FTC Chair Lina Khan: Noncompete Clauses Are Bad For Competition

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Following is the unofficial transcript of a CNBC interview with FTC Chair Lina Khan on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Friday, January 6th. Following are links to video on CNBC.com.

FTC Chair Lina Khan On Noncompete Ban: Workers Are Losing $300 Billion A Year From Noncompetes

Noncompete Clauses Are Bad For Competition In Ways We Should Be Concerned, Says FTC’s Lina Khan

ANDREW ROSS SORKIN: Joining us right now first right here on CNBC is the FTC Chair Lina Khan. It’s great to see you.

LINA KHAN: Great to be here.

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SORKIN: This is a huge proposal and would have a big impact both on the amount of money that people make, and really society at large. Speak to sort of what it means and how you got here because there's there's a lot of questions about what, you know, what could happen and also the kind of legal challenges that may come.

KHAN: So noncompete clauses today govern around one in five US workers. These clauses may have started in the boardroom, but today what we see is that they proliferated across sectors and across income levels. So we're talking about nurses, we're talking about fast food workers, janitors, but also physicians and engineers.

And we've now seen that in the aggregate, these clauses can really restrict competition, both in labor markets but also in product markets. And so our economists calculated that collectively, American workers are earning around $300 billion less because of these noncompetes, and that on the whole, innovation and entrepreneurship are suffering.

SORKIN: Now, there are some states that have tried to block these before, but this would be at the federal level so that's why this is such a big deal. It is just a proposal at the moment, 60 days now for folks to comment and then you can decide what to do. Chamber of Commerce already came out and said they are against this and effectively plan to take legal action.

KHAN: So again, we think that this is going to be a huge boon to the economy. I think, you know, the American experiment is built on open markets and free competition and that's what this would promote.

SORKIN: So I don't want to say there's two kinds of workers in America, but is this aimed at, as the President said, you know, the nurses, the hairdressers, folks who are just taking taking jobs, they're not getting paid extra for these noncompetes if you will, I mean we could just we could probably debate whether you're getting paid extra or not.

Or are these focused on, you know, we have a lot of folks who are bankers on Wall Street who follow us or by the way, I'm in the TV business. We have contracts. I can't go off to ABC and CBS tomorrow. Does it impact everybody?

KHAN: At this stage, it impacts everybody with the exception of the sale of a business so if you're buying or selling a business, you can have a noncompete in that context. But in employment contracts, it's it's across the board.

And there are a couple of reasons for that. I think you're right that in the low wage context where there aren't any, you know, particularly sensitive investments or in or information that companies are trying to protect, these are most difficult to justify. They can be coercive, they can be exploitative, and that's where you also see wages depressed.

Interestingly, we see wages depressed not just for people who are directly subject to noncompetes, but even for workers that are not because if one worker is locked into a job that means there's one less job available for somebody else to come into and so there are economy wide effects.

When you're talking about executives and engineers and tech workers, for example, or those in finance, what we've seen is that these types of restrictions are basically depriving the market of new ideas and of innovation because people are locked in. They can't go start even a competing business.

SORKIN: What do you say to somebody who, the critique of this would just say, okay, there's a free market and the employer effectively is paying for the privilege. They are paying you effectively for the noncompete meaning people, people can agree to contracts and one of the, one of the contractual terms may very well be I'm going to pay you a little bit extra, or may or whatever you think is appropriate, so that you don't go off and work for my competitor tomorrow.

KHAN: Yeah, in theory, I think we've seen that people suggest there is that premium. I think we don't always see that in practice. Sometimes employers are actually imposing these on workers even after they've agreed to a job.

I think what we've also seen is that on net, this can be bad for competition in ways that we should be concerned about regardless. At the FTC, sometimes we hear from founders who were able to secure capital, they were looking to enter a market, they were able to build the factory.

But at the end of the day, they weren't able to build and scale because all the relevant workers, the talent was locked up. And I think when you look at states like California that for decades have rendered noncompetes non enforceable, I think you can see that there can be a huge boon to innovation and competition.

SORKIN: What about the idea of trade secrets? So part of this and a lot of this comes from from tech where people have a view that there are folks who are engineers or others or in healthcare who have trade secrets, they know stuff, and so you don't want them to be able to go across the street and take either the trade secrets themselves or even sort of adjacent knowledge, if you will, in the immediate term, at least, right?

It's not necessarily just the trade secret unto itself, it's, you know what, even if they don't tell the other employer exactly what the other guys they know too much and that has value at least in the first six months to a year out from that job so we want to hold you away from having that happen for some period of time or what have you.

KHAN: Look, it's a reasonable concern. And at this stage, what we've seen is that there are alternative tools to noncompetes that you can use to protect legitimate trade secrets, legitimate IP, so you can use non-disclosure agreements that can be tailored. We also have Trade Secrets Law, right? Employers bring hundreds of lawsuits a year to enforce trade secrets.

SORKIN: The conundrum there is that's after the fact. It's typically, when I say after the fact, it's typically after somebody has arguably taken a trade secret and used it and so the employer has been quote unquote, injured, right?

They're having to show injury. This, one of the reasons they have noncompetes or these type of arrangements is to prevent even getting into a position where they're where they have to show injury first, right?

KHAN: That's right. We've also seen instances in which, you know, people break noncompetes, they go anyway. Employers are having to enforce after the fact anyway, but at this stage, our thesis is that there are these alternative mechanisms that would still protect legitimate trade secrets, protect IP, but not have such a drag on the economy in the way that we've seen noncompetes do.

SORKIN: What do you say to those who say, look, the FTC actually doesn't even have the authority to put this rule into place as section five and we can get into the details of what that is, doesn't really allow for this and if this ever got to the Supreme Court, especially given the politics of how you think about the Supreme Court today, that this is dead in the water before it starts.

KHAN: Look, Congress gave the FTC the authority to check unfair methods of competition. They told us that we could do that through a variety of ways, through bringing lawsuits, but also through bringing rules through issuing market wide rules. And so we're confident that the the text and structure of the FTC Act gives us clear authority to do this.

SORKIN: There have been times where you have proposed rules, they've had a comment period, and then you have not enacted those rules. How do you think about that?

KHAN: Yeah, it’s a great question. So as you noted, this is a proposed rule. We’ve put out a proposal, we're going to be collecting comments for 60 days. The proposed rule is based on our survey of the available evidence, but we also include a set of questions that we're inviting the public to comment on.

So once people have finished commenting, we're going to look at that full record and determine what's the best way to go forward. So we really encourage people, be it employers, be it startups, entrepreneurs, workers, to submit comments and help us decide how to proceed.

SORKIN: Do you worry and I this is what I always think about especially when you think about either bringing a case or not bringing a case whether you have more power, oddly enough, in not either proposing a rule or bringing a case against the company in some ways because people are scared of you.

If you, and that power actually has has its own regulatory effect, right? Because people say I'm not gonna either I’m not gonna do this merger or I'm not gonna do this thing because I don't want the FTC to come after me as opposed to actually bringing the case and then actually having to argue it because the possibility of losing the case could open the floodgates in other ways.

KHAN: Yeah, look, Congress charged us with enforcing the law and so we take that seriously. If we see a law violation, we have an obligation to address that. I think you're right that deterrence is important. We want companies to be by default respecting the law, abiding by the law and so in as much as the fact that there are cops on the beat is creating deterrence, that's a good thing.

SORKIN: I have two additional questions that are not curveballs per se, but I don't know if you'll be able to answer them because there's at least one of them is ongoing, which is a lot of folks focused on Microsoft Corp (NASDAQ:MSFT) and Activision Blizzard Inc (NASDAQ:ATVI) and, and I know you probably can't speak to the case itself, but I have a question about the broader context which is how tech companies should now think about mergers in the in the context of these what historically were non adjacent businesses.

What's so unusual or unique about this particular transaction and your decision to to pursue breaking it up effectively or preventing it from happening is that historically by this sort of antitrust math, you wouldn't necessarily say that, that Microsoft had a too big of stake in that in that space, but but in this case, you are. Do you think that if you're a board member or a CEO today of a company, you have to think about antitrust differently?

KHAN: So it's interesting you say historically because historically, Congress actually told us to look at all mergers, not just horizontal competitors, but also vertical mergers. And so in as much as we're kind of reactivating the law there, I think that's absolutely fair game and again, there's, you know, decades of precedent from the courts across the country that explain what types of vertical mergers may be illegal or legal.

We're also in the process of currently revising our merger guidelines. This is our core enforcement manual that lays out how we look at deals and so once we're able to publish that in the coming months that should give more clarity as well.

SORKIN: But in terms, the other question relates to that which is about timing. A lot of deals have a timing triggers, they have a calendar to them. And depending on when you come in, it can sometimes unto itself scuttle a deal irrespective if you will of whether you can actually get to court because it just doesn't make sense anymore to actually pursue a deal. How do you think about that?

KHAN: So we primarily think about the deal before us, is it legal? Is it illegal? Are we obligated to bring a challenge here? You know how that fits within the timeline of that the parties have sat up between themselves is less relevant to us directly.

SORKIN: And then finally, you’re a Twitter user?

KHAN: I am.

SORKIN: Still?

KHAN: Still on there.

SORKIN: Still on there. What do you think is happening at Twitter? And the reason I ask is because there's obviously that consent decree and you've, you've looked at them hard over the years and now there's a new owner who may have some different views about how to do this.

KHAN: Yeah, I can't speak to the specifics of of anything relating to the Twitter consent decree. I will say that, you know, there's been an enormous amount of learning over the last decade where consent decrees that we're now pursuing are much more specific about the types of business practices that might be prohibited.

We also are willing to to name individual executives if we see that they played a direct role in order violations. And so we're really looking to give our enforcement—

SORKIN: So when we've seen reports and employer employees of Twitter or at least former employees of Twitter raise questions about whether the company is following the consent decree, for example, what goes on inside the FTC on those days?

KHAN: Well, I'll just say we have a public page where anybody can reach out to us and report to us any wrongdoing that they're seeing within the company or from a company and so we monitor that monitor that quite closely.

SORKIN: Do you DM with Elon Musk ever? That’s a no comment folks. Lina Khan, thank you.

KHAN: Thanks so much.

SORKIN: It's great to see you. Appreciate it.