Tuesday, November 8, 2016

A Response to the Jackson Lewis White Paper on Non-Compete Reform

I was quite interested to read a self-styled "white paper" publication this week from the management-oriented firm Jackson Lewis. That publication, titled White House Continues Attack on Non-Compete Agreements, was of obvious interest to me since I wanted to see how other practitioners viewed the Call to Action released last week. And in particular, I was interested to see how thought-leaders would respond to the White House's suggested calls for reform at the statewide level concerning non-compete enforcement.

Before reading the Jackson Lewis publication, I was encouraged by the tone and substance of other posts, including one from Eric Ostroff's excellent blog, in which he acknowledged the overuse of non-compete agreements. Eric suggested deploying an evidentiary presumption against certain non-competes, rather than categorical bans. While I disagree that this is sufficient, it is certainly an alternative, incremental step towards reform that state legislators may consider in the coming years.

A lengthier read comes from Russell Beck, who holds great leverage on this issue since he is one of the premier private practitioners in the field and one whose work the White House has cited in its reports. In his post, Russell even offers a number of links to terrific empirical research studies on the use of non-competes, which themselves discuss litigation trends statistically, the growth of non-compete use in the workforce, and the true economic impacts of non-competes on employee incomes.


Against that backdrop, the Jackson Lewis paper was a disappointment. The publication seems less interested in provoking thought and reasoned discussion on non-compete reform, and more intent on sending the message that reform is unnecessary in the first place because everything seems to be working just fine. Blog posts that serve to advertise a firm and cater to a client base are what they are (and there's a f**king lot of them); I just happen to think they're not worth anyone's time.

The paper contains a number of unsupported or overly simplified conclusions, a couple of which are worth a further look. For starters, the post concluded that the May 2016 White House Report (titled Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses) "mostly excoriat[ed] employers' use of non-compete provisions in the United States." That's obviously wrong and a misread of the White House Report.

The report sought to identify the main areas of non-compete misuse (and if Jackson Lewis thinks there's no misuse, its lawyers have their collective heads in the sand) and to provide an analytical framework for how to balance two twin concepts: the freedom to contract and the freedom to work. Pointing out the misuse of non-competes is part and parcel of the difficult balance courts and legislatures struggle with. And all attorneys have an obligation to understand this.

The White House report's conclusion even noted that "non-compete agreements can play an important role in protecting businesses and promoting innovation. They can also encourage employers to invest in training for their employees." The document is far from an excoriation on non-competes in the main, but rather an excellent synthesis of data and state practice to see how to balance interests that lie in tension. That balancing efforts starts with incremental reform at practices that foster abuse and misuse.

The Jackson Lewis paper then says the White House's more recent Call to Action (which largely relied on the May 2016 report) "appear[s] more conclusory than based on empirical evidence." Earlier, the post even noted the reliance on limited, non-public studies. The authors, however, must not have looked at the Administration's publications. In fact, the more detailed report identifies a number of research studies (that are actually well-known and widely-discussed in the field), which directly led to the White House's conclusions and suggested areas of reform. In short, the White House report is not a half-cocked one-off. It's based on significant empirical research.

On this score, a couple of studies are worth mentioning. The obvious starting point for anyone interested in a serious discussion of reform is AnnaLee Saxenian's 1994 work called Regional Advantage: Culture and Competition in Silicon Valley and Route 128. That publication notes the disparate paths taken by the Boston research corridor and Silicon Valley, stemmed in large part by knowledge flows and spillovers that spurred innovation in California. My favorite read in this area followed Saxenian's book. Matt Marx and Lee Fleming published Non-compete Agreements: Barriers to Entry ...and Exit?, which you can find here. I have attended talks by Professor Marx, who is not a lawyer but who captivates a room full of them on the most esoteric of material. The Marx/Fleming paper is enormously influential and it looked at the significant financial cost to engineers who were bound by non-competes. It should be required reading for CEOs - and the lawyers they hire.

And finally, if anyone is interested in synthesizing the research to determine the true impact non-competes have on economic liberty, I highly recommend Alan Hyde's article called Should Noncompetes Be Enforced? The Hyde paper, available through the gold-standard Cato Institute, discusses the Silicon Valley experience at length but also extols the benefits from knowledge spillovers that employees can bring when changing firms. (Word to the wise: knowledge spillovers ain't bad, and contrary to what many lawyers think, free-flowing information does not equate to misappropriation.)


In the larger picture, non-compete enforcement presents one of the most difficult balancing exercises required in the law between two freedom-oriented concepts: contracting and employee mobility. And one of the largest problems in reconciling this balance is that one of the players (the average worker) faces an enormous disparity in bargaining power. That reality necessitates an honest, intelligent discussion on reform to restore balance.

Reform can come by engaging in the very type of debate the White House has advocated. Reform, too, may come from a different source that is mentioned only rarely. Industries can create their own set of best practices to facilitate the competition for talent while balancing rights to "excludable" or secret information. We have seen this with the financial services' Protocol for Broker Recruiting, a sort of private legislative solution meant to drive down legal fees and set the parties' expectations ex ante. In my opinion, this - along with targeted reforms (garden-leave and red-penciling) - is the best answer to balance out the competing interests at stake when regulating employee mobility. Perhaps this too is part of the reform the White House wants to initiate. Lawyers can play a large role in facilitating private legislation. But they need to start acknowledging the problem and be part of the solution.

It is not a viable option, however, for law firms that represent management to downplay the need for reform in the first place. In large part, those firms have contributed to the skepticism of non-competes by failing to understand the countervailing interests that are at play. The irony is that their management-driven practices, and the fees that keep the law firm engine running, could imperil non-competes altogether.

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