Noncompete Agreements, Innovation, and National Security

Robust intellectual property (IP) rights and a skilled workforce are foundational to the nation’s innovation system, creating incentives and capacity for discovery, development, and commercialization of new technologies. It is therefore critical to both protect IP and encourage workforce development.

Noncompete agreements (NCAs)—provisions in employment contracts under which employees agree not to work for a competitor or start a competing business for a predetermined period after their employment ends—are an essential feature of a strong innovation system, as they do just that. NCAs both secure valuable trade secrets and promote investment in workforce development.

It is therefore concerning that the Federal Trade Commission (FTC) currently proposes to ban all NCAs outright. While some NCAs in low technology areas, such as in the food services industry, can be dispensed with minimal risk, the scope of the proposed ban—particularly as it impacts high technology industries—threatens the broader innovation system and the competitive and national security advantages for the United States that come from a world-leading innovation system.

Noncompete Agreements and Innovation

Incentivizing Innovation: A secure system of IP rights incentivizes individuals and firms to invest in new ideas. IP rights are particularly critical for innovative start-ups as they bar larger companies from appropriating these ideas. The community of inventors, universities, start-ups, and entrepreneurs repeatedly emphasize the importance of secure IP rights in providing them a path to market entry and fair participation.

NCAs are essential to U.S. IP rights as they protect trade secrets by preventing workers from taking vital information to competitors immediately after ending their employment. Forty-three states and the District of Columbia recognize protecting trade secrets and other confidential information is a legitimate business interest provided by NCAs.

While there are additional laws designed to protect trade secrets, these laws alone are insufficient. Litigating trade secret lawsuits is a long and expensive process. On average, these lawsuits last several years and cost millions of dollars—time and expense that small innovative companies can ill afford. Further, by the time a lawsuit has been filed, the trade secret has already been disclosed, which cannot be undone. NCAs prevent trade secrets from being disclosed in the first place. While NCAs are not the only protection for trade secrets, they are integral to the broader legal regime that protects IP and promotes innovation.

Encouraging Worker Training: The United States’ exceptional human capital is a fundamental reason for the nation’s success, as it not only generates and implements innovative ideas, but also encourages firms to conduct business in the United States. However, this workforce must be further developed to meet the challenges of the twenty-first century. To create innovative advanced manufacturing capabilities in the United States, continued investment into the science and technology workforce is imperative.

NCAs promote the development of the U.S. workforce by assuring firms that the employees they invest in with training will not quickly move to a competitor. Fifteen states acknowledge protecting investments in worker training as a legitimate business interest provided by NCAs. The development of the skills this training provides is critical to U.S. innovation and global competitiveness.

Noncompete Agreements and National Security

In addition to promoting innovation within the United States, NCAs prevent foreign companies from poaching U.S. workers. By doing this, they work as a complement to other U.S. foreign policy initiatives, such as export controls, to prevent foreign nations from acquiring advanced U.S. technologies and knowledge.

China’s IP Theft: China, a leading technology and geopolitical rival, not only heavily subsidizes its domestic industries to gain strategic control of critical technologies, but also actively poaches knowledge workers with offers that U.S. companies cannot match. Indeed, this is part of a decades-long state-led campaign to steal U.S. IP in critical technologies. According to FBI director Christopher Wray, Chinese espionage represents “the greatest long-term threat to our nation’s information and intellectual property,” and therefore to our economic and national security. This persistent threat is incredibly costly—the FBI estimates that IP theft costs the U.S. economy between $225 billion and $600 billion annually. China is after U.S. IP and will go to extreme lengths to acquire it.

Global Competition for Skilled Workers: The global competition for technical talent is intensifying. The International Monetary Fund (IMF) predicts a global shortage of more than 85 million technology and science workers by 2030, with the United States and China short 6 million and 12 million workers respectively. Given the security and economic importance of the high-tech sector—the Bureau of Labor Statistics (BLS) found that high-tech accounted for almost 20 percent of global output in 2016—China and other foreign countries aggressively look to poach skilled American workers.

NCAs and Semiconductors

The semiconductor industry exemplifies the importance of NCAs within the U.S. innovation system. Semiconductors, an essential component in nearly all modern technology, are critical to U.S. economic and national security. As demonstrated by Covid-19-induced supply chain disruptions, the United States is dependent on foreign nations for much of its semiconductor supply. Given semiconductors’ fundamental role in the modern world, these disruptions are estimated to have decreased U.S. economic growth by a full percentage point.

Reliance on Tacit Knowledge: IP, particularly trade secrets, are central to the semiconductor industry as semiconductor manufacturing relies heavily on the tacit knowledge entrusted to employees, such as extremely complex manufacturing techniques. For this reason, NCAs bolster the semiconductor industry by protecting the IP of U.S. semiconductor firms. Studies estimate that trade secrets can comprise up to 80 percent of a semiconductor company’s IP portfolio. Further, given the intense global competitiveness of the industry, some semiconductors have an especially short product life cycle. As a result, patented legal protections sometimes become obsolete due to rapid advances in technology, dramatically boosting the importance of trade secrets in the industry.

Need to Retain Skills: Semiconductors also require a sizable manufacturing workforce with specialized skills, which the United States currently lacks. According to one estimate, the United States needs an additional 70,000 to 90,000 skilled workers to independently manufacture all the semiconductors required for critical applications. To become completely self-sufficient in semiconductors, the United States requires around 300,000 additional skilled workers. These shortages are not specific to any one part of the manufacturing process either. At present, a “skills gap” exists in virtually every semiconductor manufacturing job category in the United States.

Protecting IP: Further, NCAs protect U.S. companies from foul play on the part of foreign competitors in the semiconductor industry. Semiconductors are a specific focus of China’s state-led IP-theft campaign. Major semiconductor companies such as ASML and Micron have charged Chinese companies and persons with IP theft. Additionally, China is aggressively recruiting foreign semiconductor experts, for example hiring several hundred veteran TSMC engineers in the last few years. These engineers often take proprietary information with them—in 2021, Taiwan prosecuted over 40 individuals for revealing semiconductor trade secrets after being hired by Chinese firms. Ultimately, however, given the difficulty of discovering trade secret theft, the full extent of trade secrets that have been revealed to Chinese companies might never be known.

The United States faces the same risk. China is after U.S. IP and is poaching workers to do so. NCAs protect U.S. IP by stemming the flow of valuable trade secrets to China.

Conclusion

The United States has been uniquely innovative through much of its history, fueled by strong IP protections and exceptional human capital. As technology continues to progress at astounding rates and China emerges as a major global competitor, the importance of innovation and the ecosystem which supports it will only grow.

NCAs are vital to the United States’ innovation ecosystem. They protect IP, thereby increasing the willingness of firms to invest and create new technologies in the United States. NCAs encourage desperately needed investment in U.S. workers, who are essential to innovation and meeting the national security objectives of increasing domestic manufacturing of critical technologies. They stem the transfer of valuable IP from U.S firms to foreign competitors. In the long run, NCAs make it more likely that the innovative technologies of the future are developed and manufactured inside the United States. This strengthens the U.S. innovation system and enhances the United States’ economic growth, global competitiveness, and national security.

Andrei Iancu is senior adviser (non-resident) with the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Kirti Gupta is senior adviser (non-resident) with the Renewing American Innovation Project at CSIS. Christopher Borges is an intern with the Renewing American Innovation Project at CSIS.

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Kirti Gupta
Senior Adviser (Non-resident), Renewing American Innovation Project
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Andrei Iancu
Senior Adviser (Non-resident), Renewing American Innovation Project
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Chris Borges
Program Manager and Associate Fellow, Geoeconomics Center