Thursday, June 19, 2008

What Happened at Today's Panel Discussion About Non-Compete Agreements

Probably the most interesting aspect of this afternoon’s discussion of the impact that non-compete agreements have in Massachusetts, held at Harvard Law School, was the absence of any company willing to publicly defend the practice of having employees sign non-competes.

The organizers had lined up Melanie Haratunian, an Akamai executive, to represent that point of view, but she backed out earlier this week. The reason? Akamai is apparently in the midst of enforcing a non-compete agreement against a former employee, and was concerned that that employee’s counsel might be in the audience today. That, at least, was the story I was told beforehand by several of the event’s organizers; perhaps one of you can fill in the details.

Moderator John Palfrey simply said, in opening the discussion, that Akamai “had to pull out of this event due to some pending litigation related to this topic.” (When I called Akamai spokesman Jeff Young for confirmation, he said he was not aware of any such litigation.)

I wonder why, if the stalwarts of the Massachusetts innovation economy believe so strongly that non-compete agreements are essential to retaining their best people, that no one would come forward to defend that position? EMC? Nuance? Genzyme? Boston Scientific? Anyone? Anyone?

Update: Here's some video I shot:

Some notes from the discussion…

Harvard prof. Lee Fleming said that people and ideas move from states that enforce non-competes to states that don’t (think California.) His research has found that non-competes squelch employee mobility by about 20 percent, and 30 percent for experts in a given field. Fleming asked whether non-competes might stifle the reallocation of the best people to the best business opportunities.

Paul Maeder of Highland Capital Partners said that non-competes are like diabetes -– a silent killer. Before a company can get off the ground, a prospective founder thinks twice about risking a lawsuit.

One problem with the way non-compete agreements are written, said Bijan Sabet of Spark Capital, is that they often prohibit people from working in “an area deemed to be competitive,” which can be vague.

Maeder said he is seeing a lot of California start-ups crop up that aim to challenge Akamai’s business of Internet content delivery. He said that one of them “will likely become the market share leader,” and asked whether we want that successor company to be in California, or here

Rich Miner, an exec at the Cambridge office of Google, says that the company doesn’t require people to sign non-competes. At a previous company, Wildfire Communications, Miner recalled trying to hire an engineer from Comverse. Comverse decided to chase the employee and enforce the non-compete, and so Wildfire had to pay him for six or eight months before he could actually begin working.

Maeder observed that Washington State, where non-competes are enforceable, has produced two great tech companies: and Microsoft. But he noted that there had been no great operating system spin-offs from Microsoft, or online bookstore spin-offs from Amazon.

Maeder also compared non-competes to indentured servitude, and said they foster “sleepiness” here in Massachusetts. He advised employees to ask about them at the beginning of the interview process, not on the first day of work -- when it's too late to negotiate anything different (like six months instead of a year).

Maeder says that he discourages his portfolio companies from requiring employees to sign non-competes, but he said that isn’t yet a firm-wide policy at Highland. (It is, apparently, at Spark Capital.)

Maeder suggested that there are three ways to change the rules surrounding non-competes in Massachusetts:

1. Legislative fiat (“I don’t think it’s going to happen,” he said, having visited Beacon Hill recently. Miner agreed, saying that change needs to be “a grassroots effort.” He did say, though, that he mentioned the issue to Governor Deval Patrick when Patrick visited Google’s office recently.)

2. Educating employees about their impact

3. Get venture capitalists and executives who serve on boards to speak out about the issue with the companies they work with.

During the Q&A period, Steven Chow, an attorney at Burns & Levinson, recalled that he used to sue EMC on behalf of Digital Equipment over employees who were violating non-compete agreements by going to work at EMC. (Didn’t that do a good job of preserving DEC’s dominance?) He said that non-competes help “keep the cost of engineers down,” since employers don’t have to compete as aggressively on salaries.

'Twas a good discussion, but it would’ve been about 10,000 percent more interesting had someone been on the panel to defend non-competes as a tool for talent retention, or make a case that getting rid of them wouldn’t necessarily make Massachusetts more competitive.

Next time?

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Anonymous Anonymous said...

What no one has talked about is the stifling nature of non-competes

Follow me here:

If everyone agrees that non-competes are meant to keep enginners/scientist/inovators from leaving and also keep engineering costs down,
Does everyone agree that this is a net some gain for the company?

I argue it is a net negative for both the company and the individual innovator.

We won't even waste anytime talking about the positive or negative impact of quality of life for the innovator it is clearly negative and is not open for discussion. At a minimum from a zero sum total, individual looses for corporate gain.

I argue that not only the individual loses so does the company because of the dynamics that are created by these non-competes.

Why disclose an idea if you are a non identified key person? (Not compensated for money making ideas, rather you do some narrow function.
(All it takes is for someone to feel they are not compensated fairly or don't believe they will be rewarded if they do invent/create.)

90% of ideas come from below the silver platter level.

This cost the companies with non-competes much more because these people will simply keep the ideas to themselves and move on or keep the idea in their back pocket hoping to find a way to exploit it later.

So the company looses.

But the ideas are rarely taken advantage of
This rarely happens for three reasons:

1) Ideas are like bread...they go stale very fast especially in software fields.

2) Someone else implements the same or similar idea, rendering the back-pocket idea defacto-dead.

3) If you have ever tried to go it alone you know it is not that easy.
Most people are off the mark by two orders of magnitude on what it takes to succeed. If you are that guy/gal with an idea in your back pocket you have the naivety to think you can pull it off.

This leads to two things the company with the non-compete looses out on fresh new ideas to implement and other competitors loose out because these innovators are invisible and will not/cannot find an avenue to exploit their ideas.

So innovation is stifled and innovative individuals are held soft captives, akin to some form of "comfortable slavery"

All parties loose and innovation rots on the vine.

The observer

June 27, 2008 1:23 AM  
Blogger docdan said...

Anything that stops competition is bad--period. Companies benefit by not being poached for workers, but workers are better off because they can perhaps do better at other companies.

The net result is that companies and workers will be better in order for the entire system to compete. Companies will be forced to be more innovative, efficient, and better to their employess, and workers will be "happier" and work better.

Competition is how life started and what's good for the ecosystem is good for the economy in my book.

July 14, 2008 8:24 PM  

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