Unpacking the Business Arguments Against Noncompetes, Part 2

As Massachusetts continues to consider whether to eliminate the enforceability of employee covenants not to compete in that state, we’ve brought you not only the legal standards at issue, but some of the public policy issues that underlie the debate as well.  The two people who are probably at the forefront of this research are Professors On Amir of the Rady School of Management at the University of California San Diego and Orly Lobel of the University of San Diego School of Law.  Last year, Amir and Lobel wrote an insightful piece for the Stanford Technology Law Review entitled “Driving Performance:  A Growth Theory of Noncompete Law,” which argued that reducing constraints on employee mobility increased economic growth and innovation. [1]  (And if you follow our Twitter feed, we directed you to Prof. Lobel's new book, Talent Wants to Be Free, back in November.) 

Amir and Lobel are back at it, with a piece published a few days ago for the Harvard Business Review entitled “How Noncompetes Stifle Performance.”  They pull no punches, concluding that “limits on future employment not only dim workers’ external prospects but also decrease their perceived ownership of their jobs, sapping their desire to exert themselves and develop their skills.”

Amir and Lobel arrive at this conclusion through significant empirical research to simulate potential effects that noncompete agreements may have on employee motivation and dedication.  In this study, the researchers hired over 1,000 subjects to complete a series of tasks online.  In one group, the participants were paid to perform simple, repetitive tasks of finding particular numbers within a matrix; in the other, the participants were given a more creative activity that involved word-association.  Both groups then set up a kind of noncompete clause as an independent variable:  those in the “noncompete group” were told that although they would subsequently be invited to participate in similar work, they would be prohibited from performing the same type of task, while those in the control group were given no such restrictions.

Amir and Lobel’s findings are stark.  Among the employees in the “noncompete group,” 61% gave up on their task, forfeiting any payment, as compared to just 41% in the control group.  Moreover, those who operated under the constraints of a noncompete made twice as many errors as those with no restrictions; those subjects also “skipped more items and spent less time on the task – further indications of low motivation,” according to Amir and Lobel.

Interestingly, the pair suggest that in some fields, the negative consequences of noncompetes may be minimized.  For their subjects given more creative tasks, Amir and Lobel noted that both the experimental and control groups “performed similarly in terms of errors, skipped items, and time spent,” likely validating their hypothesis that “in creative endeavors, people are primarily driven by intrinsic motivations.”  In other words:  the more creative a job tends to be, the more employees tend to devote effort to it based on internal, personal reasons, and the less likely they are to be affected by potential restraints.  This suggests that enforcing noncompetes in highly creative fields may not be as susceptible to the types of arguments previously raised.

As always, we’ll continue to monitor the landscape and keep you updated.

[1]  I want to thank Steven H. Sholk, Esq. of Gibbons P.C., who reached out to me to discuss Amir and Lobel's work back in 2013.

• Noncompete Agreements ‎