Non-Competes and Other Contracts of Dispossession

Abstract

Employers have used non-compete clauses to deprive tens of millions of workers of the freedom to change jobs or start their own businesses. In occupations ranging from home health aide to journalist and sandwich shop worker, employers have used this legal power to their great benefit. Non-compete clauses reduce worker mobility, help employers keep wages and wage growth down, deter small business formation, entrench potentially abusive, discriminatory, or hostile work environments, and fortify market power to the detriment of workers, rivals, consumers, and broader society.

The justifications for non-compete clauses are unpersuasive. While employers and their advocates argue that they are necessary to protect investment in workers, such as trade secrets and training, there are at least three reasons to reject that reasoning. First, a broad dissemination of information across firms is often good for society. Second, non-competes are onerous for workers and a flawed means of protecting intangibles. Third, other measures, such as trade secret law and employment contracts, are more effective at protecting trade secrets and other intangibles and also much less restrictive for workers.

Non-competes are merely one example of abusive contractual terms that the legal system has condoned or tolerated. Other terms, such as mandatory arbitration, class action waivers, confessions of judgment, and unilateral modification, reflect a ubiquitous economic and political problem. Corporations use these contractual terms to unilaterally rob consumers, suppliers, and workers of a wide range of constitutional and statutory rights. Like non-competes, these contractual terms are established in an environment of radical inequality between a corporation and a worker, consumer, or small business and are often contingent and non-salient to the person or business who must accept them. The result of these contracts of dispossession is the loss of legal recourse for wrongdoing, loss of possessions, and the imposition of unaccountable private governments.

Congress should pursue a comprehensive legislative solution to contracts of dispossession. First, it should enact a comprehensive law banning these contracts of dispossession. Second, it should delegate authority to a federal agency to identify and outlaw novel contracts of dispossession in the future. These legislative reforms would remake contract law to liberate workers, consumers, and small businesses from the private rule of corporations.