Articles Posted in Noncompete Agreements

AustinSilicon Valley has been successful partially due to employee mobility. California forbids non-compete agreements, and it’s a fundamental policy of the state that any agreement in restraint of competition is to that extent void. There are certain exceptions, such as a person selling the goodwill of a business to a buyer who wants him or her to refrain from carrying on a similar business within a certain geographic area in which the original business has been sold.

However, most non-compete agreements that are enforceable to restrict workers in other states are void in California. Almost one in five employees in America is now subject to a non-compete clause, and many of these employees are in low-paying or blue collar jobs. For example, a well-known case involved the sandwich chain Jimmy John’s, which tried to stop its former franchisees from working for other sandwich makers. As a result, Silicon Valley employees are able to shift tech jobs relatively easily. The result has been substantial innovation.

Researchers have found that non-compete clauses in other states force workers to stay longer in one job, and they earn less than they would in a state like California, or in a country like Israel, which is also hostile to non-compete agreements. Although firms may invest more in research and development if their investment is protected by a non-compete clause, a worker who is locked into a particular company invests less in self-training, and this affects what the worker produces and creates. Ultimately, non-compete clauses chill innovation more than they help it.

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