The Titanic sunk in the early morning hours of April 15, 1912. Among the estimated 1,635 victims were 119 American citizens – some of them very rich, very influential. Even at the time it was an incontrovertible fact that there were not enough lifeboats and flotation devices on the Titanic for men like Guggenheim and Astor to survive.
Congress Acts
Shortly after the sinking, Congress sprang into action. The Senate sponsored a bill to require every ship that flew under an American flag be equipped with enough lifeboats, life belts, and other flotation devices to accommodate 75% it’s passengers.
Great, noble idea. There was, however, a problem with it: ship owners, engineers, captains, and others testified that the law should not apply to lake and river vessels as they had much shallower drafts than their ocean-going brethren.
It was, they explained, simple mathematics: the more weight added to the topsides of a shallow draft ship the higher the chance of the ship turning turtle at the first opportunity.
Then, as now, Congress wasn't about to let all that science stand in the way of a good law. The final bill made no distinction between ocean going and inland vessels. It was signed into effect by President Wilson in early 1915.
Ships throughout the country were immediately retrofitted to meet the new law's requirements. One such ship was the SS Eastland. A Great Lake excursion ship out of Chicago, notoriously top heavy before, the new law made her about as seaworthy as a cork with sails in a hurricane.
The Eastland Disaster
On July 24, 1915 at least 2,500 people – mostly families – headed out for a Westinghouse Company excursion boarded the Eastland.
She made it twenty feet into the Chicago River before she rolled over. Carl Sandburg reported she went over “like a dead jungle monster shot through the heart.” Eight hundred and forty-four was said and done 844 people, many of them children, died.
A classic, unfortunate example of government acting with only a surface understanding of the issue(s).
The FTC and Noncompete Agreements
That brings us to last week’s FTC’s proposed rule that would ban noncompete agreements. Everywhere, every state (except the 3 that already do not allow them). Every type of business.
The problem is that it's almost a law of nature that when a government entity makes a sweeping proclamation that employs multiple uses of 'every' it doesn't go well (see, S.S. Eastland, above).
The FTC is making this proposal because they are aware of the misuse, if not abuse, of noncompete agreements across a swath of industries – particularly for low wage earners.
The FTC is making this proposal because they are unaware of the need for noncompete agreements across a swath of industries – particularly startups.
A Little More About The Noncompetes And The Proposed Rule
- It bans noncompete agreements, i.e. any contract clause or independent agreement, which prevent workers from leaving for a competitor or starting a competing business for months or years after their employment, often within a certain geographic area.
- The proposal covers not just employees but also independent contractors, interns, volunteers and other workers.
- Every state currently allows noncompetes except California, North Dakota, and Oklahoma.
- The other forty-seven states regulate the use of noncompete agreements. There are, usually, strict limitations on how long they may be in effect, how broad a geographic area they can cover, and, in some states, whether they can be used with lower-wage workers.
- Even in the states that do not recognize noncompetes, many companies still include them in their employment packages.
- All the state laws would be pre-empted by the FTC rule unless their requirements are even more restrictive than the FTC’s.
- rs to doctors to Silicon Valley.
- The rule would void noncompete clauses for 30 million contracts. Many of those contracts were negotiated with the noncompete on the table – as in ‘signing the noncompete will add to your compensation package while protecting us.’ The rule could, in theory, also void contracts.
- Companies would have 180 days to rescind their existing agreements.
- Companies are required withdraw existing noncompetes and inform workers that they no longer apply.
- The rule would make it illegal for an employer to enter into a noncompete with a worker or to try to do so, or to suggest that a worker is bound by a noncompete when he or she is not.
The Problems
Here’s a major problem with the proposed rule: there are no studies that categorically prove that banishing noncompetes across the board would significantly boost wages. Conversely, there are no studies that categorically prove that noncompetes lead to higher wages and employers who are more likely to invest in training and in the employee.
For every study that found greater enforcement of noncompetes led to an increase in job creation by start-ups, there’s one that found "they lowered wages both for workers directly covered by them and for other workers, partly by making the hiring process more costly."
Another problem – there are, obviously, instances where a noncompete agreement is an absolute necessity.
From the New York Times:
Michael R. Strain, an economist at the American Enterprise Institute, said that while there were good reasons to scale back noncompetes for lower-wage workers, the rationale was less clear for better-paid workers with specialized knowledge or skills.
If your job is to make minor tweaks to the formula for Coca-Cola and you’re one of 25 people on earth who knows the formula," Dr. Strain said, speaking hypothetically, "it makes total sense that Coca-Cola might say, ‘We don’t want you to go work for Pepsi.’"
Dr. Strain hits upon the real truth of noncompetes – noncompetes are fair and appropriate in some cases and they are unfair and exploitive in others. The FTC is carpet bombing where they should be conducting surgical strikes. They are missing the nuances – like ordering lifeboats for all ships regardless of where they sail.
What Can You Do?
The public is allowed to submit comments on the proposal for the next two months.
You can comment here: https://www.regulations.gov/commenton/FTC-2023-0007-0001