Innovation-Killing Noncompete Agreements Are Finally Dying

One of the most stunning twists in the recent five-day crisis at ChatGPT creator OpenAI came when some 95 percent of the company’s hundreds of employees threatened to quit. The staff planned to follow CEO Sam Altman to develop successors to ChatGPT at Microsoft instead. The threat appeared to mark a turning point in Altman’s ultimately successful attempt to return to OpenAI—it was also a scenario that businesses have the legal power to block in most US states.

California, home to OpenAI’s San Francisco HQ, is one of a handful states that bar the enforcement of noncompete agreements in employment contracts, which can forbid employees from hopping jobs to a competitor, often for years. That picture is now set to change, as a raft of new legislation aims to make more places like California.

Until this year, Oklahoma and North Dakota were the only states besides California that outlawed the enforcement of noncompetes. Over the past several months, more states began to follow suit, motivated in part by new research revealing the negative impact of NCAs on innovation and wages.

So far during the 2023 legislative session, 38 states have introduced a whopping 81 bills aimed at banning or curtailing NCA enforcement, according to the Economic Innovation Group (EIG), a public policy organization founded by Napster cofounder Sean Parker. The proposed laws range from industry-specific prohibitions to more sweeping bans. In total, 10 states have enacted some form of limitation on the agreements this year.

According to research from the Universities of Maryland and Michigan, nearly one of five US workers are subject to noncompete agreements, and a third of those are presented after the worker has accepted a job offer. In tech, that number is significantly higher: 35 percent of people working in computer- and math-related vocations and 36 percent of engineers work under noncompetes, the highest share of workers in all industries alongside architects, according to the paper. If not for California’s ban, that number would surely be higher. More than half of US states even allow companies to use NCAs to bind employees after they have been laid off, according to an analysis by the law firm Beck Reed Riden.

Those numbers now look set to shift. In July, Minnesota became the first state in over a century to enact a near-total ban on NCA enforcement. (All the bans allow for a narrow list of exceptions, such as permitting an entrepreneur who sells their business from immediately starting a competitor.) Meanwhile, the EIC, labor groups, and antitrust advocates are pressuring New York governor Kathy Hochul to sign a ban that the state assembly passed this summer.

Expanding Bans

At the federal level, the National Labor Relations Board declared this year that noncompetes violate the National Labor Relations Act, and the Federal Trade Commission proposed a rule that would ban the practice nationwide. Bloomberg Law reported that the agency is expected to finalize the rule in April, although business groups are likely to challenge it. In February, lawmakers reintroduced the bipartisan Workforce Mobility Act into the Senate, which would outlaw noncompetes in all but a few scenarios. California even strengthened its ban this year, outlawing the enforcement of noncompete agreements signed in other states and making it illegal to require an NCA.

California’s noncompete laws have famously been credited with helping birth Silicon Valley. “The traitorous eight,” a group of employees of Shockley Semiconductor, a pioneer of silicon-based semiconductors, decamped to found rival Fairchild Semiconductor in 1957, then some of them left to start Intel a decade later. Steves Jobs and Wozniak left posts at Atari and HP in the mid-1970s and started Apple. In 2011, Eric Yuan quit Cisco after the company rejected his idea for a video conferencing system. That same year he founded Zoom. The list goes on. A national ban on noncompetes could open the door for new startups in states like Texas and Florida where tech companies have flocked in recent years.