Will Employee Non-Compete Agreements Fade Away Like the Baseball Reserve Clause?

30 million Americans are now required to sign employee non-compete

agreements. These agreements, like the baseball reserve clause, limit an

employee’s ability to leave a job to work for potential competitors.

Charles H. Martin, JD, MBA@Every1sGuide, #LawyerballLaw,

www.Lawyerball.com, www.facebook.com/Every1sGuidetoElectronicContracts

For 100 Years, Baseball Clubs Could Stop Their Players From Ever Playing for Another Club

“(It’s) outrageous.…I sign a contract with a club, and they can hold me forever...or so long as I want to play ball.” - George Wright, Providence Grays shortstop, 1884In 1879, the National League created the first “reserve clause” rule. It prevented designated players from playing for another team without their club’s permission.

The American Association agreed to respect the rule in 1882. It was written into all player contracts in 1887. It was a part of the AL-NL “Peace Agreement” of 1903.

Baseball’s 1922 Supreme Court Antitrust Exemption Protected the Reserve Clause from

Court Challenge“The giving of exhibitions of baseball…would not be called trade or commerce.... and the restrictions by contract that prevented the plaintiff from getting players to break their bargains and the other conduct...were not an interference with commerce among the states.” – Justice Oliver Wendell Holmes, Jr.In 1912, baseball contracts first specified that player salaries were paid in part for the club’s right to unilaterally extend a player’s contract, requiring him to work only for his club. In 1976, the Major League Baseball Collective Bargaining Agreement negotiated the first rules for player free agency. The “Curt Flood Act of 1998” finally changed federal antitrust law to prohibit the reserve clause.

An Employee Non-Compete Agreement is a Reserve Clause for Employees

Employee non-competes are now under scrutiny, because they appear to 1) suppress wages, 2) reduce worker mobility, and 3) reduce innovation, entrepreneurship, and economic growth.

Contract law is state law, but Congress can enact laws regarding contracts in interstate commerce.

Employee non-compete agreements have long been enforceable in most states. In practice, however, non-competes were, until recently, enforced mainly against engineers or similar employees with specialized technical knowledge. Most states require them to be “reasonable” in work, time, and geographic scope.

Employee Non-Competes Are Spreading to Non-Technical Workers Who Don’t

Know Trade SecretsLawsuits to enforce employee non-compete agreements rose 61% from 2002 to 2013. A 2015 study suggested that nearly 30 million U.S. workers, almost 18% of all employees, were bound by non-competes.

The two main justifications for non-competes are 1) protection of trade secrets and confidential information from disclosure to competitors, and 2) protection of investment in employee training from benefitting competitors.

Only 24% of all U.S. workers studied reported having access to trade secrets, including fewer than half of the 18% bound by non-competes. Non-competes have been enforced against fast-food deliverers, hair dressers, camp counselors, and journalists.

Non-Competes Reduce Employee Wages at Career Starts and Over Time

A 2016 U.S. Treasury Department study found that, in states with stricter non-compete enforcement, initial wages were 1.4% lower; and after a forty-year career, wages were 10% lower than in states with maximum non-compete enforcement, compared to states with minimum enforcement.

Non-competes appear to reduce wages and wage growth, because 1) employees often begin work without knowing they will be bound by non-competes, and are unable to bargain for them, and 2) worker mobility is reduced by non-competes without increased training in return.

Even in California, Non-Competes Are Imposed, and Companies Have Circumvented the State Ban

California has prohibited non-competeagreements since enactment of its 1876Constitution. Nevertheless, in 2015 Adobe, Apple, Google, and Intel settled for $415,000,000, a class-action lawsuit alleging secret agreements among them to not recruit or hire each other’s employees in violation of federal and state antitrust laws, the California ban on employee non-compete agreements, and state unfair competition law. The alleged purpose of the agreements was to fix and suppress employee compensation.

A 2015 national survey indicated that, despite the California non-compete ban, 19% of California workers are bound by non-competes, and about 37% of workers are asked to sign non-competes only after taking a job.

Non-Competes Reduce Innovation, Entrepreneurship and Economic Growth

Studies have shown that worker mobility within an area of similar employers quickly spreads expertise, and improvements in technology and work practices. This mobility effect, along with stock options and venture capital, has caused “easy mobility” states that prohibit non-competes, like California, to surpass “difficult mobility” states, like Massachusetts, in the development of industry clusters, like Silicon Valley, which depend on quick dissemination of knowledge among competing firms.

Detroit Boomed After Michigan Banned

Non-Compete Agreements

1895191019251940195519700

20

40

60

80

Spinoffs as Percentage of U.S. Car Makers Since 1905

Michigan Ban on Non-Com-pete Agreements

Per-cent

In 1905, when 25% of car makers were located in Detroit, Michigan

passed a law prohibiting employee non-compete

agreements. By 1938, two-thirds of all automakers were located in

Detroit, with many “spin-outs” founded by former employees, such

as Dodge (from Ford) and Chevrolet, Chrysler and

Lincoln (from GM). Spin-outs grew to 60% of car makers by 1938, before

stabilizing at 40% in the 1960s. After the 1985 repeal of the Michigan

non-compete ban, the job mobility of Michigan inventors fell by

8.1% compared to some states with

non-compete bans, by 15.4% for inventors with firm-specific

skills,and by 16.2% for inventors with

technology-specialized skills.

The Baseball Reserve Clause ComparisonFrom 1879 to 1999

In 1976, the first MLB Collective Bargaining Agreement allowed veteran players to become free agents. The reserve clause was later banned by the federal “Curt Flood Act of 1998”, named in honor of the first modern player to challenge the legality of baseball’s version of the employee non-compete agreement.

Despite predictions of doom, the era offree agency has seen MLB franchise values increase despite the increase in player salaries, compared with earlier salaries, and as a percentage of revenues. In 2016, the average MLB franchise value is $1.2 billion (22 times the 1976 value), while the average MLB player salary is $4.25 million (82 times the 1976 salary).

Recent State Non-Compete ReformsIn 2015, Hawaii banned new non-compete and non-solicitation agreements for high-tech employees, New Mexico limited them for health care workers, and Nebraska refused to enforce an overbroad non-compete. In 2016, Utah limited its enforcement of new non-competes to a one-year period, and Oregon allowed only non-competes disclosed before employment begins, with 18 month maximum terms and low-income limits. Facing New York allegations that their non-competes placed “undue hardship” on employees, the publisher Law360, and the sandwich chain Jimmy John’s agreed to abandon them. New York will also not enforce them against workers fired without cause.

State and Federal Legislation Introduced To Ban or Limit Employee Non-Competes

Several states have recently introduced legislation to limit or ban non-competes generally (Massachusetts, Virginia, North Carolina, Minnesota). Other states have proposed or enacted laws to prevent enforcement against employees without knowledge of trade secrets (Washington, Idaho), or with incomes below a certain threshold (Oregon, New Jersey, Maryland), or who did not receive their agreements prior to starting employment (Oregon, New Hampshire).

In response to publicity concerning sandwich deliverymen bound to non-competes by Jimmy John’s franchisees, a bill was introduced in Congress to prohibit their enforcement against workers making less than $15 per hour.

The Need for Further Non-Compete ReformOn May 5, 2016, the White House released its analysis of employee non-compete agreements and their economic impact, based on a Treasury Department study.The analysis calls for further research and for state non-compete legal reform, such as requiring early employer disclosure of non-competes, and their impact, at the time of a job offer, invalidation of overbroad non-competes, and requiring employee benefits in return for signing non-competes.On May 11, 2016, President Obama signed into law the “Defend Trade Secrets Act of 2016”, strengthening federal protections of trade secrets through access to federal courts and civil damages. It reduces the need for state law non-compete protection.

For More and Continuing Information

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