Are noncompete agreements (finally) on the way out in Massachusetts?


Governor Deval Patrick will unveil new legislation this morning that addresses two issues with big potential to shape the future of the state’s innovation economy: employee noncompete agreements, which limit worker mobility and the pace of company creation here, and visas for foreign-born entrepreneurs and the key early employees who can help grow startups into industry heavyweights. The Globe has a front page story this morning on the proposals.

Below are some of the key articles and blog posts I’ve written — along with some Globe editorials, op-eds, and blog posts by others — about why the seemingly arcane issue of noncompete agreements really matters.

I’ve been banging the drum on this issue since 2005, mainly because I believe that many workers don’t have much of a choice when an employer asks them to sign one of these contracts; that workers should be able to take their skills wherever they want; and that the use of noncompetes needlessly puts the brakes on entrepreneurs’ ability to launch new ventures and hire the people they need to grow. Plus, many employees aren’t presented with the details of their noncompete agreement until they’ve already accepted a job offer — or shown up for their first day of work.

When you read arguments in defense of noncompetes, like this 2011 blog post by Brad Macdougall of Associated Industries of Massachusetts, you notice one thing: they presume that every employee who leaves a company will be guilty of stealing trade secrets, customer lists, or other proprietary information. In today’s Globe piece, employment lawyer Andrew Botti says, “It’s sad but true that when a lot of employees leave their companies they take things they shouldn’t be taking. And that information is used to compete unfairly with their previous employers.”

I live in America, where we presume people are innocent and we understand that fair competition is what keeps our economy vibrant. And furthermore, companies rely on other existing laws, not noncompetes, to allow companies to defend themselves against the small number of employees who take with them trade secrets or confidential material. But most of the state’s employers are happy with the status quo, because noncompete agreements create a deterrent to employees going somewhere else, even if they feel unmotivated, underpaid — or they have an idea for something new.

Yesterday, an hour or two after hearing that Governor Patrick was going to try to move the ball forward on the noncompete issue, I got a call out of the blue from a father who works in the tech industry. His daughter was in danger of losing her summer job at a local camp, and he was frustrated. The reason? She had signed a noncompete agreement while working at a different summer camp the last few years. He’d gotten a lawyer involved, but was uncertain of how things would play out.

That’s the kind of ridiculousness that you see with noncompetes in Massachusetts. (Is the camp counselor going to take proprietary s’mores recipes or lanyard designs with her?) Noncompetes are used not only in fields like tech and life sciences, but at gyms, hair salons, and summer camps. Lawyers are all too happy to start the meter running when they get one of these cases. But Massachusetts will be better off without them.

Some links, in reverse chronological order:

• December 1, 2013: Noncompete claws: An antiquated restriction is hurting tech growth in Massachusetts (op-ed)

• September 10, 2013: Big shift: Governor Patrick now supports making noncompete agreements unenforceable in Massachusetts (includes testimony from Secretary of Housing & Economic Development Greg Bialecki)

• March 14, 2013: Governor Patrick discusses noncompetes at the MassTLC Annual Meeting (Here’s the video from that conversation, which I moderated)

• November 29, 2011: Talking about noncompete laws on WBUR’s Radio Boston

• September 15, 2011: State House committee meets to consider change to noncompete rules today (includes the story of Angela, a 26-year old who ran into problems with a non-compete after being laid off)

• October 30, 2011: Massachusetts should ease up protecting noncompete clauses (Globe editorial)

• July 3, 2011: Some common sense on noncompete clauses (includes several examples of how they’re used in Massachusetts)

• August 4, 2009: Dear Captains of Industry: Where is the data to support your position on noncompetes?

• June 21, 2009: Start-ups stifled by noncompetes (opens with an example from the videogame industry — see below for complete text)

• December 30, 2007: Why noncompete means ‘don’t thrive’ (focuses on Matt Marx and his research into the effects of noncompetes)

• December 1, 2007: This post by Bijan Sabet of Spark Capital was one of the first high-profile calls to eliminate noncompete agreements in Massachusetts — and everywhere else.

• September 19, 2005: What’s the cost of pact not to compete?

Start-ups stifled by noncompetes — Boston Globe, June 21, 2009

In mid-2008, Nabeel Hyatt was hoping to turbo-charge his team at Conduit Labs Inc., a developer of Internet-based games in Cambridge, by hiring an experienced 3-D artist who was working at Turbine Inc.

Westwood-based Turbine is one of the state’s largest game companies, with nearly 300 employees. But because the artist was bound by a noncompete agreement that prohibited him from going to work for another game company within 200 miles of Turbine, Hyatt decided not to risk a lawsuit. The artist found another job in the game industry. He wound up working for a company in Austin, Texas, that competes much more directly with Turbine than Hyatt’s company does.

In Massachusetts, we send a wonderful message to our most talented employees and would-be entrepreneurs: Stay where you are, and don’t do anything new, unless you can afford to take a year (or more) off to wait until the noncompete clause in your contract expires. (Or simply leave the state, as the 3-D artist chose to do.) At least since 1922, noncompete agreements have been enforceable in Massachusetts courts – and the very threat of being sued can prevent employees from taking their skills to a new employer, make it hard for start-ups to build experienced teams quickly, and force potential entrepreneurs to think twice before starting a new business.

Meanwhile, noncompetes are not enforceable in California, a state that, like ours, is home to fast-growing companies in fields such as biotech, high tech, and energy. New York and Oregon have dramatically limited the power of noncompetes in recent years. In Massachusetts, House lawmakers have introduced two bills regarding noncompetes, one that would eliminate them entirely and another that would make them applicable only to employees making $100,000 a year or more. Hearings could start as soon as July.

Our state’s economy relies on innovative businesses for job creation – and what could be a higher priority right now? Yet the law around noncompetes serves to decelerate innovation – it’s like towing a mobile home behind a Ferrari.

Governor Deval Patrick hasn’t taken a position on noncompetes. When I spoke with him earlier this month, he said, “I don’t have a stake in the status quo” but added that he hadn’t heard a consensus view from people in the innovation economy as to whether they’re a positive or a negative for businesses: “If there’s consensus in the industry, I’m happy to support that.”

Unfortunately, big employers like Hopkinton-based EMC Corp. love noncompete agreements because they create artificial employee “loyalty.” In a recent lawsuit, EMC, a titan of the data storage industry, sued David Donatelli, a senior executive who left Massachusetts to take a job with Hewlett-Packard Co. in California. EMC argued that his involvement with HP’s data storage products would violate the noncompete agreement he signed in Massachusetts. In the past, Massachusetts judges had figured that California courts would nullify any noncompete agreements signed here. But last month, a Suffolk County Superior Court judge told Donatelli he could take the HP job, but couldn’t work on storage-related products for a year. (Now, apparently, our courts want a say in whether talented people are allowed to take jobs elsewhere, and what they can do there.)

Big companies like EMC and Akamai Technologies will be a powerful force in any debate about changing the law because they have the resources to lobby elected officials. Akamai CEO Paul Sagan has joked in the past that the right solution is for California to start enforcing noncompetes, rather than have Massachusetts ditch them. At a recent event on the future of Massachusetts’ IT industry, Sagan said he’d seen no data that show eliminating noncompetes might make the state more competitive.

Luckily, we have an academic here in Massachusetts who has dedicated the past few years to looking at the impact of noncompetes. Matt Marx, who recently joined the faculty of MIT’s Sloan School of Management, has made three important findings about what noncompetes do.

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.)

Lots of people don’t like noncompetes. Hyatt doesn’t require people to sign them at Conduit, and last year Spark Capital, a Boston venture capital firm, decided it would stop asking its portfolio companies to require employees to sign them. Boston Postmortem, a networking group for game developers, is supporting the House bill that would ban noncompetes.

Colin Angle, chief executive of iRobot Corp., the state’s largest robotics company, says that while his company does ask employees to sign one-year noncompetes, it has also waived the noncompete, allowing employees to splinter off and form at least three new robotics start-ups – without waiting a year. “As an entrepreneur, I’m not going to try to discourage an employee from entrepreneurship,” says Angle. (Ken Olsen, founder of Digital Equipment Corp., similarly encouraged employee spinoffs.)

But not every CEO is such a nice guy, and there’s a reluctance on the part of companies (and their investors) to unilaterally disarm. Take the example of one biotech CEO I spoke to recently. He had been sued earlier in his career over a noncompete agreement when he left one company to join another. But yes, at his new venture, some employees have been asked to sign noncompetes. “I wouldn’t have done it if my investors hadn’t insisted.”

Oddly, certain kinds of workers in Massachusetts cannot be shackled by noncompetes: doctors, social workers, and broadcasters among them. But why should a TV anchor be allowed to jump from one station to another, while we make an EMC engineer take a year of unpaid leave before he can form a new company? How does that benefit our economy? My biggest concern is that new legislation only requires noncompetes to be “reasonable,” rather than nixing them entirely. To ensure that we get there, individual employees will have to dive in to this debate – rather than leaving it to big companies who know how to lobby. And CEOs who are willing to think about the good of the state’s economy – beyond their own firm’s desire to avoid spawning potential rivals – should speak up.

“People should stay at companies because they like working there, they’re engaged, and paid fairly, and it’s intellectually interesting,” says Peter Bell, a former EMC executive and start-up CEO who is now an investor at Highland Capital Partners in Lexington. “But if they’ve got a great idea that will create a new business and new jobs, well, isn’t that a good thing for the state?”

Scott Kirsner writes the Innovation Economy column every Sunday in the Boston Globe, in which he tracks entrepreneurship, investment, and big company activities around New England.
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