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Marshall Professor’s Research Cited in FTC Non-Compete Final Rule

Marshall Professor’s Research Cited in FTC Non-Compete Final Rule

Hyo Kang’s published study makes an impact on FTC and business competition.

Headshot of Professor Hyo Kang

Professor Hyo Kang’s timely research makes an impact with the FTC.
[USC Photo]

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It’s not every day you receive a letter from the Federal Trade Commission (FTC) acknowledging your contribution to its rulemaking process — unless you’re HYO KANG, assistant professor of management and organization.

In a recent ruling, the FTC declared non-compete clauses as an unfair method of competition, “suppressing earnings for workers, new business formation, and innovation.” The agency prominently cited Kang’s impactful research in the Final Rule, which takes effect on September 4, 2024, as a part of the agency’s efforts to promote fair competition.

Non-compete clauses in employment contracts prohibit employees from going to the competition after leaving the company. Kang and the FTC found these legal agreements affect new business development.

For the Final Rule, the FTC looked to Kang’s published work by the Journal of Economics & Management Strategy (JEMS) in 2020. In his paper “Non-competes, Business Dynamism, and Concentration: Evidence from a Florida Case Study,” Kang and his co-author Lee Fleming (University of California, Berkeley) found that large firms were more likely to enter Florida while entrepreneurs or establishments of small firms were less likely following the state’s 1996 legislative change that strengthened the enforcement of non-compete agreements. Kang’s study further found that Florida wasn’t an outlier, as the same pattern is observed at the state level across the nation.

As a result, large firms increased their share of employment in the state, while smaller firms struggled, creating a smaller proportion of new jobs as cited by the FTC. According to the U.S. Small Business Administration, small businesses help drive the American economy and account for nearly 44% of economic activity.

Marshall News asked Professor Kang about the implications of his research and the FTC’s recognition of his work.

Interviewer: What did you hope to establish when you conducted your research in Florida? Also, why Florida?
Hyo Kang: When I began writing this paper in 2016, there had been several studies on non-compete agreements, primarily focusing on the impact these have on workers and their ability to change jobs. However, I believed that non-compete agreements could also significantly affect employers and the important decisions they make. This led me to explore the implications of non-competes on firms’ (re)location and employment decisions, and how these differ by the size or growth stage of firms. These effects, in turn, have important consequences on regional market concentration and business dynamism.

We chose to focus on Florida due to a legislative change in 1996 that markedly altered the enforceability of non-competes. This law change provided a nearly ideal setting to study its effects on firms of different sizes and degrees of market concentration. Specifically, it stipulated a clar break on July 1, 1996, and the changes applied only prospectively. This new legislation aimed solely at strengthening the enforcement of non-competes without any other concurrent changes. The extent of change was also significant enough to capture the attention of employers. 

For example, courts could no longer refuse to enforce non-competes on the grounds of employee economic hardship or public policy concerns. To further check the generalizability, we conducted a cross-sectional analysis at the state level and found similar patterns across all U.S. states.

Having my research cited in the FTC’s rule and informing the policymaking process that could impact all American workers and businesses has been an incredibly fulfilling experience. 

— Hyo Kang

Assistant Professor of Management and Organization

What was the key finding and implication of your research? The FTC cited your research twice. How did your study help establish the FTC’s rationale that “Non-competes stifle new businesses and new ideas”?
HK: We found that stronger enforcement of non-compete agreements increased the inflow and growth of large firms, as evidenced by their establishments and employee numbers, while decreasing the birth, inflow, and growth of new or small businesses in Florida. Consequently, market concentration rose, and business dynamism was stymied in the state.

Given the distinct contributions of small and large firms to local economies — ranging from incremental to breakthrough innovations, and varying in the quantity, quality, and types of jobs — non-compete agreements can have profound impacts on local economies. The dominance of large firms and the types of jobs they provide could lead to significant implications for both consumer and producer welfare. For example, startups often add unique value to the economy by incorporating innovative technologies and practices, such as disruptive innovations, that mature firms may not. Consequently, state governments might consider implementing policies specifically designed to attract entrepreneurs and foster the jobs they create. As this study finds, the strong enforcement of non-competes is arguably one significant factor deterring the creation and inflow of new businesses. These findings support the FTC’s rationale that non-compete agreements stifle new businesses and new ideas.

To provide further clarity, my study primarily focused on small firms and their establishments by measuring both new firm formation and the creation of business subsidiaries owned by small firms altogether. The FTC specifically sought evidence on the former, new firm formation. While my findings largely support the FTC’s conclusions, I wanted to point out this subtle distinction.

How does it feel to have your work cited by the FTC in the Final Rule?
HK: When I started working on this project in 2016, there was a gap in our understanding of how non-compete agreements affect businesses and the local economy, despite their significance. Publishing my findings in a leading journal and filling the gap was highly satisfying as a researcher.

Honestly, my expectations did not extend beyond that. However, having my research cited in the FTC’s rule and informing the policymaking process that could impact all American workers and businesses has been an incredibly fulfilling experience. I am also pleased to see that many other works I referred to, or that were influenced by my research, provided important grounds for the Final Rule. 

Inspired by this experience, I am committed to continuing my research efforts that are not only academically rigorous but also relevant to everyday business practices and policymaking processes.