As the Federal Trade Commission considers banning noncompete agreements, a new study from the National Bureau of Economic Research shows why doing so could be beneficial.
States that don't enforce noncompete agreements will see more innovation based on filed patents that are important enough to be cited by others.
When a state makes NCAs easier for firms to enforce, "that state experiences a statistically and economically significant decrease in patenting," according to a study published on Tuesday by the National Bureau of Economic Research.
Businesses in states that don't enforce NCAs may also have more luck in recruiting. The study found that workers may be more likely to change jobs if they don't have to worry about NCAs.
"Several studies, including ours, find that worker mobility is higher when states make it harder or impossible to enforce NCAs," said Matthew Johnson, the study's lead author and an assistant professor at the Sanford School of Public Policy at Duke University. He said this is especially true for workers in innovative industries such as tech, pharmaceuticals and space.
The study arrived at a critical juncture in the debate over NCAs. The U.S. Federal Trade Commission (FTC) is considering regulations that would ban noncompetes. It recently submitted public comment on the proposal; if it follows through with a ban, court challenges are considered a certainty.
Along with Johnson, the study's co-authors are Michael Lipsitz, an economist at the Federal Trade Commission, and Alison Pei, a doctoral candidate in economics and public policy at Duke.
Reduction in important patents
On average, states that made NCAs easier to enforce had a reduction in high-value patents by as much as 19% compared with states that left their treatment of NCAs unchanged. A high-value patent is cited frequently by other patents and received more weight in this study.
The paper argues that NCAs limit job mobility and the spread of knowledge. If states want to encourage innovation, "our findings imply that a state could expect a meaningful increase in innovation if it made NCAs unenforceable," Johnson said.
Several studies, including ours, find that worker mobility is higher when states make it harder or impossible to enforce noncompete agreements.
Matthew JohnsonAssistant professor, Sanford School of Public Policy, Duke University
Johnson said states that make NCAs harder to enforce experience an increase in new business formation. "This is consistent with the idea that NCAs make it difficult for startups to grow and for workers to form new ventures as spinoffs," he said. NCAs make hiring difficult from incumbent firms.
The value of non-compete agreements is hotly debated.
For example, the Computer and Communications Industry Association, a tech industry public policy group, argued that noncompetes help with innovation.
"As the enforceability of noncompete agreements increases, an established firm would be expected to invest more in risky research and development due to a reduced risk of employees departing for competitors with relevant information," it stated in comments to the FTC's proposal rule.
Patrick Thibodeau covers HCM and ERP technologies for TechTarget Editorial. He's worked for more than two decades as an enterprise IT reporter.
