The Real Reasons for Eliminating Non-Competes in Massachusetts

As I posted in December, there is legislation afoot to ban non-compete agreements in Massachusetts, and I support it. As momentum has picked up, more discussion has ensued. On July 22 the Boston Bar Association will host Freedom To Compete? A Symposium on Bills Affecting Employee Non-Compete Agreements, but for now the discussion is occuring online.

One frequent claim is that we who oppose non-competes are only doing it to emulate California. To whit, in the comment thread of Amrith Kumar’s post “In defense of employee non-compete agreements” he claims

I also have to agree with you that the only arguments that have been advanced in favour of eliminating the non-compete are the ones that as you point out amount to “CA doesn’t have it, and Google and Facebook are in CA”.

But that is far from the only argument. In fact, Amrith immediately goes on to link to a Boston Globe article that discusses the research of Matt Marx, a recent HBS PhD and now faculty member at the MIT Sloan School, who studied non-competes and found three compelling (to me) problems with them:

First, he looked at Michigan. During the decades of that state’s greatest economic growth, from 1915 to 1985, noncompete agreements were illegal. In 1985, the law changed – and Marx found that inventors were suddenly less likely to move from one company to another, and specialized inventors were much less likely to move. (I’d observe here that the last 25 years in Michigan have not been a good era to emulate.) Marx has also surveyed inventors in the speech recognition industry around the country and found that about 25 percent of those who were bound by noncompetes often took “occupational detours’’ into other technology sectors reluctantly, to avoid getting sued.

Finally, Marx’s research has found that employees bound by noncompetes tend to take jobs with large companies rather than small start-ups – in part because they believe that a larger company might be able to defend them against a potential lawsuit. (Also, as with the Conduit example, small companies are less likely to take a risk with employees covered by noncompetes.)

There seems to be a persistent desire by defenders of the status quo to tar all supporters of change as mere California fan-boys, desperately trying to emulate a state they envy. In fact, there are many compelling reasons to be opposed to non-competes, even for a state that favors more conservative technology startups like enterprise software and biotech.

My own argument comes in three parts, none of which mention Facebook:

  1. Currently the system is broken – Individuals are prevented from taking jobs, they are required to sign agreements they do not understand which limit their future potential. For engineers, this starts with their first job out of school, if not before, and likely continues through their entire career. What little understanding they have of their rights comes from anecdotes and scaremongering from their peers and the occasional human resources representative.
  2. Economics is insufficient to solve the problem – Employees do not generally have collective bargaining opportunities. While it is possible to avoid non-competes, it is difficult at best and likely career limiting. Employers, on the other hand, have little incentive to reduce their use of non-competes. They could be accused of acting outside the fiduciary interest of their investors, for example. And so we have the current stable situation, where everyone requires strict non-competes, whether they have any ability to or intention of enforcing them.
  3. A middle-ground cannot be created with more complex legislation – One of the biggest problem with non-competes is their chilling effect. I only know one person who ever had a non-compete legally enforced and supported in court. But no startup, and few individuals, are interested in initiating a court battle over employment. It is too distracting, too costly, and all together too risky. Legislative complexity favors organizations with large sophisticated legal teams over individuals. Adding more complexity to the legislation cannot resolve the chilling effect. We need simple legislation that all employees can understand.

The only thing I look to California for is validation that the extreme position, basically banning all non-competition agreements, does not lead to some kind of entrepreneurial apocalypse. We can see rather that non-competes are a minor aspect of the regulatory environment, when it comes to venture funding and venture success.

I hope you agree that the current system is broken, that it is not going to be solved through laissez-faire economics, and that more complex legislation is not the answer. That is why I support legislation significantly restricting the use of non-competes, to the point where every employee will be able to know and exercise their right to compete with a former employer.

3 Comments »

 
  1. Amrith Kumar says:

    Richard,

    I’ve posted a long response to your post on my blog. I apologize for the “bouncing blogs” but it is hard to type a long response in this box.

    My response is at http://hypecycles.wordpress.com/2009/07/12/why-retain-noncompetes/

    I appreciate your point of view and all that goes into your questions and responses. Thank you for engaging in this conversation. It is a conversation not about California and Massachusetts but what is best for Massachusetts and the innovators and innovation that we all want in the state.

    -amrith

  2. Great post, Richard.

    I think the only reason for bringing CA into any of these discussions is that it’s quite obvious that the situation there – most non-competes being totally unenforceable – has not damaged the business climate or affected the willingness of venture capitalists to invest there. In fact, I find it interesting that companies like EMC and Akamai, which are so fervently in favor of non-compete agreements here in Massachusetts, still find a way to operate in California despite their inability to force employees to sign non-competes in the Golden State. Why wouldn’t they simply refuse to open offices in CA, or avoid acquiring companies there, if non-competes are so essential to doing business?

  3. Amrith Kumar says:

    Richard, you mention the paper by Matt Marx. I found references to his paper on http://prohibitrestrictiveemploymentcovenants.net/ and that page provides a link to http://www.hbs.edu/research/pdf/07-042.pdf.

    I read that paper and my understanding is at http://hypecycles.wordpress.com/2009/07/17/marx-paper/

    What that paper concludes is “We found a relative decrease in Michigan mobility of 33.9% once noncompetes began to be enforced, with an additional 14.2% effect for highly-cited inventors and a 17.3% attenuation of mobility for specialist inventors.”

    If you have pointers to additional work that make the other points (re: moving to larger companies and occupational detours) please let me know.

    Thanks,

    -amrith