be sued. is chilling eect has
been documented in interviews with workers who either
remained in their jobs or took career detours due to a non-
compete they had signed (Marx 2011).
If non-competes have a chilling eect even in the absence
of a lawsuit, then non-compete reforms that only limit the
behavior of a judge in a courtroom might have insucient
eect. Workers might avoid breaching their non-compete
even if their employer were unlikely to sue them to enforce the
Source: Beck Reed Riden LLP 2017; author’s calculations.
Note: The type of enforcement in which courts can rewrite terms of contracts is often called the rule of reformation. When courts can delete provisions but
cannot insert new text, the enforcement doctrine is often called blue pencil. These two types of enforcement are combined in the figure category, “Modified
and enforced even if contract does not comply.”
FIGURE 4.
Non-Compete Enforcement, by State
Not enforced
Enforcement Doctrine
Undecided
Modied and enforced even if contract does not comply
Enforced only if contract complies with state law
WA
OR
CA
NV
ID
MT
WY
UT
AZ
NM
CO
ND
MN
IA
WI
OH
KY
TN
NC
VA
IN
MI
PA
VT
NH
ME
NJ
MD
DE
MA
RI
CT
AL
SD
NE
KS
OK
TX
MO
IL
NY
AR
LA
MS
SC
GA
FL
WV
HI
AK
14 Reforming Non-Competes to Support Workers
contract. For example, a worker might avoid pursuing a job
opportunity at another company for fear that they might be
sued, even if such an opportunity was not clearly in violation of
the contract. Even in California, someone asked to sign a non-
compete who does not know that the contract is unenforceable
under state law might be reluctant to change jobs for fear of
retaliation. As long as rms can use non-compete contracts,
the chilling eect will obtain because there appears to be little
downside to rms asking workers to sign non-competes.
In implementing its 2016 non-compete reform for low-
wage workers, Illinois not only rendered such contracts
unenforceable but also banned rms from using such contracts
at all: “No employer shall enter into a covenant not to compete
with any low-wage employee of the employer” (Illinois
Freedom to Work Act 2016, sec. 10 (a)). e ban on using
non-competes for low-wage workers, in combination with
the state’s Consumer Fraud and Deceptive Business Practices
Act, empowered Attorney General Lisa Madigan to bring legal
action against noncompliant rms that allegedly required low-
wage workers without proprietary or condential information
to be bound by non-competes (Channick 2017).
Note that the Illinois provision does not ban all non-competes
but rather those that are unenforceable on their face. Given
this provision, workers can report violations (and can do so
anonymously) for the state attorney general to investigate.
Public investigations, declaratory judgments, injunctions, and
civil penalties would surely reduce the abuse of non-compete
agreements by rms. Currently, companies have little to lose by
aggressively using non-competes, especially in states that allow
modication and enforcement of overbroad non-competes.
I propose that state attorneys general be empowered through
unfair-employment-practice statutes to eliminate non-competes
that are unenforceable on their face. e threat of legal action
could yield a reverse chilling eect to partially counteract the
deleterious eects on workers.
3
NON-DISCLOSURE AGREEMENTS
Non-competes are just one option that employers can
pursue to protect their legitimate interests. Non-disclosure
agreements (NDAs) are another option, but these agreements
can be dicult and costly to enforce: the former employer
must show that the ex-employee divulged trade secrets or other
proprietary information. By comparison, it is much simpler
to verify whether a non-compete has been violated: one need
only establish that the ex-employee is working at a rival rm.
From an employer’s perspective, a non-compete is a less
costly way of protecting condential information. Moreover,
an NDA cannot guard against the use of nonproprietary
training, whereas a non-compete blocks the ex-employee
from deploying that training elsewhere and thus increases the
value of the investment to the employer. As the peer-reviewed
literature shows, rms are advantaged by the ability to use
non-competes (Conti 2014; Younge and Marx 2016).
At the same time, although an NDA does not specically
block the worker’s career exibility—only the sharing of
proprietary information—a non-compete by denition limits
subsequent career opportunities for the worker. Bound to
their current employer, they might fail to capture the same
compensation they would if they could test their value on the
open market. Indeed, workers subject to non-competes are
less likely to leave their employer; when they do leave, they
tend to also leave their industry or their current geographic
region (Garmaise 2011; Marx 2011; Marx, Singh, and Fleming
2015; Marx, Strumsky, and Fleming 2009).
Policymakers might therefore want to explore legal
instruments for the protection of trade secrets that are at once
more reliable than NDAs and less impactful on workers than
non-competes. ese instruments would be substitutes for
non-competes and could diminish their harmful eects.
One possible approach is that adopted in the settlement of IBM’s
lawsuit to block ex-employee Mark Papermaster from joining
Apple. e term of Papermaster’s non-compete was reduced in
exchange for his agreement to certify in writing at three-month
intervals that he had abided by his NDA. In this way, IBM’s
trade secrets were more tightly protected without blocking
Papermaster from taking a new job (Elmer-Dewitt 2009).
The Hamilton Project • Brookings 15
Questions and Concerns
1. Is trade secret litigation too slow and too costly to rely on as
a replacement for non-competes?
Surely it is easier to prove violation of a non-compete (“Is the
ex-employee now working at a rival?”) than to prove violation
of an NDA (“Did the ex-employee divulge trade secrets?”). But
the non-compete is a blunt instrument with which to compel
adherence to the spirit of an NDA. Non-competes have many
negative implications for individual workers, including those
workers who are abiding by their obligations regarding
condential information.
2. In general, mutually agreed-on contracts are considered
benecial. Why are non-competes dierent?
One might claim that government should refrain from
interfering with contractual relations between consenting
employers and employees and avoid articially restricting the
set of possible employment relationships. Brad MacDougall,
vice president of government aairs at the Associated
Industries of Massachusetts, gave voice to this perspective
when he claimed, “e non-compete issue is really about
choice for both individuals and employers, who should be free
to negotiate contracts of mutual benet” (Regan 2014).
However, the experience and analysis of non-competes
suggests that non-competes are oen not mutually agreed on.
e research highlighted in this chapter shows that the process
of getting workers to sign non-competes oen resembles less a
negotiation than it does an ambush. In addition, workers oen
cannot refuse to sign the non-compete lest they lose their job.
3. Are non-competes really an important issue outside of a
few high-level executive jobs?
It is true that non-compete usage is highest among executives,
but they are also widely used among nonexecutives. Nearly
half of engineers have signed a non-compete, and about a h
of workers in the overall population are currently subject to a
non-compete. Moreover, non-competes are relatively common
among both low-skilled and high-skilled workers.
16 Reforming Non-Competes to Support Workers
Conclusion
E
mployee non-compete agreements remain a controversial
topic, as evidenced by wildly varying policy across
states. is policy variation could be due to dierences
in how state policymakers think about the interests of workers,
existing rms, and would-be entrepreneurs. Research provides
insight into these interests, suggesting that non-competes
discourage mobility and depress wages among workers while
promoting stock market performance among publicly traded
rms. Non-competes make it harder to start new companies
and also act as a brake on their performance by making it more
dicult to attract experienced talent.
Balancing these interests is a delicate matter and probably
rightfully le to states to decide. However, the process by
which employers obtain signatures from employees should
be standardized to ensure that workers are not ambushed
but instead have the ability to negotiate such contracts and
receive legal advice. Moreover, modifying and enforcing non-
competes that were originally unenforceable only serves the
interests of rms at the expense of workers. Given that non-
competes rarely achieve their impact via lawsuits but much
more oen via a chilling eect, states should regulate not
only enforceability in a courtroom but also whether rms are
allowed to compel employee signatures. Finally, state attorneys
general should be empowered to sanction rms that engage in
abusive non-compete practices.
The Hamilton Project • Brookings 17
Author
Matt Marx
Associate Professor, Strategy and Innovation, Boston University
Questrom School of Business
Matt Marx is Associate Professor of Strategy and Innovation
at the Boston University Questrom School of Business and
was previously Associate Professor at the MIT Sloan School
of Management. He studies the mobility of knowledge
workers as well as the commercialization and diusion of new
technologies.
He has published extensively on the impact of employee non-
compete agreements and has testied frequently on behalf of
reform eorts. His work has been recognized with a Kauman
Junior Faculty Fellowship and the INFORMS award for
best innovation and entrepreneurship article published in
Management Science or Organization Science during 2009.
Professor Marx previously worked as a soware engineer and
an executive at technology start-ups SpeechWorks and Tellme
Networks, where he received six patents. He holds a BS in
Symbolic Systems from Stanford University, a master’s degree
from the MIT Media Lab, and an MBA as well as a doctoral
degree from Harvard Business School.
Acknowledgments
I’d like to thank Lee Fleming and Evan Starr for their feedback on earlier dras of this document, as well as John Bauer for
discussions about Illinois’ Freedom to Work Act in conjunction with non-competes.
18 Reforming Non-Competes to Support Workers
Endnotes
1. is nding is not simply an artifact of the automotive industry or general
westward migration; in fact, it is robust to a variety of tests including
pretending that the policy change happened in Ohio or other nearby, mid-
sized Midwestern states that would have been similarly aected by general
migration patterns.
2. As described by Pardue (2011), the text summarizing a constitutional
amendment in Georgia does not have to resemble the actual bill.
3. I am especially grateful to John Bauer of Lawson & Weitzen for discussions
on this point.
The Hamilton Project • Brookings 19
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20 Reforming Non-Competes to Support Workers
ADVISORY COUNCIL
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DOUGLAS W. ELMENDORF
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The Hamilton Project • Brookings 21
Highlights
Firms use non-competes widely in order to minimize recruiting costs, safeguard investments,
and protect intellectual property more easily than is achieved via non-disclosure agreements. But
these benefits come at a cost to workers, whose career flexibility is compromised—often without
their informed consent. In this paper, Matt Marx describes evidence from empirical research on
non-compete agreements and recommends policies to balance the interests of firms and workers.
The Proposal
Mandate that employers inform workers that they intend to seek a non-compete agreement
in advance of hiring. Marx proposes that a reasonable amount of time be provided for workers to
adequately review the proposed contract.
Require employers to compensate existing employees for signing a new or revised
non-compete. Marx recommends that firms be required to compensate these workers in some
manner beyond simply continuing their employment. Employees should retain the right to refuse to
sign an updated contract without retaliation.
Prohibit judges from modifying non-compete agreements. Under this doctrine, courts would
throw out non-competes that contain one or more unenforceable provisions under state law.
Empower state attorneys general through unfair-employment-practice statutes to eliminate
non-competes that are unenforceable.
Institute mechanisms to make non-disclosure agreements easier to enforce. Marx suggests
that non-disclosure agreements could substitute for non-competes and diminish the latter’s
harmful effects.
Benefits
The benefits of non-competes accrue primarily to employers and at the expense of employees.
Moreover, the process by which these parties agree to such contracts only rarely includes a
true negotiation. Rather, employees are routinely strong-armed into signing the contract without
carefully considering its implications. The policies in this proposal would better balance the
interests of firms and workers, limiting non-competes to instances in which they are more likely to
be mutually beneficial.
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