Meta’s launch of a Twitter-like platform, Threads, resulted in a cease and desist letter earlier this month from Twitter lawyers. The letter claims that Meta hired former Twitter employees and used trade secrets to launch a competing platform. While it is not yet clear how the dispute between Twitter and Meta will play out, it comes at a time when the Federal Trade Commission (FTC) is attempting to place a blanket ban on non-compete agreements. This situation offers a worthwhile case study on why bans on non-compete agreements are unjustified.
Twitter claimed in their letter that Meta had utilized the knowledge of their former employees to build a platform that could significantly harm their platform. Meta has argued that none of the former Twitter employees that now work at Meta have worked on the Threads team. If there had been non-compete agreements and if they had been enforceable in California, this would be a non-issue. Essentially, non-compete agreements prevent employees from working for competing companies in a given industry or starting their own companies that would compete with their former employer for a period after their employment ends to protect trade secrets ending up in the hands of competitors.
In its proposed rulemaking to eliminate these contracts, the FTC argues that such agreements should be considered a violation of Section 5 of the FTC Act which prohibits unfair business practices. The impact of the proposed rule would void all existing non-compete agreements and prohibit them moving forward.
The FTC argues in its proposal that non-compete agreements stifle workers’ mobility and inhibit competition for major companies. The FTC estimates that the rule change would result in roughly $300 billion more in wages per year and would double the number of companies founded by a worker in the same industry. Others have pointed out that these numbers do not seem to consider the jobs lost as well as other unintended negative consequences on small businesses that would result from legitimate trade secrets having less protection.
The reality is that these contracts have diverse impacts. Former Commissioner Christine Wilson noted this when she argued that there is not a clear consensus in the literature regarding the overall impact of non-compete agreements. In addition, Wilson argued that the new rule proposal did not provide sufficient evidence for its claims that non-compete agreements hurt competition, saying that the FTC had only litigated on non-compete agreements once and it was found that they were not in violation of Section 5 of the FTC Act.
Some research shows these agreements reap consumer benefits. For example, one study finds that in the financial sector when non-compete agreements are non-enforceable and financial advisors are allowed to move freely between firms, especially small firms, were willing to tolerate more misconduct and fees were higher because clients were willing to follow advisors from company to company. Ultimately, tolerating misconduct to retain clients leads to long-term harm.
Employees may also reap some benefits from these agreements as shown in a study that found a positive relationship between the amount of training a company was willing to give its employees and how strict the enforcement was in the state regarding non-compete agreements, especially in fields that require specialized knowledge. While the FTC argues the effects of non-compete agreements are negative for workers, the reality is that there are tradeoffs with legitimate benefits that should be considered.
The dispute between Meta and Twitter over Threads provides a case study on the FTC’s claims regarding non-compete agreements. Under California law, non-compete agreements are unenforceable and the results are not quite as straightforward as the FTC argues. In particular, the claim that former employees would use the knowledge they gained to create startups comes into question.
Meta makes a good case and may well be right, but that is for the courts to decide. However, the argument that non-competes should be nullified because they inhibit startups just does not apply — Meta is an established player. While this is just one example, it does show that the issue is more complex, and the claims of the FTC should be questioned.
Intellectual property needs protection and nullifying non-competes undermines investments, creativity, and innovation.
The FTC’s basis for a non-compete ban is flimsy at best. The impacts are not uniform and as Threads shows, the FTC’s assumptions are not always accurate. With thin evidence supporting it and the potential for a significant impact on businesses, a ban on non-compete agreements is likely to do far more harm than good.
Trey Price is a technology policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information, visit https://www.theamericanconsumer.org/ or follow us on Twitter @ConsumerPal.