John Donvan:

Hi everybody, I’m John Donvan, welcome to Intelligence Squared. And in this debate, we are going to discuss something that may well be now or someday part of your work life, the noncompete. What is a noncompete? Well a reported one out of five American workers are required by their employers to sign noncompete agreements when they start a new job. And that agreement then bars that employee if he or she leaves the job from going to work for the competition. As many as 30% of all US private sector workers have signed such agreements, which actually find their roots all the way back in 15th century England. These clauses generally are active just for a limited period of time, say a number of years, and very often apply to a specific geographic area.

For the employers, it’s protection, they have invested in that employee, they have trained that employee, they have shared business secrets with that employee, and the noncompete removes the risk the employee will take all of that to the competition. The Biden Administration through the Federal Trad Commission has made it clear it wants to get rid of noncompete clauses by outlawing them everywhere across the board, asserting that they are just not fair to workers. Much of the business world calls that a mistake, saying that noncompetes make common sense and are good for the economy. This debate will examine the merits of these arguments by asking this question, should the FTC, the Federal Trade Commission, ban noncompete clauses?

So, let’s meet our debaters arguing that the answer is yes, that the FTC should ban noncompete clauses, Economic Policy Institute president and former chief economist to the US secretary of labor, Heidi Shierholz, Heidi, thanks so much for joining us.

Heidi Shierholz:

Thanks for having me, it’s my pleasure.

John Donvan:

And arguing no that the FTC should not ban noncompete clauses, executive vice president, chief policy officer and head of Strategic Advocacy, US Chamber of Commerce, Neil Bradley. Hi, Neil, thanks for joining us.

Neil Bradley:

It’s great to be with you, John, and great to be with you, Heidi.

John Donvan:

All right, so let’s get to it. We wanna ask each of you to tell us why you’re arguing yes or no, you each get two minutes to explain your position on that, so Heidi, you’re up first, you’re answering, yes, the FTC should ban noncompete clauses, please tell us why.

Heidi Shierholz:

Okay. I will start by saying that noncompetes are trying to hide what they are. They are not trying to hide that they are inherently anti-competitive, it is in their name. They are noncompetes, they are a direct restriction on competition, and they should be banned. They are bad for innovation, they’re bad for business formation, they’re bad for productivity, they’re bad for workers, they’re bad for consumers, they are bad for the economy in general. For one, noncompetes keep workers who are employed at a firm but who may be great innovators or entrepreneurs, it keeps them from being able to leave and start their own business.

You can see why the firm their at really loves that. It squashes that source of competition that they would otherwise face. But you can also see why that’s terrible for economic dynamism and innovation, it’s terrible for productivity and economic growth. Noncompetes restrict workers’ freedom. They keep people locked in jobs. I think here’s a, a useful way to think about the impact on workers. For an individual non-unionized worker, basically the only source of leverage that they have with respect to their employers is their ability to quit and take a job somewhere else.

The fact that they could do that means their employer has to provide a job that is competitive enough in terms of compensation, working conditions that the worker doesn’t want to leave to take another job. Noncompetes cut off that source of worker leverage at the knees. If I’m a business owner, and I no longer face the implicit threat that my workers could leave, I don’t have to pay them as well. Again, you can totally see why the owners of the firm that their at, that the employee is at, really love that. But you can also see why it is terrible for working people. And the research bears all of this out, noncompetes reduce business formation, they reduce worker mobility, they reduce wages, they are bad for our economy and for our workforce and it is well past time that they were banned nationwide.

John Donvan:

Thanks very much, Heidi, uh, and now Neil it is your turn, your answer to the question should the FTC ban noncompete clauses is a clear no. Because?

Neil Bradley:

Well, they shouldn’t ban noncompetes, John, let me give you three simple reasons. First, when noncompetes are used appropriately, they actually benefit workers. The FTC’s own research demonstrates that employers are more likely to provide job training programs, enhanced job opportunities, and to share information, critical, sensitive information with employees when their covered by a noncompete agreement. And the reason is clear, because they don’t have a fear that they’re going to take that information or the skills that they’ve learned and simply walk across the street to a competitor. By the way, the employee also benefits because employers compensate employees because they sign a noncompete agreement. So there’s a, a give and take, the employer is providing access, training and, and benefits, and the employee is getting compensation for the fact that they signed a noncompete.

Second, it helps our economy innovate and grow. We are a knowledge based economy. When we think about expanding, creating new products and services, that happens because talented people get together in a room and hash out ideas and new business opportunities, that’s really hard to do when you’re worried that someone’s gonna take that information, that learning, and go to a competitor and use it against you. So it actually harms innovation.

Third and finally, this is why the FTC should not [inaudible

], I suspect one thing Heidi and I will agree on is the fact that this is a really big policy change that’s gonna affect lots of employers and lots of employees, which raises the question, why in a democratic society should three unelected individuals on the Federal Trade Commission get to enact a policy that overturns the laws of 47 states without even a clear authorization from Congress? So in a democracy we elect people to make these decisions for us. We don’t allow three people sitting in some building in Washington to write these major changes that affect how we live and work.

John Donvan:

Thanks very much, Neil, so what I hear each of you seeing is that there, you’re making a case both from the point of view of what’s good for the business and also what’s good for the worker. I’d like to take that in two steps, beginning with the conversation about the worker. So, Heidi, we just heard Neil say that actually noncompete clauses can be good for workers because they incentivize an employer actually to invest in the worker, to trust the worker, to, to share the secrets with the worker, to train the worker knowing that they, the, the employer can hold on to that benefit longer term. So, what’s your response to that?

Heidi Shierholz:

I think that’s a real red herring. So, uh, just stepping back, employers who actually provide good jobs don’t have to worry that their employers will leave en masse right after they get valuable training. But if an employer does provide such poor jobs that they do feel like they have to worry about that, that employers might leave once they get, you know, trained up, um, they can address that without noncompetes, they don’t have to use noncompetes. So, for example, an employer who wants to prevent a worker from leaving right after receiving training can require the worker to sign an employment contract with a, you know, with a fixed duration, basically saying that if we give you this training, you have to work with us for a certain period so we can recoup the cost of that training from you.

So, there are totally other mechanisms that can protect these kinds of investments if the employer thinks, you know, they, they can’t provide a decent enough job to retain workers after they give them training. Um, that so, so that, in other words, there’s other mechanisms and the idea that banning noncompetes, or that keeping noncompetes is necessary for this just doesn’t hold water.

Neil Bradley:

Yeah, uh, you know interestingly the, the FTC in their proposal not only bans noncompetes, they ban what are called de facto noncompetes which is interesting because you’re like, “What’s a de facto noncompete?” And they actually have trouble defining it. But it would actually, uh, uh, uh, based on our read on it, be exactly the type of contract that Heidi just described, something that depending on the duration of the period would prevent an employee from leaving. I also think it misunderstands how a m- uh, job training works today. So, when we think about job skills and training today, yes it can be, “Here’s a six-week program that you’re enrolled in and that you go through,” but in lifelong learning where we’re constantly evolving, now we’re all learning AI and Chat GPT and all of these other things, it’s a constant source of innovation and training.

You know, at my employer here at that US Chamber of Commerce, every year we have skills programs to help us keep up with the latest technology. So the idea that, uh, when we do that for senior executives or our top performers, there’s no way to protect that in a way that Heidi described. You know, furthermore this idea that people are locked into jobs and can’t leave just simply isn’t borne out by the facts. Um, if you look at, and we just got, uh, new data from the Department of Labor about the quits rate, if, if noncompetes are really holding people back from changing jobs, then why has the rate of people choosing to leave their place of employment to go for somewhere else doubled in the last decade?

So, interestingly, employees have more freedom than they’ve ever had before, but for employers, being able to protect their investments in key employees is really critical.

John Donvan:

Just so, just so I understand, Neil, are, are, are you arguing that in fact the, the current, the status quo where, according to the FTC one in five workers is in a noncompete, uh, has to, had to sign a noncompete agreement, is not actually preventing, uh, uh worker mobility?

Neil Bradley:

The, we have, we, we are at a level of worker mobility in this country that we haven’t seen in decades, that’s a fact. Um, you know, the one in five, it’s really difficult to ascertain, that one in five was based on a single study that is using information from about… A survey from about 10 to 15 years ago. There are a lot of Americans who are covered by noncompetes, but the number who have noncompetes enforced is actually quite low. So we actually survey our companies. Um, and our… We have a lot of companies at the US Chamber, not just big companies, small ones as well, who use noncompetes. And here’s what typically happens, if someone has a noncompete and they wanna go somewhere else, it’s usually an aspect of negotiation, uh, that, uh, that, that it becomes a part of what an employer, with a departing employee, tends to work out.

So, you don’t, you can’t go to courthouses and find lots of litigation over broken noncompetes. It is a tool that protects employers, allowing them to provide resources and it becomes another bargaining issue between employees and employers on the front and back end.

John Donvan:

I’m gonna give Heidi a, a chance to respond to a lot of what you just said. So, go, go for it, Heidi.

Heidi Shierholz:

Yeah, there’s so much there, this is a great discussion. Um, so I just wanna point out, you’re totally right, uh, dynamism in the, this recent period has gone way up. That has, that, that is completely orthogonal to noncompete f- f- noncompete policy, right? Like it has everything to do with the post pandemic, um, the post pandemic economy. It has very little to do with noncompetes. If you look at very rigorous studies that actually look directly at, you know, like what happens when, when people have noncompetes or not, the best studies show that noncompetes r- increase the amount of time workers are at a job by around 11%. So, that is a clear reduction in mobility. Like, there’s just no question, that’s the point of noncompetes, right? Like, we wanna keep people where they are, we don’t wanna let them go away because that means they could compete with us or we then have to pay them higher wages to be able to keep them, to keep and retain the workers that we need.

And then the other thing that I think is really worth pointing out is, is this, and, and just talking about, is this idea of whether workers truly have the bargaining power to negotiate over noncompetes. Um, and there’s, there’s research on this that shows that the vast majority of workers who sign c- noncompetes do not negotiate over them. Many of them do not even know they have a noncompete until they try to leave to go to a, to, to a competitor. One of the ways this h- like how is it possible that they don’t know? One of the ways this happens is that workers are often asked to sign non-complete, noncompetes on their first day of work. They have accepted the job, they have, um, like, p- potentially changed their life around to make this job work, they have turned down other jobs, they are in a position of extremely limited bargaining power, and they’re faced with a ton of papers that you’ll, you know, you sign a bunch of things on your first day, and one of them is a noncompete agreement, and you’re just like, “Okay,” and, and you just sign it because you have n- no ability to negotiate at that point.

Most workers have no ability to negotiate that point. That’s not the case for all workers, but that’s the general idea.

John Donvan:

So, so what I hear is there, there’s just an impasse, there’s just a basic fundamental disagreement here on whether, uh, whether you both, each feel the evidence shows that the existence of noncompete clauses has, uh, enhanced or harmed worker mobility. I think was just have to declare an impasse on that. I wanna, I wanna have a little bit-

Neil Bradley:

You know, we do, but John I wanna, I, I, I, if I can, I actually wanna say, it would be an interesting discussion if what Heidi just said, and I, she’s right, there, there are some employers who I would argue shouldn’t be offering noncompetes in that stack of paper you sign after you’ve accepted a job on your first day. So, let’s have a discussion about reforming the rules around noncompetes so that when you’re negotiating over wages or the terms of the employment, that’s disclosed upfront. That would be actually a prudent discussion, I suspect we could actually come to an agreement on that, but that’s not what the FTC is proposing. The FTC is proposing to throw the baby out with the bathwater and get rid of the benefits because they don’t wanna have a serious discussion about how we fix legitimate problems when they arise.

John Donvan:

I wanna, I wanna just also kind of specify who it is we’re talking about. So, you know, there was a, there was a famous case where, um, the, the, the company Jimmy John’s, a s- sub- submarine sandwich shop, was, for a time, requiring, you know, workers who are working close to minimum wage to s- sign a noncompete, uh, agreement so that they couldn’t quit their job and go work for McDonald’s or something like that in, in the same neighborhood. And ultimately, under pressure, under actually legal pressure, uh, Jimmy John’s, years ago, stopped doing that. But, uh, Neil, are y-, are, where are you on that level of noncompete where, where the, the training is at sort of fast food level, that the company’s secrets are ingredients in a sandwich, does, would that, are, are you arguing for the legitimacy and the value of noncompete in, to that sector of the workforce?

Neil Bradley:

No, I’m not. And in fact, when you hear me argue, you’ll hear me talking about the appropriate use of noncompetes. And listen, there are some employers who use them inappropriately at time. And you just noted, by the way, uh, that when, when, uh, that company tried to, tried to do that, the rules in place, largely governed by states and state action, uh, have a way of pushing back and preventing them from doing that. So, um, uh, listen, you know, the, um, we live in a, in a fallen world, not everyone always operates perfectly, and we have great rules for protecting against that. The reason that we are against this ban on noncompetes is that rather than attempting to address real issues, it simply bans them outright, and that means that you lose the real benefits that are derived for the economy and workers when they’re appropriately used.

John Donvan:

So, I, that gives me the opening to swing to the other, uh, framing I wanted to bring to this conversation which is the impact on the business. So, Neil, what kind of business do you feel a noncompete regime is justified?

Neil Bradley:

Yeah, it’s, um, it, it’s really across industry, so, um, y- you know it is, uh, you, w- we have, um, uh, for example, I heard from a small, uh, manufacturer in Ohio, uh, they pride themselves on being leading edge in terms of efficiency and product delivery in the things that they manufacture. Um, uh, part of it is kind of their cultural secret sauce, uh, constant training that they do for their senior managers and the people who run, uh, the- these manufacturing, uh, lines. And because of that, they utilize noncompetes for their senior managers of their teams and the designers and the line managers in exchange for that training and in exchange for the compensation they provide. It’s a perfect example of an employer that without that type of protection, not only wouldn’t make that investment in the employees, they would lose a little bit of that secret sauce that gives them a competitive advantage against someone else.

Now, what we want in a competitive economy is for other companies to be developing their own secret sauce as well. And what you lose and what employers of all stripes will lose is, uh, the benefit of making those investments in their own secret sauce and knowing that those investments won’t simply walk across the street to the competitor and that their competitors are going to be developing their own secret sauce on their own and letting the best employer win in the marketplace.

John Donvan:

Okay, so Heidi, is, is the secret sauce factor actually a legitimate concern for businesses? Are, are they not at risk of being undermined by having their expertise and knowledge and secrets surface elsewhere?

Heidi Shierholz:

Yeah, th- th- that is a really important question because there are very valid reasons who businesses want to and need to be able to protect their trade secrets. And the thing is they do not need noncompetes to be able to do this. So, like, intellectual property law already provides significant legal protections for trade secrets, and if that’s not enough, employers can still use tailored, non-disclosure agreements. And I think one thin that is-

John Donvan:

Could you give an example of how that would work?

Heidi Shierholz:

I don’t know the details of, of what a non-disclosure agreement would necessarily look like, but it would have provisions like, “We would have the right to sue you if you disclose X, Y, or Z.”

John Donvan:

It sounds like you’re saying rather than say you can’t go from company A to company B, you can go to company B but you can’t share the secrets once you get there?

Heidi Shierholz:

Yes, exactly.

John Donvan:

You can’t disclose the secrets.

Heidi Shierholz:

You would have, yes, exactly, you would not be able to disclose the th- things that are spelled out in the, in the non-disclosure agreement. And one thing that I think is really important, is that in states where nonconfeet- competes are legally unenforceable like California, where Silicon Valley exists, there hasn’t been a proliferation of leaks of trade secrets and other confidential information that has just brought these companies down. Noncompetes are not needed, there are just other very effective ways to protect trade secrets that don’t have the other very negative impacts that noncompetes do on, you know, reducing dynamism and innovation, reducing productivity and economic growth hurting workers’ wages and on and on and on.

Neil Bradley:

Think about this for a second, Heidi’s right in the sense that, um, there are intellectual property protections and trade secrets, but those are actually quite narrow. The things that you can protect on trade secrets is defined in law and, and, and a narrow subset of what is often the secret sauce, uh, that an employer uses. So the suggestion that, “Well, okay, you could use a, a non-disclosure, uh, agreement to get there.” You’re enforcing that on the back end. So, what you’re suggesting is is that someone’s gonna take the secret sauce, go to an employee, you’ve asked them to sign a non D, an NDA, they reveal a little bit of the secret sauce, and then you’re going to sue and litigate and try to prove that they actually shared the secret sauce. And in a knowledge economy where you’re really talking about business strategies and approaches and efficiencies, it’s actually quite complicated.

Uh, it isn’t like the person took the document from their former employer and brought it to their new employer. It’s well, when they shared that idea, was it originally their idea? Or did they learn it from someone else? Or was it an idea that was already in the aether and in the atmosphere? So, it is really hard to use NDAs in the real world in a knowledge based economy to protect the innovation that occurs in companies, uh, today. And, you know, it’s interesting, uh, people like to invoke California and Silicon Valley, uh, but, but even some of the very reports, I, I think one that Heidi’s organization released at the end of last year, noted that noncompete agreements are actually common in California even though they are non-enforceable because there’s a concept of codifying this idea. And, and it also points to the fact that when there are real problems and there are inappropriate use of noncompetes, people do litigate.

But they are an important tool, even in states like California today, as a way of conveying to employees, and a way of figuring out how you protect that secret sauce that not other tool can, can do.

Heidi Shierholz:

Can I loop back around to, to one other part of the conversation which I think is important, this idea of we could potentially ban noncompetes for low wage workers like the… What would’ve protected the Jimmy John’s employees when Jimmy Johns had the noncompetes but maybe keep it, not, like, not ban them for high wage workers, that is, it really gets at this idea of bargaining power. I think… High wage workers are the ones who are least likely to have the big negative wage effects of noncompetes. That, you know, that’s gonna hit the workers with the least bargaining power to most, so that’s gonna be low and middle wage workers. But, when you have noncompetes for high wage workers, you still have all the very negative effects of noncompetes on reducing innovation, reducing dynamism, reducing mobility, just like reducing productivity and growth in the economy. So, I think it, I just wanted to make sure we covered that. Like, it’s not okay to just ban them for low wage workers.

John Donvan:

I, I, I, I, I hear you, though interestingly having a mirror image argument about the impact of these clauses on, on innovation. So, on the one hand, Heidi I hear you saying that, uh, it, it stifles innovation because workers can’t go out and start their own companies, or employees can’t go out and start their own companies and, and do something different and do something new. And Neil, I hear you saying that it, uh, these, these clauses protect innovation because companies can, can continue to build on their ideas and keep going places and trust more employees to, you know, their better employees to, to come on and develop them because, uh, because they, they know they’re not gonna go across the street and sell what they know to somebody else.

So, I wanna talk a little bit ab- and I, I’d like you each to respond to the other side’s argument about that. So, you know, if you could go first, Heidi’s argument that an individual with a dream and an idea and some insight that hasn’t, perhaps, uh, hasn’t been appreciated at, at the place he’s working for, wants to go out and start his own company and now can’t. That’s anti-innovation she’s arguing.

(25:22):

Neil Bradley:

Well, uh, one, noncompetes aren’t uh, uh, aren’t structured as permanent you can never go, uh, to a competitor ever for the rest of your life anywhere in the world. So, let’s understand, so let’s understand-

John Donvan:

Let’s say, let, wait, wait, Neil, let’s say it’s a two-year, a two-year gap.

Neil Bradley:

Sure. So, so, so-

John Donvan:

So, that’s a pretty long period.

Neil Bradley:

Yeah, so it’s a, it’s a two-year limit or, in most instances, they’re geographically limited, so you can’t go start a business within, you know, or go to a competitor within X, um, you know, uh, 50 miles or 100 miles. Um, so we’re, we’re not barring people from leaving forever. I guess the question is, is where’s the, the proof? And the, the, the proof that we see is, uh, including, but the FTC’s own economists, is that it does encourage innovation, and if you look at the economy overall, the economy overall is actually quite innovative. We actually are setting, as President Biden just noted, we are setting records even last year af- as we are coming out of the pandemic, post pandemic, for new business starts. So, we actually have a really dynamic economy where we have established firms that are innovative and growing, and we have new firms being started.

And wanna, as according to the FTC, take a gamble and overturn the laws of 47 states not with some narrow approach to regulating the inappropriate use of noncompetes, but by banning them outright. You’re talking about a tool that we’ve been in- using in this country since its founding.

John Donvan:

Before you move on to that point, and I do wanna go to that point, the problem I have with appreciating the argument that you just made, that during and after the pandemic, since the pandemic, there has been a great deal of business dynamism, is we really can’t trace which people are doing that in spite of having had to sign noncompete clauses before. I mean, you’re, you’re talking about a very large number from 30,000 feet, whereas Heidi is saying, I believe Heidi is saying that the people who have noncompete clauses have not been able to do those things. And you’re saying you think maybe they are, but how do you know that they are?

Neil Bradley:

Uh, actually, that’s what I’m saying is, is that, um, we actually have a, a, a dynamic economy where incumbent businesses, businesses that exist are innovating and we still get the benefit of new business starts. So, in that environment, and we know that the dynamism in existing companies is in part supported by the use of noncompetes. To come in with a radical proposal (laughs) that says we’re gonna overturn the laws of 47 states and ban them completely is likely to have real adverse consequences. There’s no real proof that we’re gonna get the explosion in new business starts or innovation that Heidi contends that we might get, and there’s a real chance that we’re gonna lose the innovation that is encouraging [inaudible

] So, there’s a balancing act here.

John Donvan:

Yeah.

Neil Bradley:

And the balancing act, noncompetes, because they are not permanent, because they cover in generally geographic areas and for a limited time duration, help achieve the balance that we want between innovation and incumbent firms and new business starts. The FTC’s rule destroys that balance and it’s really hard to find any need in the current economic data for doing that.

John Donvan:

All right, Heidi, I w- I want you to follow up though before you go to where you want to go, because I can see that you, you wanna respond to that-

Heidi Shierholz:

(laughs)

John Donvan:

-to take back the question about the impact on innovation. Neil making the argument that the noncompetes are anti-innovation or, or, or suppress innovation for the reasons that he just laid out. And he’s also saying there’s not much evidence for your case that innovation is being stifled because of noncompete clauses.

Heidi Shierholz:

Yeah, I think that we need to not use today’s macroeconomic conditions which are extraordinary in the aftermath of a pandemic, war, like we are in extraordinary circumstances, to try to shed light on what noncompetes are doing. If we’re, if we wanna look at macroeconomic conditions, let’s just go back to 2019. The, the recovery from the great recession like, 20, you know the, the years leading up to the, to the covid recovery when we weren’t in a extraordinary situation, there as an, as a labor economist, all I heard was… All we all, I mean, heard because that’s what the data we’re showing, dynamism is dropping, worker mobility is going down. Like, those were the… That was the driving conversation of the day, and that did have, because that was the longer run, that’s the longer run trend, that had a lot to do with things like noncompetes. So, I think it’s just important to not act like what’s happening now in the macro-economy says very much about the-

John Donvan:

Yeah.

Heidi Shierholz:

-macroeconomic impact of noncompetes. But then to, sorry, I’ll get back to your question of do these, do noncompetes stifle innovation or not? It’s just a remarkable twist to try to claim that this thing who’s primary purpose is actually to keep people from being able to form businesses that could compete with you, or to take a job at another firm that competes with you won’t stifle innovation. It’s just, that’s what they’re all about. I started with this, it’s in the name.

John Donvan:

Thanks very much, Heidi. You’re making the point that the semantic argument, that the word actually says don’t compete.

Heidi Shierholz:

And also just the, the fact of what they do. They keep people from being able to form a business or take another job that competes with it, the firm that you’re in and, and that there’s no way-

John Donvan:

Although, Neil says, not for- not for- not forever.

Neil Bradley:

[inaudible

] but the interesting thing is, so do patents, right?

Heidi Shierholz:

Yes, that’s a whole nother podcast, yeah. (laughs)

Neil Bradley:

So, so, so are we gonna get rid- or is the FTC next gonna ban patents?

Heidi Shierholz:

I, I-

Neil Bradley:

Embedded in our constitution is the idea of intellectual property. Heidi cited intellectual property as the reason that we don’t need noncompetes because we can protect that. IP, patents are a restriction on competition because it is a reward for an investment in innovation. And noncompetes is a way of preserving the benefits of the investment in innovation and job training and other benefits for employees. And we should no more wanna ban noncompetes than we wanna ban patents.

Heidi Shierholz:

I think that’s a red herring. Like, what we’re talking about now is noncompetes and we know what they do, like, they, they-

Neil Bradley:

But, but Heidi, you would agree that patents impede, uh, competition, right?

Heidi Shierholz:

I w- I would. Yes.

Neil Bradley:

So, so we have patents-

Heidi Shierholz:

100%.

Neil Bradley:

-because they provide a trade off.

Heidi Shierholz:

I, I-

Neil Bradley:

We have a trade off-

Heidi Shierholz:

We, that’s another conversation about whether we think we should ban patents-

Neil Bradley:

But we, but this is important, John, this is important. Because patents are a trade off. It’s a trade off between impeding competition but inducing innovation. Noncompetes serve the same thing. It’s a red herring to suggest that innovation only occurs when someone leaves a firm. Innova- or starts a new firm. Innovation occurs in existing firms too, and noncompetes is a way of maintaining that balance just like patents maintain a balance between innovation and competition. By the way, they’re not permanent patents, you can’t have a patent for, uh, in perpetuity, just like you can’t have a noncompete in perpetuity. So, the reason we’re, uh, we’re answering no to the, your question today is because what the FTC is proposing is to ban them completely. And it, you, you’ve, you, you destroy that balance.

John Donvan:

Heidi, the point that Neil just made in terms of the temporary nature of patents, that they ultimately expire, he also made the case that noncompetes also expire. I had suggested, you know, a two-year period. And I’m wondering whether that temporary nature in any way mitigates against the harm that you say they’re causing because ultimately an individual could, I guess, sit out the, the, the, the-

Heidi Shierholz:

Yeah, that’s-

John Donvan:

[inaudible

] but-

Heidi Shierholz:

Sorry to interrupt you. You, you kind of put your finger on it. The, the vast majority of people have no ability to sit out for any length of time. They depend on the money that they get from their, from their job to actually make ends meet. And so there’s, they could, it doesn’t… The fact that, you know, it only restricts for a, for a given time period, that it, it doesn’t, that doesn’t make them okay.

John Donvan:

Okay. I wanna move on to the topic that Neil has hit on, hit on several times, and now is the time I would like to take it on. His argument that this is quite radical, that this is changing a business practice that’s been in place for a very, very long time and that it impacts a lot of business, uh, uh, a lot of businesses out there. I understand your argument that it’s good for workers completely, but just on the face of it, it’s a very, very big step, and, uh, could be interpreted as, as very, very heavy-handed on the part of the FTC to tell businesses that they have to stop this practice. And it intersects with something that they’ve been doing for a long time. So, just would you concede that it’s a radical, uh, move whether you’re for it or against it, does it seem to you like quite big, quite drastic?

Heidi Shierholz:

Only because noncompetes have proliferated so dramatically in the last couple of decades. Like they, they didn’t used to be that common. If we would’ve banned, if the FTC would’ve banned noncompetes before they proliferated as much, nobody would be having this conversation about whether it’s like a, it’s, it’s a totally radical idea. Um, that’s the difference. It’s waited long enough that now they are really, really ubiquitous, and that, um, actually is having these, uh, having meaningful effects. So, it’s just a matter of timing about whether or not this is a big change or not.

John Donvan:

You’re, you’re basically arguing it shouldn’t have gotten this far?

Heidi Shierholz:

It shouldn’t have gotten this far, right.

John Donvan:

Okay. Neil?

Neil Bradley:

We can find court cases dating back to 1811 adjudicating noncompete clauses between stagecoach lines in the original colonies of the United States. We have been living with noncompetes and utilizing and benefiting noncompetes since our founding, and using courts, and using state, remember, 47 states, every state has a law on the books, 47 states have figured out how they want to regulate them, the case law, and that’s been built up over two centuries. It seems pretty radical to me when we go and elect people to represent us and our state legislatures and governors and we elect people to represent us in Congress and we elect presidents, that none of those people are actually voting and deciding whether or not to overturn two centuries of precedent and ban a common business practice, but yet three people that 99.9% of Americans would have no idea who are, woke up one day and decided on their own that noncompetes are a bad idea and by the vote of three people, ban them for everyone.

Like, that is not a democracy I know where we make decisions that way. And my guess is, is that Heidi wouldn’t like it if three people in a different administration decided to make rules going the other way. That’s not how we operate in a democracy. And so let’s have a real debate about this, but let’s not pretend that we’re not doing something radical here by the votes of three people to overturn two centuries plus of precedent.

Heidi Shierholz:

I, can I just jump in and say, I didn’t mean to imply that noncompetes are new. I mean to imply the proliferation of them has happened in the last couple of decades. Noncompetes, you’re totally right, have been around for a very long time but they, but, but they have, we haven’t seen the ubiquity of them that we’re seeing now for that whole period. And the other thing, states have made them unenforceable, like we’ve seen state action and it wasn’t, it, you know, it, the, it wasn’t a sky is falling situation, so it’s hard to s- to look at wh- what the FTC is saying and say that it would, it would be this just radical like deterioration of, I don’t know, the business economy.

Neil Bradley:

But, but then if it doesn’t change anything, why are all these benefits? So, you can’t on one hand-

Heidi Shierholz:

It will-

Neil Bradley:

You can’t on one hand argue-

Heidi Shierholz:

It will increase wages.

Neil Bradley:

-that fundamentally, uh, and there’s all of these benefits, but really just has no real change and no practical impact. So-

John Donvan:

I, I don’t think that-

Heidi Shierholz:

It didn’t have any negative impact.

John Donvan:

I don’t, I-

Neil Bradley:

If, if, if you’re giving benefits from somewhere-

John Donvan:

Oh, hold, time out, time out-

Neil Bradley:

-you’re giving costs somewhere else.

John Donvan:

Time out, time out, time out. Neil, I don’t, I don’t really think in good faith that’s what Heidi’s arguing, uh, that there’s, that there’s no impact. So, Heidi, why don’t you step in there?

Heidi Shierholz:

Yeah, [inaudible

] yes, that’s exactly right. Like I’m not saying that there’s no impact, I’m saying the impacts aren’t negative. It’s that we aren’t, it’s not a sky is falling situation. What we see when, what non- noncompetes do is they hold down wages. Wages will go up. They hold down worker mobility. Worker mobility will go up. They hold down business formation. Business formation will go up if, if noncompetes are banned. Those things, I’m in favor of all of them, right? The, those are… We aren’t going to see the, the, the sort of terrible things that opponents of this rule are suggesting may happen.

John Donvan:

All right, so, um, Neil brought in the issue of patents which, you know, as, was, was referred to that’s a whole separate debate, but it kind of was actually quite relevant in the point he made. I wanna do the opposite, Heidi, where at the beginning, you mentioned that, um, for workers who are not protected by unions, this is one of the forms of power that they have left. So, while I don’t wanna make this debate about unions, I think the point is interesting to bring to you, Neil, that this is one form of power, the power to walk away and, and, and start another business or work for somebody else is a form of power that workers have in an economy where unions have lost a ton of their teeth.

Neil Bradley:

Yeah, w- one of the great powers that workers have, particularly outside of unions where, uh, they get to actually negotiate for themselves, is the, the power to negotiate wage increases. Um, and, um, uh, we, we do see people negotiating wage increases. Part of and, and even some of the studies cited by the FTC, uh, and, and our surveys, employers compensate employees in terms of increased wages for the cost of signing a noncompete. So this is part of a negotiation. Now, to Heidi’s point earlier, can we improve transparency around those negotiations? Absolutely, and we can probably find agreement on that and, and do something productive there that, uh, strengthens workers a little bit. But if you simply ban noncompetes, then y- there’s no [inaudible

] to bargain over. I can’t bargain for higher wages because you’re asking me to sign a noncompete if you’re barred from asking me to sign a noncompete. So, interestingly, you’re actually taking away something that employees can negotiate over right now by na- banning noncompetes.

Heidi Shierholz:

That, I mean, the answer to that is the vast majority of employees who are asked to sign noncompetes have no ability to negotiate over them it is the rare bird who is in the position, who has the bargaining power to be able to do that. That is not the typical situation. So you are actually making workers better off by removing that possibility.

Neil Bradley:

You- you’re both giving and taking away power. So a ban of noncompetes, yeah, you, you, you’re right. If I have, if you, if the FTC were to ban noncompetes, um, then, uh, the worker has more power in terms of their ability to pick up and leave. That’s true. But you also have to recognize what you took away. And so, you know, the, um, uh, a study, uh, Paul Wong, Yung Lin, Emily Walden, competition policy international. Employees who negotiate over noncompetes at the time of their signing, they’re negotiating over wages, receive 9.7% higher wages. Common sense tells us that if the employer is asking for something that imposes a cost on the employee, meaning, “I can’t take a job within 50 miles for two years if I were to quit,” that in exchange for that they extract higher wages. That’s what our own survey data shows of US Chamber members who use noncompete agreements.

If you ban the ability of employers to ask for a noncompete, then there’s nothing to negotiate over there. So, you’re right, you are giving workers more freedom in one space, and then you’re taking away their power to negotiate in another space.

John Donvan:

What do we expect would happen inside companies in relationship to management, especially top management and those who report to them, in a world where there are no noncompete agreements?

Heidi Shierholz:

We can look to what’s happened in places like California that have made noncompetes unenforceable. We haven’t seen a big decline in employment, we haven’t seen a big reduction in things like the, the kinds of things that Neil is talking about. We will see it play out with workers getting higher wages. Workers staying at companies for less time, that will happen because they’ll be able to go to the job that’s a better match for their skills and interests and we will see higher innovation.

Neil Bradley:

We haven’t seen this surge of wages in California, Oklahoma, of North Dakota either. But to your question, John, about what would happen, we actually went out and surveyed, and we asked, we asked companies, uh, and of those companies who use noncompete agreements, uh, and we said, “What, would you make changes?” So 67% of those who currently use noncompetes said that they would adjust their talent and compensation strategy negatively if they weren’t able to use noncompete agreements. So, if, if the FTC’s proposed ban were to go into effect, I don’t know that anyone can say with absolute clarity, um, what the end result would be, but here’s what businesses are telling you they’re going to do, what they’re anticipating doing in anticipation of that. And none of those things, adjusting compensation down, uh, reducing their investments, uh, in, in job training and talent, none of those things are good for workers.

John Donvan:

Is it not the case that if an employer hires somebody and brings them in with a noncompete clause, that employee who wants a raise can’t go across the street and say, “I’m gonna…” and come back and say, “I’ve got a better offer.” Is it, is it not something that would suppress income for an employee, the fact that they can’t walk? That they’re in a sense, kind of locked into that job and don’t have that negotiating ability to say, “I’m gonna walk and leave,” because they’re ot- not really a threat?

Neil Bradley:

Noncompetes generally don’t pro- they don’t prevent you from taking any other job. It’s not like you go and you sit at home on your couch, you know, for the period of the noncompete. Um, it means that-

Heidi Shierholz:

Just in your field.

Neil Bradley:

-you’re not going to a compe- it means that you’re not going to a competitor for a period of time and generally in a geographic region. So, you’re right that there is a cost in that, but if you have an employment contract, the time your employment contract is up and you’re negotiating that aspect of it, it’s gonna be something that nego- you negotiate. If you’re in the midst of a contract and you’re trying to get a r- a, a, a raise out of that, um, yeah, that is a consideration. But, so the, you gotta remember, there’s give and take on both ends of this throughout the duration of, uh, uh, uh, the person’s negotiations for employment, employment, and ultimate departure.

John Donvan:

Heidi, your response to that?

Heidi Shierholz:

It takes away everything. Employees basically have two potential sources of power. If you’re in a union, you have the power of joining together with your colleagues to make collective demands. If you’re an individual worker, the only source of power you really have is your ability to, th- the implicit threat that you could leave and take another job. That is it. Your employer does not have to pay you competitive wages if they’re not competing for you with any other companies that are competitors of theirs. And so it 100% red- wa- reduces wages. It puts downward pressure on wages because workers just have less leverage.

John Donvan:

All right. I wanna leave it there as we head for our closing round. Thank you both of you for that conversation. And our closing round is simply a chance for each of you to make a summary statement of about one minute. And you went first on that, Heidi, so you go first again. So one more time, the question, should the FTC ban noncompete clauses? You have been arguing yes. For the last time, why are you a yes?

Heidi Shierholz:

I think it’s maybe useful to kind of step back from this and think about exactly who wins from having noncompetes. So, for one, it’s existing firms who want to stop new firms from forming and competing for them. Noncompetes are great for those firms. But they’re, you know, clearly very bad for consumers and for the economy overall. The other group who wins is exiting firms who want to prevent other firms from being able to poach their workers which means they can pay their workers less because noncompetes mean that their workers just have fewer outside options. Again, noncompetes are great for those firms but they’re clearly bad for the overall workforce. And I think it’s just important to remember that just because existing firms really like their noncompetes, that does not mean that they’re good for the workforce or they’re good for the economy.

Noncompetes are bad for economic dynamism and innovation, they depress business formation, they hurt productivity and growth, they shrink workers’ wanes, they restrict workers’ freedom, they’re just bad for the economy in general. The F- the FTC has the authority to ban unfair methods of competition, methods of unfair competition which noncompetes clearly are. And, you know, the, the workforce and the broader economy will be better for it.

John Donvan:

Thanks very much, Heidi, and Neil you get the last word, your closing statement on why your answer to this question is no.

Neil Bradley:

Yeah, so, um, it ignores all the benefits that noncompetes provide. So, uh, when, when employers offer noncompetes, employees negotiate over higher wages. It allows them to protect their investments and job training and information sharing. It allows them to protect the innovation that, uh, companies, uh, uh, uh, uh, uh, produce, uh, in house. I, I think most importantly is that, um, rather than having a discussion about how we make sure that noncompetes are used appropriately, which would be a pretty useful discussion, and I think we could find common ground on, instead, we get a radical proposal that overturns 47, laws of 47 states, 200 plus years of precedent, and simply bans them. And that ignores all the positive benefits that noncompetes generate for workers, for employers, and for the economy as a whole. And so for that reason, uh, the FTC shouldn’t ban noncompetes.

John Donvan:

Thank you, Neil. And that concludes our debate. I would like to thank both of our debaters. You listened to each other, you engaged with each other, you completely disagreed with each other-

Heidi Shierholz:

(laughs)

John Donvan:

-but you showed one another respect and civility which is what we like to do here on this program. So thank you, both of you, Neil and Heidi for joining us.

Heidi Shierholz:

It was my pleasure, thank you so much.

Neil Bradley:

Thank you John, it was great to be with you.

John Donvan:

And thank you for tuning into this episode of Intelligence Squared. I wanna let you know that as a nonprofit, we do work to combat extreme polarization through civil and respectful debate of the kind you just heard. And our program is generously funded by listeners like you, by the Rosencrantz Foundation, and by friends of Intelligence Squared.

Intelligence Squared is also made possible by a generous grant from the Laura and Gary Lauder Venture Philanthropy Fund. Robert Rosencrantz is our chairman, Clara Conner is CEO, Leah Mathow is our chief content officer, Julia Milfey and Marla Sandoval are our producers. Andrew Lipson is head of production, Damon Whittimore is our radio producer. Raven Baker is events and operations manager. And Gabrielle Yanachelli is our social media and digital platforms coordinator. I’m your host John Donvan, we will see you next time.