The debate continues about whether we ought to change the way that noncompete agreements are used by Massachusetts employers, but one possibility seems to have been taken off the table by our elected representatives: that we’ll ban them entirely.
And that’s depressing –- especially given the mounting evidence about the deleterious impact that noncompetes have on innovation and entrepreneurship. (For the uninitiated, employment contracts often contain a noncompete agreement which bans the employee from going to work for a competitor, or starting a competitive business, for a specified period of time after leaving the current employer -- even if he is laid off.)
My view is that getting rid of noncompetes would make our state more competitive by encouraging the creation of more start-ups and accelerating their growth by letting them hire the best people they can find. Eliminating noncompetes would also help us retain talented employees in Massachusetts –- rather than forcing them to seek work elsewhere in order to try to escape the reach of a noncompete agreement, as many do each year. I’m also not convinced that nixing noncompetes here would have any impact at all on the fortunes of existing businesses, big or small. In my experience, when someone leaves Company A to start or join Company B, as long as they’re playing fair -- not taking customer lists with them, for instance –- I think our economy gets stronger, and Company A is forced to become a better competitor.
Part of what has shaped my opinion is actual evidence. At a recent symposium sponsored by the Boston Bar Association, MIT professor Matt Marx presented data from several surveys and analyses he has conducted about the impact of noncompete agreements on various innovation industries, both nationally and in the state of Michigan specifically.
In one slide, he referenced some of his on-going research that is apparently finding that states that permit noncompete agreements seem to lose workers to states that don’t permit them. In particular, non-competes seem to drive off workers that are most productive (in terms of generating patents).
And here’s his concluding slide, noting, among other things, that noncompetes often cause people with deep expertise in one industry to take a “career detour” into another industry to avoid prosecution.
(For those who are interested in more data on the impact of noncompetes, here is a UCLA paper [in PDF form] that finds that two interesting phenomena tend to accompany noncompete agreements: lower executive compensation and decreased spending on R&D. And here is a summary of Marx's research [also in PDF form.] Some background on Marx: he's not a career academic, but holds seven patents in the field of speech recognition and has worked as a tech executive in both Massachusetts and California. There is also this paper from Columbia and UCLA researchers who found that after biotech companies go public or are acquired, they spawn fewer new start-ups in states where noncompetes are enforced.)
Earlier this year, State Rep. Will Brownsberger introduced a bill that would have effectively eliminated the use of noncompete agreements here. But Brownsberger is now advocating legislation that would try to encourage employers to craft shorter, less-restrictive noncompete agreements; eliminate them entirely for employees earning under $50,000 a year; and make sure that employees are aware that they’ll have to sign a noncompete before they accept a job offer. Many people are concerned that this revised legislation would still spawn plenty of lawsuits. (It’s worth looking at the discussion on Brownsberger’s site and reading this post from Greg Bialecki, the secretary of economic development for Massachusetts, who writes that “the uncertainty created [by new legislation] might even be worse than the status quo.”)
In the best-case scenarios under Brownsberger’s revised bill, a talented employee who wanted to leave her current job to do something new would have to stockpile enough money to serve out a six-month long noncompete agreement, or survive on 50 percent of her pay for a year or two if the employer chose to offer a longer “garden leave” arrangement. (Garden leave allows employers to ensure an ex-employee doesn’t compete with them for a year or more by paying a portion of the ex-employee’s salary.)
What happened to Brownsberger’s original stance? When I spoke to him at the Boston Bar Association event last month, he told me that he’d been persuaded to modify the original legislation mainly by talking to small companies that belong to groups like the Smaller Business Association of New England (I’d also gotten two phone calls from SBANE board members). Their belief is that the elimination of noncompete agreements would undermine the businesses they’ve spent years or decades building. Apparently, the logic is that existing businesses in Massachusetts would lose immeasurable value every time an employee walked out the door. I have to wonder how much value Google lost when Evan Williams left to start Odeo, the company that eventually created Twitter. How much value does a hair salon lose when a stylist leaves to go start her own salon? How is it that businesses in California manage to survive, thrive, and remain globally competitive, even as employees are free to walk out the door at will and apply their talents elsewhere?
What bothers me most is that companies, big or small, that support the status quo have not presented any data or examples to support their belief that nixing noncompetes would kneecap their businesses. They simply say that noncompetes are “essential tools to attract and retain employees,” in the words of EMC’s general counsel. Forrester CEO George Colony asks the question, ”How can today’s start-ups hope to mature into successful firms if their top performers are easily poached?” It’s a great question.
It’s interesting to note that Forrester (founded in Massachusetts in 1983 by Mr. Colony) has a current market cap of about half a billion dollars. Facebook (founded in Massachusetts in 2004, but now headquartered in Silicon Valley), is valued at about $10 billion by its investors. Perhaps it is not so hard for companies to mature and succeed in an environment devoid of noncompetes? (Another side note: as many as 10 percent of all Facebook employees joined the company from Google – without having to wait out a one- or two-year-long noncompete. Could that have helped accelerate Facebook's growth?)
Here’s a question for Mr. Colony: how horrible was it when Charlene Li, one of Forrester’s top social media analysts (based in California), left in mid-2008 to start her own research firm? There was no plunge in Forrester’s stock last July -– but perhaps the company lost customers, or suffered a decrease in revenues when Li went off to start her own California-based company? If there wasn’t, why would it be so awful if a Massachusetts-based Forrester employee left to do the same thing –- and contribute to the growth and vibrancy of our state’s economy?
Rather than lobbying legislators like Brownsberger in private, I would like to invite companies that support the status quo to make their case in public –- with data that would persuade us all that eliminating noncompetes would do irreparable harm to our state’s economy.
Here is a question, for starters. When California-based employees who work for a company like EMC Corp. or Akamai Technologies or Forrester or Biogen Idec depart to join a competitor or start their own venture, how much does that impact these Massachusetts-based companies? Why do they even bother continuing to operate offices and hire employees in such a Wild West, anti-business state?
I don’t believe, as some have asserted, that simply getting rid of noncompetes would make our innovation economy just like California’s. But I do believe that the law surrounding noncompetes is one very important lever we can control to increase the vibrancy and global competitiveness of our state’s economy, and encourage the world’s smartest people to come to here to work –- and stay here for their entire careers. (And I would add that I am very supportive of legislation that forces former employees to play fair with regard to trade secrets and intellectual property.)
During the Q&A period of last month’s noncompete symposium, I asked Brownsberger and the other panelists what data they had seen to support the argument that not having noncompetes would be a doomsday scenario for Massachusetts companies. No one could present any. You can listen to the whole symposium by downloading the MP3, or just clicking “play” below (attorney Stephen Chow from Burns & Levinson is the first voice you'll hear):
I agree with entrepreneur and investor Sim Simeonov, who writes:
In technology, velocity of execution is everything. The pace of innovation is accelerating. Twenty years ago, when release cycles took 18-36 months, a one year non-compete wasn’t such a big deal. Today, when agile start-ups can ship [a new software release] every week, a year-long non-compete can have a significant impact on a company’s ability to compete for and recruit great talent and on individuals’ ability to apply their talents and skills early in the development of new markets.
Also worth reading is Tim Rowe’s recent opinion piece on Xconomy. Rowe is a partner at New Atlantic Ventures, and he runs the Cambridge Innovation Center in Kendall Square, which houses dozens of start-up companies. Rowe writes, “I believe movement from company to company is a form of innovation pollination, and we should encourage it.”
While no businessperson likes the idea of an ex-employee going out to compete with them, I think it’s time to talk about the greater good here -– not every company’s individual self-interest.
And it may be that it is going to take an army of a few thousand individual employees to persuade our legislators about the change we’d like to see –- after all, it is employees who are the ones who are shackled by these agreements. The group leading the charge to try to nix noncompetes in Massachusetts, the Alliance for Open Competition, has set up this petition where you can express your support.