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Last week, the Federal Trade Commission made a big announcement. It was about non-compete agreements, these agreements that prevent workers from leaving their jobs for competitors or to start new rival businesses. The FTC said starting later this year, the vast majority of non-compete agreements cannot be enforced anymore. They will effectively be banned.
We reported an episode a few years ago about where non-competes came from. So we're going to play that episode now. And later on, we will give you an update about when or if that new FTC ruling will go into effect. This is Planet Money from NPR.
Back in the 90s, Jeff Hong's an ambitious software engineer, living in Los Angeles, working for Microsoft, living the life. His job was to find and work with Microsoft's latest clients. So I would go off from place to place, helping people build fairly large systems. So say the Disney stores need back-end software or Citibank needed to improve their online banking, Jeff would help them build those systems.
And then after a few years, I convinced my corporate masters that we should open an office in Hawaii. Don't we all want to open offices in Hawaii? But for Jeff, Hawaii is home. I was born in Hawaii. I grew up here. My family celebrated over 100 years of being here in Hawaii. And moving back put him somewhat closer to another important part of his life.
I met a boy who lived in Sydney. And so that's kind of far. Yeah, like Australia far. They date long distance, fall in love, and they want to live in the same place. But back then, same-sex marriage wasn't permitted in Hawaii. It was very difficult because of, you know,
you know, the way that the laws were structured at the time to be able to have him come to Hawaii. And so we were doing the very, very long distance relationship for quite a few years.
Now, Jeff, he's the kind of guy who will make things work for him when he needs to. And that is what he does here. He reduces his hours at work so he has time to travel to Australia and go see that boyfriend. But eventually his boss is like, wait, why do we have some guy working for us part time? It turns into a whole thing. And after nearly 20 years at the company, Microsoft lays him off.
This was in May 2012. So Jeff decides he needs a new start. And he thinks, maybe this would all be a lot easier if I just launched my own company. I already have all these connections and potential clients. But as he's leaving Microsoft, the company lets him know that there are things he can't just go do, like start a business and take their clients with him. Those connections were made while he was working for Microsoft. At first, Jeff...
Jeff is like, that is absurd. You can't stop me. But then Microsoft says, don't you remember that contract you signed nearly 20 years ago? Jeff thinks way, way back to when he first got his job and signed a whole mess of papers. Buried in there was the issue. It was two sentences in this huge set of
papers that you sign along with like, you're going to turn in your badge and your computer if you separate from the company, that kind of thing. What did those sentences say? If you hold on, I can actually look it up because I kept it.
Let's see. So, you know, part 10 of 15, for a period of one year after termination of my employment, I will not render services in any capacity to any client or customer for which I perform services during the 12 month prior to my separation.
And that's it. That's it? Those two sentences are a non-compete clause. They basically mean that Jeff can't take work from any of Microsoft's clients, which in a state as small as Hawaii is so many companies and government agencies. Blue Cross Blue Shield, Hawaiian Airlines, all of the state and federal departments. Jeff can't start his own business. His job options are limited. He ends up collecting state unemployment.
Hello and welcome to Planet Money. I'm Erika Barris. And I'm Amanda Aronchik. More than 30 million people in the U.S., from janitors to executives to yoga teachers, have signed something just like what Jeff signed, a non-compete agreement.
Imagine studying and training and then working for years in an industry. Then all of a sudden you are essentially locked out of your field. Today on the show, why non-compete clauses exist and why they have spread everywhere. And Jeff Hong's attempt to fight them.
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Now, it's worth taking a minute to understand just where non-compete clauses came from. Which means it's that time in our show when we fill the room with smoke, toggle some switches and pull a lever, then doobity-doobity-doobity-doo, doobity-doo, doobity-doo.
Look down at ourselves. We are in some old-timey clothes. We are now in Britain. Look at that. It is 1414. Yay, old 1414. We're here to witness the trial over the very first non-compete dispute.
that we know of. So there's this young man who is training to become a dyer, which is someone who dyes fabric. Young man's name is John Dyer. Because people back then, their last name was often their trade. So I would be Amanda Radio. And I would be Erica Podcast. Nice, I like it. To get more details on the story, we went to Matt Marks. Not a Marxist. But
He is an economist who studies non-competes and all their iterations through many, many generations. Matt says that dyeing cloth was high-tech stuff back then. John Dyer was being let in on all the secrets of the trade. He had an agreement with his master that once he had been trained in the fine arts of clothes dyeing,
He wouldn't set up his own clothes dyeing shop in the same city. He would go somewhere else. This agreement was supposed to last for six months after he finished his training. Somehow, the master seemed to think that John Dyer didn't, in fact, wait the whole six months. Apparently, he...
Broke that promise, and so his master hauled him into court. And John Dyer shows up to court, and the judge is like, folks, there are bigger labor issues right now. The bubonic plague had basically wiped out about a third of the labor supply in northern England. There were not a lot of workers left. Even 70 years after the plague ended, there were still not enough people to do all of the work.
And so when the master clothes dyer brought this essential non-compete lawsuit before the judge, the judge basically said, are you kidding me? The judge decrees that this is not the time to put restrictions on people's ability to work. If you can work, work. So in the good year of 1414, John Dyer, the defendant, he wins the case and he lives out his days like
I don't know, dying fabric. We don't really know. There isn't much of a record of him. This was the first non-compete case that we know about. The employee wins, hands down. Then there isn't much in the history of non-competes until almost 300 years later when a pair of bakers, Mitchell and Reynolds, end up in court. This time, the judge rules in the opposite way.
The plaintiff wins the case. The other baker can't just run off with the recipes and customers and set up a bakery across the street.
Over the centuries, there are legal disputes between dentists, then champagne distributors, then arms manufacturers. And it seems that employers begin to win more and more often. The employer's argument is basically, we invest all of these resources in you, our loyal employee. You've benefited from our training and institutional knowledge, learned all our secrets, and now you're going to take all of that and start your own business or go to my competitor? Yeah.
I don't think so. And Matt says that that argument has become even more prevalent as our economy has changed. Here's the thing. In today's economy, the assets of the firm that are most valuable, especially in the knowledge economy, are less so property, plant and equipment. It's more the ideas that are in people's heads.
And unlike property plant equipment, those people can leave. So when Jeff Hong got laid off from Microsoft in 2012, the company let him know that they may enforce the non-compete sentences in his contract, which is how he ended up on unemployment. That was my first time ever filing for unemployment. I couldn't do anything. I had to wait. And so Jeff is just stuck. He's back home in Hawaii and he's unable to start his new business. Did you think about like,
moving away again then? Like, were you thinking like, well, I work in tech. Let me go back to the mainland.
Yeah. And I mean, there's, you know, I could have been like, I'm setting up my company in California and then I'm consulting on a remote basis with customers back in Hawaii. And, you know, there's all of that kind of stuff. Jeff was thinking that California might be a good spot for his new business, because even if you sign a contract with a non-compete clause in that state, it's not going to be a good spot for you.
California will not enforce it. Different states enforce the rules differently. But by this point, Jeff's partner had plans to move from Australia to Hawaii. They were finally going to be together in Hawaii. They did not want to move. And he begins to think, I wonder if I can fight this non-compete. Is it even legal? Maybe I'll sue Microsoft.
He starts reading a lot about old non-compete cases, and he learns about a Hawaiian case that was settled in 2006. It involved a woman who worked for a tourism company. She'd left her job. Two weeks later, she goes to work for another company that offers tours. But the first company is like, wait a minute. Remember that contract you signed? And they take her to court. And the state Supreme Court sides again.
against her. They even ruled that she can't work for another tour company for three years. And remember, this is in Hawaii. Tourism and hospitality are Hawaii's biggest industries. Jeff looks at this old case and he's like, uh-oh. I was probably going to lose. And so folding was...
the best choice. Sometimes you just got to walk away when you know you have a bad hand. Let's just stop here. And remember, Jeff did want to break a contract he willingly signed. He did want to take clients that he landed on company time to his new business. He wanted to use all of the knowledge and skills he had learned in almost 20 years at Microsoft to pick off clients from Microsoft.
And they're just like, no, you want to start your own business? Wait a while, then start from scratch. So Jeff decides not to sue. Instead, he comes to an agreement with his former employer. We reached out to Microsoft, who, by the way, is a funder of NPR, and they wouldn't discuss Jeff's case. We did see a copy of their agreement, which said that for one year, Jeff could work in his field, but only with one of his former clients, Hawaiian Airlines. And that could have been that.
But Jeff, Jeff he couldn't let it go.
He keeps digging into this whole non-compete thing and how they alter people's lives and how they are pervasive in just about every industry. And he thinks, why stop with just my case? Why don't I change the law? Make non-competes unenforceable in Hawaii? So originally I tried to make it general. He thinks, why not ban all non-competes in every industry? But he quickly discovers that people don't always want quite that much change. Because?
Because it's a small community. And so you definitely have this, I'm stuck here. And people don't want to make waves. And he also realizes that there are some really powerful industries in Hawaii that want this kind of protection. And these contracts have spread to jobs he hadn't even imagined. One of the strongest users of non-competes in Hawaii that I actually found cases on is hairstylists.
So you kind of apprentice with somebody on the hairstyling thing. And then you can't cut hair within 20 miles of one of his stores, but he has stores all over the Island. So you have no place to cut hair except at one of his places, or you have to pay back something. And it's like,
Wow. There was resistance to Jeff's ideas across lots of industries, big businesses and small. So he thinks for his bill to pass, it just can't include everyone. You realize you're in a lifeboat. OK, so now that you're in a lifeboat, you're like, well, I guess I can be in the lifeboat. Who else can I add?
Because every time you add someone, it has potential to sink the ship. Eventually, the bill just covered two types of employees, tech workers and doctors. It was introduced during the 2014 legislative session and things were looking good. It went all the way to the Committee for Economic Development. Jeff thinks this is it. But then he waits and waits.
Hand weights. You were just waiting to get scheduled. And you could get scheduled at any time at the pleasure of the committee chairman. But if you don't make it by the last day, then you know you died. That's exactly what happens to Jeff's bill. It dies in committee. After the break, we find out just why non-committee clauses have spread so far. And Jeff, Jeff tries to resurrect his dead bill.
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Now, there are reasons for non-competes. Here are three. When someone has access to proprietary knowledge, when someone is aware of what they're signing and has intentions of breaking their contract, and when the employee could cause real harm to the company. But how did it happen that all of these different people in so many different jobs, from hairstylists to software engineers to pediatricians, that they also signed contracts where they promised not to work for the competition?
Lauren Iden Liam is a former lawyer who now teaches strategic management at Baruch College, and she researches non-competes. Lauren,
Lauren says that all those papers that someone like Jeff signed, they've spread everywhere because employers are kind of just mimicking what they see other employers do. You go online, you look for a checklist of all the agreements that you need to include when you're hiring your first employee. You see mention of something called a non-compete and you just include it because it's there.
Isomorphism is what we would call that. Hold on. What was that word? Isomorphism? Isomorphism. Hey, you know, academics. Yeah. So you start seeing it. You start doing it. You think it makes you more legitimate as a business. Maybe it makes you look more official. Lauren says employers are just cutting and pasting the language into their new employees contract.
Just go online, search for non-compete template. There are so many to choose from. It just goes on and on and on. So that's why we are now in this situation where more than a third of all American workers have signed one of these contracts at some point in their careers. So...
What effect does this have on the workforce? Lauren says that it is a few different things. There has been some research showing that non-competes not only affect the people that sign them, but it may also affect the job mobility of people who don't sign them. Because when someone signs a contract with a non-compete clause, they might stay in their job longer than they want to. So that means the next worker can't move up.
Also, some economists have found that non-competes suppress wages. If you've signed one of these contracts, you might not be able to take a higher paying job. You're stuck. And Lauren says the other big thing about them is just the chilling effect they have on employees. Are employers using these non-competes just as a scare tactic?
So if I'm an employer and I included in my standard documents, but I have no intention of actually enforcing it, I just want to make the employee think twice about trying to leave. That was one of the problems that Jeff Hong set out to fix in Hawaii. Now it's 2015, and after his initial bill didn't go anywhere, he decided to try again. When you tried all over again the next year, were you kind of like, well, this may happen again? Or were you filled with renewed optimism?
I was filled with renewed optimism because that committee chair left that committee and the new committee chairman said, Jeff, we can get this bill moving. They introduced a very similar bill to the state legislature in Hawaii. But this time they narrowed the pool of workers even further.
We tried again with some more modifications and it passed. And that was actually considered kind of stunningly fast. Jeff was thrilled that it passed. Non-competes for tech workers in Hawaii would no longer be enforced. And they celebrate. They all got matching compete forever tattoos. They burned a stack of non-compete contracts. No, not really. They just had, in Jeff's words, unparalleled.
A nice party. And there's been a tangible effect ever since. A recent paper found that since the law went into effect in Hawaii, the wages of newly hired tech workers rose by 4 percent and job mobility went up by 11 percent. This has become a national issue, too. This summer, President Biden signed an executive order asking the Federal Trade Commission to take a look at non-competes and consider reforming them. And Jeff?
He's now married to that guy he was dating way back when. They have an eight-year-old Boston Terrier together. And he started that company. Still has Hawaiian Airlines as a client, and he's even grown his business. There are now six employees. And of course, Jeff, he didn't ask any of them to sign a non-compete contract.
So that's where we left things. As we mentioned before, a lot has changed since then. Last week, the Federal Trade Commission issued a ruling. It said later this year for most workers, non-competes will no longer be enforceable. Now, there are some exceptions, like if you're a senior executive type with policymaking authority and you make above a certain salary threshold and you signed a non-compete before this ruling goes into effect.
then your non-compete still applies. Also, if you own a company and you sell that company to somebody else, if you signed a non-compete when that sale happened, that also still counts. But for most people under this new ruling, no more non-competes. And businesses have to notify their employees about this.
Fun fact about the FTC ruling, it actually pointed to what happened in Hawaii as part of its rationale for getting rid of non-competes. They cited studies about Hawaii's non-compete ban for tech workers, which found that after the ban, there were more startups, more job mobility, and higher wages for tech workers. We checked in with Jeff again.
Well, it's so exciting to know that your tiny little aspect of petitioning your government fits in the mosaic of lots of people wanting to do this and that you can make your contribution into the national discussion by some tiny little piece of public policy here in Hawaii. So that makes you happy and it gives you that hope, right? That we can all participate and make a change.
The story, though, it does not necessarily end there. The day after the ruling came out, the Chamber of Commerce and a number of business groups sued the FTC. They said the FTC, the government agency, does not have the authority to do this kind of thing, that a big policy like that should come from Congress, not a federal agency. So we won't know what's going to happen with the ban on non-competes until those cases get resolved.
For now, what we're left with is this patchwork of rules around non-compete agreements at the state level. Hawaii's got one set of rules. Georgia's got a different set of rules and on and on and on. But some companies have started to move away from non-competes. Like at Microsoft, the company Jeff was fighting. Two years ago, they got rid of non-competes for their workers. They kind of saw the writing on the wall.
One of Jeff's employees actually came from Microsoft, and that employee didn't have to wait months to start work.
You can email us. We are at planetmoneyatnpr.org. And you can find us on social media at Planet Money. Today's episode was originally produced by Dave Blanchard. It was edited by Ebony Reed and engineered by Isaac Rodriguez. The update on today's episode was produced by Willa Rubin and was edited by Keith Romer. It was fact-checked by Sierra Juarez and was engineered by Josephine Neonai.
Alex Goldmark is Planet Money's executive producer. Special thanks to Evan Starr, Jonathan Pollard, Sam Martindale, and Chris Lee, and to Matt Marks and Lauren Iden-Liam for talking to us again. I'm Erica Barris. And I'm Amanda Aronchik. This is NPR. Thanks for listening.
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