Lina Khan’s Make-Believe Liberty: Debunking the Claim That Almost All Employee Noncompete Agreements Reduce Freedom
The Federal Trade Commission recently banned employee noncompete agreements (“NCAs”). This paper critiques Chair Khan’s claim that banning NCAs enhances liberty.
While some NCAs restrict vocational liberty, others enhance a type of liberty Chair Khan ignores, i.e., freedom not to work. Contract Law bolsters this second liberty, by enforcing voluntary contracts to refrain from working in agreed places or times in return for compensation. The Commission’s Final Rule found that such NCAs can induce significant investments that improve productivity and/or product quality. Banning such NCAs would reduce this form of liberty.
The ultimate impact of NCAs on liberty turns on whether coercive or voluntary agreements predominate. The Final Rule found that only Senior Executives, less than one percent of employees, enter voluntary NCAs. Other NCAs, the Rule found, result from a coercive formation process. That is, employers use a “particularly acute” bargaining power advantage coercively to dictate NCAs. The Commission invoked numerous supposed facts indicating the possession and use of such power, including labor market concentration, pre-acceptance ignorance of NCAs, lack of individual bargaining, and employers’ supposed failure to compensate employees who enter such contracts.
The claim that employers use particularly acute bargaining power coercively to dictate uncompensated NCAs lacks any substantial basis in the record. The Rule cited no evidence data how many employees bargain over NCAs in concentrated labor markets. Moreover, the Rule relied on a study of members of one association, representing less than one percent of employees, to support its claim that employees usually lack pre-agreement knowledge of NCAs. Finally, the Commission offered no substantial evidence that “almost all” employees receive no compensation for NCAs. Instead, the Commission seemed to claim that individual bargaining, a somewhat rare occurrence, is necessary to confer compensation.
The Rule also ignored information that contradicted key findings regarding NCA formation. Thus, the Rule ignored unrebutted evidence that 77 percent of employees bargain in unconcentrated labor markets. The Commission also ignored evidence that most employees have pre-contractual knowledge of NCAs, findings reported on the same page of a study the Rule cited for other purposes. Finally, the Rule ignored literature explaining how employers compensate employees for NCAs without individual bargaining.
Comments discussed these data and literature, explaining why they undermined the NPRM. Despite claims that it carefully considered all input, the Commission ignored these comments, violating the requirement to consider feedback that contradicts its reasoning. Given the lack of factual support, any claim that banning NCAs enhances liberty appears to be baseless speculation.