The End of Non-Compete Agreements?

Happy Friday! The downside of selling the naming rights of your basketball arena to a shady crypto exchange is that, when that shady crypto exchange is exposed as a huge fraud, you have to strip the name off the building.

Until further notice, the Miami Heat play their home games at “The Arena.”

Quick Hits: Today’s Top Stories

• Attorney General Merrick Garland announced Thursday he was appointing a special counsel—former federal prosecutor Robert Hur—to oversee the criminal investigation into President Joe Biden’s possible mishandling of classified material. According to Garland, his decision to name a special counsel was made in consultation with U.S. Attorney John Lausch on January 5, after Biden’s attorney informed Lausch on December 20 that a second batch of classified documents from the Obama administration was found in the garage of Biden’s home in Wilmington, Delaware. The Biden team informed Lausch yesterday that they found yet another document with classification markings at Biden’s personal residence in Wilmington. 
• The Bureau of Labor Statistics reported Thursday the Consumer Price Index fell 0.1 percent from November to December, while increasing at an annual rate of 6.5 percent—a notable decrease from last month’s year-over-year rate of 7.1 percent and the lowest such measure since October 2021. Declining energy, travel, and used car costs contributed to the slowing, while the price of some food and household items continued to rise. Stocks climbed on the news, with the positive report increasing the likelihood the Federal Reserve only raises interest rates by 25 basis points—rather than 50 or 75—at its next meeting. 
• The Treasury Department reported this week the federal government ran a budget deficit of $85 billion in December 2022, a significant increase from the $21 billion deficit it ran in December 2021. Outlays for the month increased 6.3 percent year-over-year—from $508 billion to $540 billion—and government receipts decreased 6.5 percent. Higher borrowing costs for the government due to increased interest rates have played a key role.
• South Korean President Yoon Suk-yeol said for the first time this week that, if North Korea continues to escalate its nuclear threats, Seoul would consider building its own arsenal of nuclear weapons or asking the United States to deploy some of its warheads on the Korean Peninsula. “It’s possible that the problem gets worse and our country will introduce tactical nuclear weapons or build them on our own,” Yoon said. “If that’s the case, we can have our own nuclear weapons pretty quickly, given our scientific and technological capabilities.”
• The House voted 331-97 to pass the Protecting America’s Strategic Petroleum Reserve from China Act, legislation that would prohibit the sale and export of crude oil from the SPR to China or any entity under the control or influence of the Chinese Communist Party. The bipartisan vote comes after presidents of both parties have overseen sales of millions of barrels of oil to Chinese or Chinese-affiliated companies in recent years. It’s unclear whether the Senate will take up the legislation.
• A spokesman for the family of Taylor Dudley—a 35-year-old U.S. citizen and Navy veteran who had been detained in Kaliningrad, Russia since April—announced Thursday Dudley had been released into Poland, where he was greeted by U.S. officials. It’s unclear on what charges Dudley was being held; the spokesman for his family said he had traveled to Poland to attend a music festival and “at some point crossed the Russian border.” 
• Nebraska Gov. Jim Pillen announced Thursday that his predecessor, former Gov. Pete Ricketts, would fill retired Sen. Ben Sasse’s U.S. Senate seat through 2024. Ricketts, one of the biggest backers of Pillen’s campaign, said yesterday he was committed to running in both a 2024 special election to serve out the remainder of Sasse’s term and the 2026 election for a full term of his own.
• NASA announced Wednesday researchers had discovered a new exoplanet with the James Webb Space Telescope for the first time. Just 41 light years away, LHS 475 b is almost exactly the same size as Earth, and completes its orbit around a red dwarf star in just two days. Researchers are still working to determine whether LHS 475 b has an atmosphere.
• The average number of weekly confirmed COVID-19 cases in the United States increased about 3.5 percent over the past two weeks according to the Centers for Disease Control, while the average number of weekly deaths attributed to the virus—a lagging indicator—increased 61 percent. About 38,400 Americans are currently hospitalized with COVID-19, up from about 34,100 two weeks ago.
• The Labor Department reported Thursday that initial jobless claims—a proxy for layoffs—decreased by 1,000 week-over-week to a seasonally adjusted 205,000 last week, remaining near historically low pre-pandemic levels.

FTC Says: Don’t Sign It

The Federal Trade Commission has proposed banning non-compete agreements, and the collection of public comments on the proposal is—like most such comment collections—a gallery of frustrated citizens: There’s the biotech startup cofounder upset that pharmaceutical company non-competes have stifled his headhunting. The veterinarian who says she stuck it out at a poorly managed practice until conditions got bad enough that she found a job outside her non-compete radius—120 miles from her husband, visiting only on weekends. The man who recalls borrowing money from his dad to pay lawyers to fight a non-compete after he was fired during a recession.

The FTC’s proposed rule aims to end these workers’ travails. While a handful of states already restrict how companies use non-compete agreements, the FTC would paper over the country’s patchwork regime with a federal ban. Fans of the move say it’ll improve worker pay and boost economic activity, but join the FTC’s critics in acknowledging it could reduce companies’ investment in their workers and is vulnerable to legal challenges.

Non-competes—contract clauses that block employees from working for a company’s competitors for a certain period of time—are most common for highly paid workers, but extend well beyond the world of well-compensated executives and employees with technical expertise. An analysis from the Federal Reserve Bank of Minneapolis found about 12 percent of workers in their thirties making $20 an hour or less were bound by non-competes, compared to about 18 percent of workers making more. In practice, the agreements are often sprung on workers after they’ve accepted a job and turned down other offers—and they can be almost goofily overused. The Jimmy John’s chain, for example, required all its sandwich makers to sign such deals until 2016, when a lawsuit forced it to end the practice. A string of studies suggest enforced non-competes tend to lower wages, discouraging employees from taking higher paying or better fitting job opportunities—and in some cases driving them to accept pay cuts or leave their industry to escape a lousy workplace.

A handful of states have begun limiting their use, with mixed effects. Oregon ended enforcement for hourly paid workers in 2008—one analysis found those workers’ wages rose an average of 2 to 3 percent—while Massachusetts now requires employers to tell prospective employees a non-compete will be required before they arrive for their first day of work. Oklahoma, North Dakota, and California largely don’t enforce the agreements, and some attribute the success of Silicon Valley’s tech sector to the state’s non-compete environment, which attracted entrepreneurs looking to launch startups without being sued by their previous employers. Meanwhile, congressional efforts—such as a bipartisan bill introduced in 2021 which would have largely banned non-competes—have stalled.

Handing out non-compete paperwork even when it can’t be enforced can have a chilling effect on employees who either don’t know about state regulations or don’t understand what they mean for the threat of getting sued. “It’s a frightening thing to receive a threat to be sued under a contract,” said Ryan Nunn, a researcher at the Federal Reserve Bank of Minneapolis who has studied the wage impacts of non-competes on lower-paid workers. He spoke to The Dispatch yesterday in his personal capacity. “You may not have a detailed knowledge of whether that contract is enforceable [or] have ready access to representation.”

Even otherwise savvy workers can miss the memo. “When I first moved to California, there’s no big billboard that says, ‘Welcome to California: There’s no non-compete,’” said Matt Marx, an entrepreneurship and management professor at Cornell University who studies non-competes. “So I just assumed it was the same. And when I got there, and was asked to sign another two-year non-compete, I figured, ‘Oh, this must be valid.’ So I signed.”

The FTC hopes banning these agreements in most cases and requiring employers to tell employees they’re off the hook will prevent such situations—but the proposal has potential drawbacks. For one, businesses would likely invest less in costly training for workers when they can’t rely on non-competes to keep those workers around. Plus, the rule would offer lopsided benefits—while the commission predicts a 2.3 percent raise for hourly workers overall, it anticipates a 9.4 percent pay bump for CEOs. “The effect will be less information-sharing within the company,” George Mason University economist Tyler Cowen argued. “New workers in particular, who have not demonstrated their long-term loyalty, will have a hard time getting access to information and getting ahead.”

The sweeping proposed rule matches the FTC’s aggressive style under current Chair Lina Khan, but it will likely face legal challenges—and might not survive them intact. The Supreme Court’s 2022 West Virginia v. EPA ruling held that agencies need clear congressional authorization to regulate on a “major question.” This proposed rule altering millions of employment agreements could certainly qualify, and it’s not certain the FTC’s remit to fight “unfair methods of competition” will cover it. The U.S. Chamber of Commerce has already issued a statement calling the rule “blatantly unlawful” and argued in its public comment that “the FTC should combat potentially anticompetitive non-compete clauses through its traditional tools, such as competition advocacy and case-by-case litigation.”

One dissenting FTC commissioner, Christine Wilson, highlighted these concerns. “The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction,” Wilson wrote. “With all due respect to the majority, I am dubious that three unelected technocrats have somehow hit upon the right way to think about non-competes, and that all the preceding legal minds to examine this issue have gotten it wrong.”

Some analysts worry about unintended consequences if the rule survives—and that the FTC won’t be nimble enough to respond accordingly. “Under that new regime, we need to ask: How quickly will they respond to new information—for example, that it had destructive implications?” wrote Brian Albrecht, chief economist at the International Center for Law and Economics. “How easily can they make incremental changes?”

Even if the rule doesn’t take force, Marx—who’s been studying non-competes for more than a decade–sees a possible upside. “If nothing else,” he said, “If the FTC announcement just gets the conversation going and has people reading their employment agreements and asking, ‘if I take this job, what will I have to promise you?’ That’ll be a win.”

Worth Your Time

• Reason’s Matt Welch might have the best take on the whole George Santos fiasco. “George Santos is a more breathtaking fabulist than Joe Biden, in a much less important job,” he writes. “Biden is a leaky-brained liar of a president, who nonetheless bulls—ts less (and with far less influence on the beliefs of voters) than the craven Donald Trump. No one here deserves a medal, nor do the people who voted these openly flawed humans into office. You want to solve a problem like George Santos? Keep laughing at the guy—he deserves it, it’s fun, and ridicule is a response that the power-hungry have a hard time coping with. At the rate of revelations, it’s not hard to imagine his situation becoming untenable even to Kevin McCarthy. But we also need to solve the problems of Joe Biden and Donald Trump, which means not excusing or minimizing their lies just because the other guy is worse, and maintaining the citizen self-respect not to succumb to political trench warfare. Not only do your political hatreds pay for an entire unproductive economic sector, they also enable awful people to get away with their past malfeasance in the improbable name of saving America. Want politicians to stop lying to you? Stop letting them.”
• Graza, a start-up company selling squeezable bottles of extra-virgin olive oil, had a tough holiday season. Orders arrived late. The packaging was a mess. Customers felt misled. So the CEO, Andrew Benin, did something crazy. He apologized—to all 35,544 people who had ordered something over the past 60 days. “The mea culpa from a one-year-old company with the subject line ‘Learning from our mistakes’ was just about the opposite of a typical corporate response,” Ben Cohen reports in the Wall Street Journal. “It explained in plain English and candid detail what went wrong and why. It took accountability for those errors and offered a discount on future orders. It was raw, transparent about uncertainty and messy with typos and misspellings. It was also oddly entertaining and strangely charming. Mr. Benin watched the replies come back within minutes. First one, then another, then 866 more. ‘Thanks for your honesty,’ wrote one. ‘I wish more businesses did the same.’ ‘I won’t be using the discount,’ wrote another, ‘but I will be reordering.’ ‘These messages go a long way,’ wrote someone else. Mr. Benin believes in communicating like a person, not ‘as a business, with a business tone,’ which became obvious to anyone who opened his apology email. And there were many. The average open rate of Graza’s regular marketing emails was already exceptionally high at 58%. This one reached 78%.”

Presented Without Comment 

Also Presented Without Comment 

Also Also Presented Without Comment 

Toeing the Company Line

• On Thursday’s episode of The Dispatch Podcast, Sarah, Steve, David, and Declan weigh in on the Biden classified documents saga, discuss Republicans’ plans for their new House majority, debate what should be done about Rep. George Santos, and explain why Americans should care about the political violence in Brazil. Plus: the three guys compete to see who knows the least about Prince Harry.
• In the final edition of The Current (for now), Klon thanks readers for following along the past several months. “In the coming days it’ll be announced that I am joining a D.C.-based strategic advisory firm as one of its senior executives,” he writes. “No matter how many caveats or disclaimers were provided, I would never be able to credibly claim independence. I don’t regret the new opportunity, but it does require me to make a regrettable choice in laying down this newsletter.” Stay tuned for news about how The Dispatch will be covering national security and technology going forward.
• Nick’s latest Boiling Frogs (🔒) dives into the controversy surrounding a Hamline University professor showing a medieval image of Mohammed to an art history class. “The Hamline fiasco is noteworthy because it’s a throwback,” he writes. But it also demonstrates that, “no matter how sensitive you aspire to be while serving some liberal end, you’re forever one heckler away from being deemed not sensitive enough.”
• On the site today, Robert Bryce wades into the great gas stoves debate, Rebeccah Heinrichs and Richard Goldberg argue against the White House’s policy of restraint in a arming Ukraine, Audrey previews how Republicans might handle Biden’s missing documents case, and Kevin ponders whether George Santos’ “fake it ’til you make it” approach really works for anyone. 

Let Us Know

Have you ever had to sign a non-compete agreement in your career—or asked employees to sign one?