The major league baseball reserve clause was banned by the U.S. Congress in 1998. Since 2000, however, the employee non-compete agreement has spread to cover 30 million U.S. workers. It does not prevent an employee from leaving their job, but, like the reserve clause, it causes many workers to change their careers. This presentation summarizes the arguments for and against the non-compete, and its widening application, which a growing number of policy-makers, employees, and businesses are questioning.

1. Will Employee Non-Compete
Agreements Fade Away Like the
Baseball Reserve Clause?
30 million Americans are now required to sign
employee non-compete agreements. These
agreements, like the baseball reserve clause,
limit an employee’s ability to leave a job to work for
potential competitors.
Charles H. Martin, JD, MBA
@Every1sGuide, #LawyerballLaw,
www.Lawyerball.com, www.facebook.com/
Every1sGuidetoElectronicContracts

2. For 100 Years, Baseball Clubs Could Stop Their
Players From Ever Playing for Another Club
“(It’s) outrageous.…I sign a contract
with a club, and they can hold me
forever...or so long as I want to play
ball.” - George Wright, Providence
Grays shortstop, 1884
In 1879, the National League created
the first “reserve clause” rule. It
prevented designated players from
playing for another team without
their club’s permission.
The American Association agreed to
respect the rule in 1882. It was
written into all player contracts in
1887. It was a part of the AL-NL
“Peace Agreement” of 1903.

3. Baseball’s 1922 Supreme Court Antitrust Exemption
Protected the Reserve Clause from Court Challenge
“The giving of exhibitions of baseball…would
not be called trade or commerce.... and the
restrictions by contract that prevented the
plaintiff from getting players to break their
bargains and the other conduct...were not an
interference with commerce among the states.”
– Justice Oliver Wendell Holmes, Jr.
In 1912, baseball contracts first specified
that player salaries were paid in part for
the club’s right to unilaterally extend a
player’s contract, requiring him to work
only for his club. In 1976, the Major League
Baseball Collective Bargaining Agreement
negotiated the first rules for player free
agency. The “Curt Flood Act of 1998”
finally changed federal antitrust law to
prohibit the reserve clause.

4. An Employee Non-Compete Agreement is a
Reserve Clause for Employees
Employee non-competes are now under
scrutiny, because they appear to 1)
suppress wages, 2) reduce worker
mobility, and 3) reduce innovation,
entrepreneurship, and economic growth.
Contract law is state law, but Congress
can enact laws regarding contracts in
interstate commerce.
Employee non-compete agreements
have long been enforceable in most
states. In practice, however, non-
competes were, until recently, enforced
mainly against engineers or similar
employees with specialized technical
knowledge. Most states require them to
be “reasonable” in work, time, and
geographic scope.

5. Employee Non-Competes Are Spreading to Non-
Technical Workers Who Don’t Know Trade Secrets
Lawsuits to enforce employee non-compete
agreements rose 61% from 2002 to 2013. A
2015 study suggested that nearly 30
million U.S. workers, almost 18% of all
employees, were bound by non-
competes.
The two main justifications for non-
competes are 1) protection of trade
secrets and confidential information from
disclosure to competitors, and 2)
protection of investment in employee
training from benefitting competitors.
Only 24% of all U.S. workers studied
reported having access to trade secrets,
including fewer than half of the 18%
bound by non-competes. Non-competes
have been enforced against fast-food
deliverers, hair dressers, camp counselors,
and journalists.

6. Non-Competes Reduce Employee Wages at Career
Starts and Over Time
A 2016 U.S. Treasury Department
study found that, in states with
stricter non-compete enforcement,
initial wages were 1.4% lower; and
after a forty-year career, wages
were 10% lower than in states with
maximum non-compete
enforcement, compared to states
with minimum enforcement.
Non-competes appear to reduce
wages and wage growth, because 1)
employees often begin work without
knowing they will be bound by non-
competes, and are unable to bargain
for them, and 2) worker mobility is
reduced by non-competes without
increased training in return.

7. Even in California, Non-Competes Are Imposed, and
Companies Have Circumvented the State Ban
California has prohibited non-compete
agreements since enactment of its 1876
Constitution. Nevertheless, in 2015 Adobe,
Apple, Google, and Intel settled for
$415,000,000, a class-action lawsuit alleging
secret agreements among them to not recruit
or hire each other’s employees in violation of
federal and state antitrust laws, the
California ban on employee non-compete
agreements, and state unfair competition
law. The alleged purpose of the agreements
was to fix and suppress employee
compensation.
A 2015 national survey indicated that, despite
the California non-compete ban, 19% of
California workers are bound by non-competes,
and about 37% of workers are asked to sign
non-competes only after taking a job.

8. Non-Competes Reduce Innovation,
Entrepreneurship and Economic Growth
Studies have shown that worker
mobility within an area of similar
employers quickly spreads
expertise, and improvements in
technology and work practices.
This mobility effect, along with stock
options and venture capital, has
caused “easy mobility” states
that prohibit non-competes, like
California, to surpass “difficult
mobility” states, like
Massachusetts, in the
development of industry clusters,
like Silicon Valley, which depend
on quick dissemination of
knowledge among competing firms.
0
50,000
100,000
150,000
200,000
250,000
300,000
1959
1965
1970
1975
1980
1985
1990
2003
2007
Number of
High-Tech
Jobs
High-Tech Jobs in Silicon Valley
v. Route 128 – 1959 to 2007
Silicon Valley
Route 128

9. Detroit Boomed After Michigan Banned
Non-Compete Agreements
0
20
40
60
80
1895 1910 1925 1940 1955 1970
Percent
Spinoffs as Percentage of U.S. Car
Makers Since 1905 Michigan Ban on
Non-Compete Agreements
In 1905, when 25% of car makers were
located in Detroit, Michigan passed a
law prohibiting employee non-compete
agreements. By 1938, two-thirds of all
automakers were located in Detroit, with
many “spin-outs” founded by former
employees, such as Dodge (from Ford)
and Chevrolet, Chrysler and
Lincoln (from GM). Spin-outs grew to 60%
of car makers by 1938, before stabilizing at
40% in the 1960s. After the 1985 repeal
of the Michigan non-compete ban,
the job mobility of Michigan
inventors fell by 8.1% compared
to some states with
non-compete bans, by 15.4%
for inventors with firm-specific skills,
and by 16.2% for inventors with
technology-specialized skills.

10. The Baseball Reserve Clause Comparison
From 1879 to 1999
0
100
200
300
1920 1950 1970 1985 1994 2001
MLB Franchise Values and Salaries
Pre and Post-1976 Free Agency
Average
MLB Salary
($000)
Average
MLB
Franchise
Value
($Million)
In 1976, the first MLB Collective
Bargaining Agreement allowed veteran
players to become free agents. The reserve
clause was later banned by the federal “Curt
Flood Act of 1998”, named in honor of the first
modern player to challenge the legality of
baseball’s version of the employee non-
compete agreement.
Despite predictions of doom, the era of
free agency has seen MLB franchise
values increase despite the increase in
player salaries, compared with earlier
salaries, and as a percentage of revenues. In
2016, the average MLB franchise value is
$1.2 billion (22 times the 1976 value), while
the average MLB player salary is $4.25 million
(82 times the 1976 salary).

11. Recent State Non-Compete Reforms
In 2015, Hawaii banned new non-
compete and non-solicitation
agreements for high-tech employees,
New Mexico limited them for health
care workers, and Nebraska refused
to enforce an overbroad non-compete.
In 2016, Utah limited its enforcement
of new non-competes to a one-year
period, and Oregon allowed only non-
competes disclosed before
employment begins, with 18 month
maximum terms and low-income limits.
Facing New York allegations that their
non-competes placed “undue hardship”
on employees, the publisher Law360,
and the sandwich chain Jimmy John’s
agreed to abandon them. New York will
also not enforce them against workers
fired without cause.

12. State and Federal Legislation Introduced To Ban or
Limit Employee Non-Competes
Several states have recently introduced
legislation to limit or ban non-competes
generally (Massachusetts, Virginia,
North Carolina, Minnesota). Other
states have proposed or enacted laws to
prevent enforcement against employees
without knowledge of trade secrets
(Washington, Idaho), or with incomes
below a certain threshold (Oregon, New
Jersey, Maryland), or who did not receive
their agreements prior to starting
employment (Oregon, New Hampshire).
In response to publicity concerning
sandwich deliverymen bound to non-
competes by Jimmy John’s franchisees, a
bill was introduced in Congress to
prohibit their enforcement against workers
making less than $15 per hour.

13. The Need for Further Non-Compete Reform
On May 5, 2016, the White House
released its analysis of employee
non-compete agreements and
their economic impact, based on a
Treasury Department study.
The analysis calls for further
research and for state non-
compete legal reform, such as
requiring early employer disclosure
of non-competes, and their impact, at
the time of a job offer, invalidation of
overbroad non-competes, and
requiring employee benefits in return
for signing non-competes.
On May 11, 2016, President Obama
signed into law the “Defend Trade
Secrets Act of 2016”, strengthening
federal protections of trade secrets
through access to federal courts and
civil damages. It reduces the need
for state law non-compete protection.

14. For More and Continuing Information
See www.charleshmartin.com.
See www.lawyerball.com
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/e/B00E8NSUCU