This conversation has continued into a subsequent post (here). This is my personal blog and the opinions expressed on this blog are my own. They do not represent the opinions or policies of my employers, current or past.
There has been a lot of discussion of employee non-compete agreements in the recent past.
First, there has been a lot of press over recent lawsuits seeking to enforce some of these non compete agreements. The most recent ones that I recall involve IBM and Dell ( “Judge: Former IBM executive can work at Dell“, “US court rejects IBM appeal in executive’s move to Dell” ) and the case of EMC Corp. v. Donatelli described here,
There is some evidence to show that the absence of non-competes helped California get ahead of Route 128. The conclusion of the study referenced here was that:
The Rotman School of Management study found that laws enforcing non-compete clauses initially gave the Route 128-area companies the protection they needed to create new inventions in a young tech industry. As the industry grew, the non-compete clauses stifled growth by limiting labor mobility, according to the study.
And recently, Wade Roush wrote in xonomy Boston that, “Massachusetts Representative Will Brownsberger filed a bill today calling on the state legislature to outlaw the non-compete agreements that prevent many Massachusetts residents who leave their employers from finding work at similar companies”. Many have come out in favor of this amendment and I understand that support for this change is fairly large.
In his blog, Richard Tibbetts argues that
They [non-competes] hurt workers, who are not able to change jobs freely and make use of their skills in the best jobs possible.
In a letter to Representative Garballey that is on the blog entry above, Mr. Tibbetts writes that,
While the other companies are generally not competitors, non-competes are often broad enough to cover at least some of our business. In some cases, potential employees have declined to pursue discussions with me, fearing legal repercussions from their previous employer.
My Point of View
I hated non-competes with a passion. I thought they were intrusive and unfair to employees. I’ve done a lot of reading and thinking and come to the conclusion that I was wrong.
If, as an entrepreneur, I had an idea that I knew would take many years to completely prosecute, wouldn’t I want some protection for my idea and my ability to benefit from it? While I appreciate that non-competes make it difficult for workers to “change jobs freely”, I think that this is a good thing if the purpose of changing the job is to take an idea and develop a competitor. I entirely agree with Mr. Tibbetts who feels that non-competes should not be so broadly and generally worded that they stifle innovation. But, I disagree with the perspective of those who feel that the only answer is to outlaw the non-compete.
There are several areas of innovation where it takes a considerable amount of time, trial and error, and cost, to take an idea to fruition. At any time during this process, the inventor is vulnerable to the theft of the idea and the non-compete is the only thing that provides protection for the investment in sweat, tears and midnight oil. Without this protection, we will do more damage to innovation because investors will be reluctant to provide the significant funds for projects that have little or no entry barrier. Enterprise class products (software and hardware), some medical devices and products and a whole host of other classes of products take many years to develop and I can hardly imagine it making any financial sense to undertake a development effort that could be very long without some protections similar to the ones afforded by the non-compete.
Therefore, rather than outlawing the non-compete (the simplistic solution), why not address the problem in a manner that provides the protection to innovation and inventors and yet deters the use of “broad” and “sweeping” non-competes? Or better still, allow the market to regulate itself. If innovators feel strongly about this, let them advertise this fact; prospective employees can weigh offers and consider the benefits of not having a non-compete in their choice. That way, in areas of technology or endeavour where the market supports the lack of a non-compete, that will become the norm. And in areas of the technology where the market supports the non-compete, that will be the norm.
Scott Kirsner’s blog has news of an event on July 22nd, “A Symposium on Bills Affecting Employee Non-Compete Agreements”.
The event is free. I encourage you to attend, listen and participate. Irrespective of which side of the debate you happen to be on, this affects all of us!
I’ll be rooting for the good-guys who are in favor of either the restriction of non-competes or the status quo. Eliminating them will significantly complicate innovation and advancement in several areas. While the non-compete stifles innovation so does the lack of a non-compete. What we need is a middle ground that provides innovation the protection that it needs to flourish.
After all, we all get riled when “the Government” tries to regulate our finances, our lives and our bedrooms. Why then are we asking the same evil Government to interfere in our non-competes?
July 9, 2009 at 11:20 pm
I appreciate your thoughts on the matter. Obviously the ideal lies in some kind of restricted or voluntary non-competition agreements, but I think the power balance in employee negotiations, along with the chilling effect of agreements that employs don’t fully understand and lawsuits they cannot afford to prosecute, make it difficult to create a suitable middle ground through regulation.
Regarding your concern about theft of idea, I come from the school of thought that execution matters considerably more than ideas, and that in a situation where an employee can leave and do better than their employer society benefits. I think you overestimate the situations where an idea is susceptible to unethical theft.
July 9, 2009 at 11:25 pm
While I think non-competes are generally not a good thing, it’s not like anybody is forced into signing. If you aren’t okay with a prospective employer putting restrictions on your career in the future, you probably shouldn’t accept that position. I realize this is a simplified view of things, but still think you’re on point in your final paragraph. Less government interference FTW!
July 10, 2009 at 8:20 am
Can you explain how the lack of a non-compete has stymied innovation in California? Has Google, for example, become less innovative as a company as employees have left to start companies like Twitter, or join companies like Facebook?
July 10, 2009 at 9:31 am
Scott,
Your listing three (or three hundred) companies that were successful in California where non-competes are almost unenforceable is just as meaningless as my listing three (or three hundred) companies that were successful in Massachusetts where they are enforceable.
I am certain that there is more to the success of a company (or a geography) than whether the prevailing law allows or prohibits a non-compete agreement.
I disagree with the conclusion that Mr. Tibbetts arrives at but I agree with him that the issue is that what we need are “restricted or voluntary non-competition agreements”.
The problem demands a more nuanced argument than the one that says Google and Facebook are in California and therefore non-competes are bad things, which is basically the argument you make here. Should we also adopt the California Tax model (because Google and Facebook are in California)? Well, why not?
-amrith
July 11, 2009 at 7:34 am
Amrith-
You write: “Without [non-competes], we will do more damage to innovation because investors will be reluctant to provide the significant funds for projects that have little or no entry barrier.”
I am just asking whether you truly believe this has been the case in California, which didn’t have non-competes for the entire 20th century. You would argue that investors there have been reluctant to provide funding for projects that have little or no entry barrier? I don’t think you can say that when California is the state that attracts the most venture capital in the entire US (and probably the world). Investors there somehow don’t feel their companies need the protection of non-competes.
And my question about Google is merely using them as an example. I simply don’t agree that companies lose influence/power in the marketplace when an employee leaves to do something in the same sector, and that was the point about Google. EMC locally is one of the companies that is most stringent about enforcing non-competes. But wouldn’t we as a regional economy be better off if there were more “next generation” EMCs here? I find it interesting that the latest company EMC has bought, Data Domain, as well as its last major acquisition, VMware, were both started in CA, not MA.
But that’s all just anecdotal — I would love to hear your argument about how the lack of non-competes in California has limited investors’ interest in putting their money to work there.
July 11, 2009 at 8:50 am
Scott,
It is my belief that there are classes of technology that are resource and capital intensive and that have long gestation periods. Enterprise IT products and medical/biomedical products are two areas that immediately come to mind, there are likely to be others as well.
It is in these areas that the protection afforded by non-competes are most vital.
The new media, web technology company is fundamentally different from an enterprise platform startup or a biotech startup. For example TechStars will give $6000 per founder for up to three founders and (to quote their web page),
That is not the case with an enterprise platform company, it will likely take many more people and many more months to get a working prototype together.
Do we agree about this? Or, do you feel that it is possible to fund and execute a prototype for a company like VirtualIron, Netezza, or Akamai (names enumerated to identify a class of companies only) using the same funding model as one would for a company like twitter.com, facebook.com or google.com? Consider the same question in the context of companies in the biotech or biomedical device space.
It is therefore no coincidence, that in your article you cite a biotech CEO who says, (and I quote)
Yes, it definitely is in the interest of the investor here to protect their investment. And in industries like this where you cannot get by with $18,000 and a summer to write a prototype, one needs the investors to pitch in and support the entity for often many years and many million dollars. For example, it is now public record that Netezza raised more than $80m before going public in 2007.
I agree entirely with you that we would be much stronger as a region if we had more next-generation-EMC’s. But, I doubt that you can make the argument that the sole reason for the success in California is the lack of non-competes.
You ask, “I am just asking whether you truly believe this has been the case in California, which didn’t have non-competes for the entire 20th century.”
I believe that it did not impede the success in California but it definitely played a part in deciding the mix of technologies that
emerged in California and the rest of the country. Start-Up localities like MA have had a higher number of enterprise and big-iron companies than California. I also believe that this will very significantly impact the attractiveness of MA as a destination for biotech
research. If Gov. Deval Patrick has any hopes that the $1b invested in the biotechnology initiative have some success, he should ensure that we have an environment that is attractive to other investors.
It is important again to note that this is not a binary argument, ie the statements below are both equally false:
But rather, the environment (like the tax rate, the educational institutions nearby, …) all impact the kinds of companies you
attract to the region. And one aspect of the environment is whether there is a protection for the fledgling company during its gestation period through a non-compete.
It is therefore to the credit of the ecosystem in California and (in the US as a whole) that in spite of their lack of protection through
non-competes, companies like VMWare and CISCO have been built and there has been enterprise innovation there.
You mention EMC’s acquisition of Data Domain and that Data Domain (a CA company). I must point out that in MA we have many companies in a related space, ExaGrid, Diligent Technologies, Sepaton (where I worked) and maybe others which have all flourished in spite of non-competes. While Diligent was acquired by IBM, the other two are still private.
If MA were to “outlaw non-competes” then it would be a benefit in some sectors and a loss in other sectors. The areas of industry that require that protection (as indicated by the biotech CEO you quoted) would move to some other state that afforded them this protection. And it would attract more industry that did not require this protection.
There is nothing wrong in attracting more of the new-media companies to MA, I think that is an awesome idea and I commend all the things you are doing to make that happen. But, it is important to do these things without affecting the other areas of industry that require a different environment in which to thrive.
We agree absolutely need a reform of the non-compete law in MA. But, I submit to you that there are other ways to do that than entirely outlawing the non-compete.
We agree that we must foster innovation, we agree that we must make it possible for more entrepreneurs to start companies in MA, and I am sure we agree that we should not do something that would decimate one section of the technology ecosystem in favour of another.
Do we agree that we can achieve all of these in some way other than eliminating non-competes? Or do you believe that eliminating
non-competes is the only way to address this situation?
Yes, I think it would be great to have more “next generation EMC’s” in MA. But, I also think there is a higher likelihood of this if we had meaningful reform of the non-compete rules and a lower likelihood if we entirely eliminated it.
-amrith
July 10, 2009 at 9:19 am
Mr. Kirsner ,
I believe you have fallen into the classic trap of confusing cause and effect. While the lack of non-competes may have spurred innovation in California, it is neither the only nor the most important reason for Silicon Valley’s success. There are other more important reasons, such as more risk taking by Sand Hill VCs, the proximity to Stanford, and Berkeley etc which have been argued ad nauseam over the years.
Your examples of twitter and facebook actually help to under score Mr. Kumar’s point, that while non- competes may hinder Web.20 companies with low entry barriers (where California has taken a lead over Boston), it has not stifled innovation in the Enterprise ( where Boston has been strong).
In the words of Samuel M. Shafner, co-chairman, International Practice
Group, Burns & Levinson LLP, Boston,
“The issue deserves more thoughtful consideration that a knee-jerk “if Silicon Valley does it, it must be right” reflex.”
http://www.masshightech.com/stories/2008/01/28/editorial3-Noncompete-i> ssue-is-complex.html
July 10, 2009 at 9:26 am
Sorry the link doesn’t work above. Here is the working link:
http://www.masshightech.com/stories/2008/01/28/editorial3-Noncompete-i%3E%20ssue-is-complex.html%3E
Kamala
July 10, 2009 at 1:46 pm
Current non-competes only work to the advantage of the employer and are too nebulous and capricious.
The only ethical way I can see a non-compete being written so as to benefit both parties is to include a list of all companies that the employee is not allowed to work for in the future as well an ‘option fee’ for the employee if he or she decides that the current situation is no longer in their best interest.
I say this as an entrepreneur. I don’t want somebody on my team who after some time has decided it is no longer a good fit. Ideas are a dime a dozen, it’s all about getting the work done.
July 10, 2009 at 9:51 pm
Amrith,
You are dead wrong about non-competes. I think they are bad and they must go. But, I think this is the case because they are too unfair to the employee and too loose and difficult to understand. Hence prospective employers are reluctant to take a chance.
I think a middle ground like you propose is workable. And I hope Massachusetts does something like that.
But the reason it will never happen is because the best argument that seems to be made is
“Coz California doesn’t have it”
For Gods sake, can’t people get off the bloody talking points and think? And maybe have a rational conversation?
I think you are wrong but I like your style.
Nicole
July 11, 2009 at 6:17 am
Nicole,
I appreciate your point of view and I too feel that a middle ground is workable.
But, 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”.
There is one other line of thought that says that if there are exceptions or exclusions for some trades (and Scott Kirsner makes this case in http://www.boston.com/business/articles/2009/06/21/start_ups_stifled_by_noncompetes/?page=2) then there should be the same exclusion for IT/Software, or as Scott puts it “the EMC employee”.
Again the argument being proposed is “because something or someone else has no non-competes, …”
Attend the event on July 22nd, it affects all of us.
And thanks for visiting my blog!
-amrith
July 11, 2009 at 9:06 am
[...] 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 [...]
July 11, 2009 at 9:10 am
I went ahead and wrote a long form response on my blog at http://innocuous.org/articles/2009/07/11/the-real-reasons-for-eliminating-non-competes-in-massachusetts/
I think it is fair to say that too many people on both sides want this debate to be about California and whether Massachusetts must emulate it to be successful. That’s a bad line of argument, in either direction.
Instead I think we need to focus on our own situation, and the fundamental problems with noncompetes. They are a complex regulation of dubious economic value that favors established companies with large legal budgets over individuals and innovators. That is why they must go.
See the post for more detail. -tibbetts
July 11, 2009 at 10:12 am
Amrith-
I agree with you that we have healthy enterprise and life sciences sectors, but when you say that we have “more” big iron and enterprise companies than California, where is your data?
If you would like to make the case that our enforcement of non-competes in Massachusetts has somehow given us an edge in life sciences and enterprise tech over California, I would encourage you to make that argument with data. I would challenge you to:
- Pick the 10 biggest enterprise tech companies in Massachusetts, either by employee size or market cap
- Pick the 10 biggest life sciences companies in California, either by employee size or market cap
And compare that to California.
I don’t think the lack of non-competes is the sole reason for California’s success as a region, however I do think it is a factor in allowing that region to iterate very quickly on new ideas in *any* sector.
July 11, 2009 at 10:17 am
Also, Amrith, let me ask one other question:
Is there a patent system in the US that allows you to protect your ideas from being stolen by former employees or other evil-doers?
Quoting you below, with some emphasis:
“There are several areas of innovation where it takes a considerable amount of time, trial and error, and cost, to take an idea to fruition. At any time during this process, the inventor is vulnerable to the theft of the idea and ***the non-compete is the only thing that provides protection*** for the investment in sweat, tears and midnight oil.”
Here is some info, for your reference, about how patents protect intellectual property:
http://www.uspto.gov/go/pac/doc/general/#patent
July 11, 2009 at 9:34 pm
Scott,
I may have said more big iron and enterprise companies, I meant higher fraction of the investment rather than absolute counts. Yes, clearly the counts are tilted in favor of CA that has more companies and deals, period.
But, as Richard Tibetts points out, it is not about California vs. Massachusetts, it is about what is best for Massachusetts. And for the talents, and kind of ecosystem we have in Massachusetts.
With regard to your information about US Patents, I appreciate the education. In my day job, I deal with patent attorneys and matters of intellectual property protection for my employer almost every day.
But, since the patents that we have applied for (or are in the process of applying for) are largely not awarded, let me provide you with some examples of the process involved in filing patent applications for the kinds of products I deal with on a day to day basis. For this example, I will use Netezza whose patents can be reviewed on google patents.
Netezza was registered in 2000. The first patent application date on record is February 28, 2002. And the patents filed at that time were not for the core technologies; FPGA, query processing, versioning, etc., Some of the first of the core patents were applied for only in 2003 and 2004. That is because it took a fair amount of time to come to the point where a patent could be filed.
In this day and age, especially post Bilski, the bar for filing even a provisional patent application has been raised significantly. It is for this reason that it isn’t so easy to “just get a patent”. At my current company, there are technologies that we have worked on for two or more years, and we are just at the stage where we can file patent paperwork.
Thanks for your point of view,
-amrith
July 12, 2009 at 10:33 am
[...] In defence of employee non-compete agreements [...]
July 12, 2009 at 9:57 pm
[...] MA’s Non-Compete Laws Amrith Kumar put up a blog post last week that presented some thoughtful arguments in favor of non-competes and also spurred a [...]