The Impact of Non-Competes: Event Next Tuesday at Harvard

The Kennedy School's David Luberoff e-mailed today to let me know about an event coming up on Tuesday, April 21st, on "Using Non-Compete Laws to Spur Economic Development in Massachusetts." Judging from the description, the focus actually seems to be about "getting rid of non-compete laws as a way of spurring economic development."

State Rep. Will Brownsberger, who has introduced legislation to nix non-competes in Massachusetts, will be there, as will Lee Fleming and Matt Marx of the Harvard Business School, Bijan Sabet of Spark Capital, and Robert Fisher from Foley Hoag.

Here's the descrip:

Massachusetts, like many states, allows firms in knowledge-intensive fields to limit their employees' ability to take jobs with other firms. These "non-compete" restrictions help firms because they limit the disclosure of trade secrets, honor customer confidentiality, and prevent competitors from appropriating employees' specialized skills and knowledge. But new analyses based on a "natural experiment" in Michigan suggest that the restrictions should be reconsidered because they can stymie individual innovation, which in turn may hamper regional economic development.

Details here.

Sunday's Globe column: How non-competes make states less competitive

Yesterday's Globe column attempts to explain how non-competes can make states less competitive by limiting the cross-pollinating effects of people moving from one company to another, or forming new start-ups.

Here's some video of HBS researcher Matt Marx explaining how non-competes work -- and how they worked on him (Matt began his career as a speech recognition engineer in Boston, before moving out to Silicon Valley and then back):



Bijan Sabet, the VC at Spark Capital who has been leading the charge to change the law (or at least the culture) surrounding non-competes in Massachusetts, takes me to task for not talking to big company execs about how much they love non-competes. My colleague Carolyn Johnson already did that quite ably in this piece.

Very simply, big companies like to use non-competes as flypaper, so they don't have to worry about their best employees zipping away when a better opportunity presents itself. (At Future Forward back in November, Art Coviello of RSA/EMC and Paul Sagan of Akamai said as much... Sagan even suggested that a good solution to the problem would be to have California *start* enforcing non-competes.)

Two interesting data points about local companies...

- EMC Corp. had 8900 employees in Massachusetts, and 4900 in California (these numbers include VMware) at the end of Q3 2007. The California numbers were growing *much* faster -- California had added 1400 people since Q3 2006, and Massachusetts only 270.

- Biogen Idec has 1750 employees in Cambridge, Massachusetts, and 400 in San Diego, California.

Why (let me ask rhetorically) do these companies even bother having operations in California if it is so hard to retain top talent without non-compete agreements?

Let's Get Rid of Non-Compete Agreements

Venture capitalist Bijan Sabet has launched a discussion about getting rid of non-compete agreements in Massachusetts -- and I'm glad. In fact, Sabet's firm, Spark Capital, has decided to stop requiring that its portfolio companies ask employees to sign non-compete agreements.

A lot of people say that non-competes aren't a big deal. If you are one of those people, why not read this piece: 'SANgate CEO ruled out of job by EMC non-compete lawsuit.' Non-competes are not enforceable in California, Connecticut, and many other states ... but they most definitely are in Massachusetts.

Other people say that it is impossible to measure what the impact of enforceable non-competes is. And that's sort of true: it's hard to tell how many Raytheon, Analog Devices, EMC, or Biogen employees today have great ideas for start-ups ... or would be more productive working for a start-up ... but they can't do it because they worry about being tangled up in litigation.

But there has been some great data collection recently, by a Harvard Business School PhD candidate named Matt Marx. Marx and two colleagues looked at what happened after legislators in Michigan accidentally made non-competes enforceable in 1985. Inventors were suddenly 34 to 51 percent less likely to move from one company to another. And the "star" inventors were the least likely of all to move. (Marx also provides a history of the non-compete, which traces back to 1414.)

You can read an excellent Q&A with Marx here. The full research paper is here (in PDF form). Here's a cool data point: Marx himself was an engineer/executive at a Massachusetts speech-recognition company, Applied Language Technologies. While Marx wouldn't have been able to jump to another Massachusetts speech recognition company because of our state's enforceable non-compete agreements, he was able to go work at a Silicon Valley speech rec company, because non-competes aren't enforceable there. He says:

At first I thought I wouldn't be able to take the job [in Silicon Valley] given the noncompete agreement I had signed in Boston, but I was nonetheless able to make the move because the California courts generally refuse to enforce such agreements. Ironically, when I returned to Boston a few years later for business school, the founder of the first company [Applied Language] invited me to do some consulting on the side while a student, but I wasn't able to because the Massachusetts courts would enforce the noncompete that the California company made me sign.

But if we want to change the non-compete environment in Massachusetts, we need more than just start-ups and VCs to agree that non-competes are a hindrance. We need the state legislature to change the law. That will require that big companies join in the crusade -- and in recent conversations I had with the CEO of Akamai and the president of RSA Security (now part of EMC), it struck me that they are very unlikely to want to get rid of non-competes.