Latest on the Non-Compete Bill in Massachusetts

I don't intend to turn this into the "all non-compete, all-the-time" blog -- but there's a lot of action on that front right now...

Next week is the Symposium on Bills Affecting Employee Non-Compete Agreements at the Boston Bar Association. (I'll be there.) State Rep. Will Brownsberger will be talking about the latest version of the bill on non-competes -- essentially, his proposal to eliminate non-competes entirely has been combined with another State Rep's proposal to simply limit the way they are used.

Here's his summary of what's in the new, combined bill (you can find the complete language of the bill here.):

Overview of current working draft of non-compete legislation
(combining House 1794 and House 1799, bills filed by Rep's. Brownsberger and Ehrlich)

Motivation:

To protect employees from unfair non-competition agreements while preserving protections for legitimate risks to business assets.

Basic Approach:

Prohibit non-compete agreements for lower level employees; for others, allow non-compete agreements but clarify guidelines and give employers strong incentives to require only moderate and reasonable agreements.

Key Elements:

- Create procedural protections for all employees

- Agreements must be in writing
- Employers making job offers must give early notice that a non-competition agreement will be required, in time for a prospective employee to assess his or her options and decline the job offer before resigning their present job.


- Clarify common law rules that, to be enforceable, non-competition agreements must be necessary to protect trade secrets, confidential information or good will and must be consonant with public policy and reasonable in duration, geographic scope and proscription of activities

- Limit term of agreements to one year (unless garden leave payments of at least 50% of total compensation are made, in which case agreements may last two years).

- Make non-compete agreements unenforceable against employees making under $50,000 and enforceable only to protect trade secrets or confidential information (but not for goodwill) for employees between $50,000 and $100,000.

- Create safe harbors for very moderate agreements -- giving employers incentives to choose agreements meeting those terms:

- Six month agreements prohibiting activities of the type the employee was actually engaged in within the geographic area that they were working in.
- Garden leave agreements supported by adequate compensation (greater of $50,000 or 50% of total compensation).


- Punish overreaching by employers by awarding attorneys fees to the employee whenever an agreement is reformed or found unenforceable and was not within one of the safe harbors.

- Otherwise preserving existing law

- Preserve existing common law defenses for employees facing enforcement actions
- Not applying new rules to business purchases, covenants not to solicit employers' customers, etc.


- Effective as to agreements entered on or after January 1, 2010

Welcoming your thoughts...

July 22nd Event on Non-Competes... New Blog... And Some Advice

- Attorney Stephen Chow has put together what looks to be a really solid evening about the pending Massachusetts legislation that could change the status quo here with regard to non-compete agreements. It's free, it takes place on July 22nd in Boston, and I'm attending in the hopes that at least some of it will be comprehensible to non-lawyers. Perhaps you will, too?

Find out more or register for the event here.

Speakers will include:

• State Rep. William N. Brownsberger, Esq., Sponsor of H. 1794 (bill to eliminate non-competes)
  
• Russell Beck, Esq., Foley & Lardner, LLP, Drafter of H. 1799 (bill to restrict non-competes)
  
• Stephen Y. Chow, Esq., Burns & Levinson LLP, Massachusetts Uniform Law Commission, Drafter of H. 87, Symposium organizer
  
• Michael L. Rosen, Esq., Foley Hoag LLP, Author of the Massachusetts Noncompete Law Blog, Speaking for the status quo
  
• Hon. Gordon L. Doerfer (Ret.), JAMS, Moderator
  
• Dr. Matthew Marx, MIT Sloan School, Investigator on longitudinal study of electrical engineer parties to non-compete agreements
  

- Foley & Lardner's Russell Beck, one of the speakers at the July 22nd event, has just launched a new blog dedicated to trade secret and non-compete issues.

- I was talking to an attorney last week who offered some good advice. Non-competes, unfortunately, are enforceable even if you are part of a lay-off at your company. This attorney said he has been involved in negotiating severance deals with several employees to make sure they're not targeted by their former employer if they want to go and work or start a company in the same field. In these negotiations, he has found that employees can often get released from their non-competes by giving up about 25 percent of their severance payment. Interesting...

Should We Make Non-Compete Agreements Illegal in Masssachusetts?

I say yes, in Sunday's Globe column, though as always, I'm curious to hear what you think.

If you want to change the status quo, here are a couple sites to know about:

- Prohibit Restrictive Employee Covenants
- Rep. Will Brownsberger's site. Brownsberger is the state rep who has introduced a bill to make non-competes illegal in Massachusetts
- Alliance for Open Competition
- Massachusetts Non-Compete Law blog

There were so many great comments that couldn't fit in the story, but just one for the blog from Jeff Anderson, CEO of Quick Hit (and former CEO of Turbine, another local games company mentioned in the column).

"The biggest problem we have as a start-up is attracting and retaining talent. If someone wants to relocate to Massachusetts, they need to feel like if this job doesn't work out, they can find another job. But if non-competes are de rigeur, if not only reduces the number of companies that you have in any given space, like games, but it forces those people to leave." Anderson adds that he has received two or three dozen job applications from talented people working for other games companies in Massachusetts, but says that it would be problematic to hire them because of their non-competes.

"When you think about all the other problems that start-ups have to deal with, from capital and vision to competition, and all the pieces that have to be properly aligned, non-competes just add to that."

Of course, like most companies in Massachusetts, even though Anderson is philosophically against non-competes, he asks employees to sign one, even though he says it is as narrowly-defined as possible.

Gov. Patrick on Non-Compete Agreements in Massachusetts

I had the chance to chat with Governor Deval Patrick for a few minutes today at Microsoft's NERD Center, toward the end of the Innovate MassTech meeting (aka the IT Collaborative Study Group Meeting.) So I asked him about non-competes.

Paul Sagan, the CEO of Akamai, had just said on stage that he is in favor of keeping non-compete agreements legal and enforceable in Massachusetts, and that he'd seen no data that says that non-competes have any effect on making us less competitive. (The best data I've seen comes from this excellent paper written by three folks at Harvard Business School.) Another CEO told me he liked the fact that employees were more loyal (or less mobile) than in California, so you didn't have to worry about constant turnover here.

Yet at the event, I also spoke with a number of people who'd either been prevented from hiring someone they wanted to hire because of Massachusetts' stance on non-competes, or who knew first-hand of someone who'd been prevented from moving from one company to another.

I asked Gov. Patrick whether the non-compete issue had shown up on his radar screen, and he said it had -- he'd heard about it here in Massachusetts and on a recent trip to California. "I don't have a stake in the status quo," he said. He'd heard arguments from individuals who have been prevented from taking jobs because of non-competes, and also from executives who feel that keeping employees from jumping to other firms in their industry helps them stay competitive. "There's not a consensus view" of whether they're a positive or negative thing in Massachusetts, he said. I suggested that larger companies would love for non-competes continue to continue to be enforceable, while many small start-ups would like to get rid of them -- and that the bigger companies have more political throw weight. The governor didn't agree that things break down so neatly between big and small.

He seemed like he's still in listening mode, willing to be persuaded: "If there's consensus in the industry [as to whether they're a good or bad thing], I'm happy to support that."

And then he went off to be pounced upon by the rest of the media mob... (see pic above)

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.

Gaining Steam: The Campaign to Ban Non-Competes in Massachusetts

A bill was introduced on Beacon Hill this week to make non-competes illegal and unenforceable in Massachusetts.

Richard Tibbetts of StreamBase offers some advice about how you can get your Massachusetts representative and state senator behind the bill.

Will Brownsberger is the state rep from Belmont/Cambridge who introduced the bill.

Here's the key legalese:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction.

Just today, Play Hard Sports CEO Jeffrey Anderson was telling me how non-competes make it really challenging to get the best people aboard a new company... not a problem they have out in California.

Worth reading is Angelo Santelli's blog post on the bill:

One argument that has been made in favor of non-competes is to prevent a cadre of engineers from leaving a company en masse to start another potentially competing company. I actually witnessed this first hand while at Shiva and I still don’t like non-competes. It was a mistake to lose these great engineers in the first place. The second mistake was not investing in their business and getting a seat at the table in the event that they were successful, which they eventually were.

I commend Rep. Brownsberger for filing this bill and hope it passes. All in favor say, “Aye”.

...To which I offer a hearty "Aye."

Foley blogs about non-compete law

My Globe colleague Todd Wallack just called this new blog to my attention: Massachusetts Noncompete Law, published by the law firm Foley Hoag LLP.

Here's blogger Michael Rosen's description of it:

Foley Hoag’s Massachusetts Noncompete Law Blog focuses on developments in Massachusetts in the areas of covenants not to compete, non-solicitation and non-disclosure agreements, trade secrets and the many related issues that arise when employees move between employers. As court decisions and other legal developments arise, this blog will describe them and discuss their implications for the businesses and individuals affected by them.

In several of the industries that are significant drivers of the Massachusetts economy—including high technology, life sciences and financial services—employers routinely require employees to sign various types of agreements restricting their activities during and after their employment. As a company’s intellectual property is placed at risk every time a valued employee walks out the door, the movement of talent between companies—particularly competitors—begets litigation. We hope to promote a working dialogue on these developments—post your thoughts and join the discussion.

(Unfortunately, the Alliance for Open Competition blog, run by a group of people who hope to change the way non-competes are enforced in Mass., seems to have gone dormant for half a year.)

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: Amazon.com 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?

June 19th: Discussion About Non-Competes at Harvard Law

Bijan Sabet at Spark Capital has been trying for a while to assemble an open discussion about the impact of non-compete agreements on the economy here in Massachusetts... and it looks like it has finally come together for June 19th, at Harvard Law School. An RSVP is required.

Here's the description:

The use of employee non-compete agreements by Massachusetts companies is routine, with employers mandating that employees steer clear of any business of a competitive nature once they leave their present jobs, typically for a year or more. Many believe these agreements are critical to guarding a company’s hard-earned intellectual property — protecting legitimate business interests, and thus our region’s economy. Others, however, believe that non-competes are nothing more than handcuffs that prevent talented entrepreneurs from bringing new innovations to market and, in some cases, even driving entrepreneurs to leave the region to pursue their innovations elsewhere. In this session, we’ll bring together some of the area’s best known venture capitalists, entrepreneurs and executives to explore the issue of non-competes and weigh the pros and cons of their use here in the Commonwealth. Are non-competes protecting innovation and economic growth in Massachusetts? Or stifling it?

Panelists will include:

- Jeremy Allaire, founder & CEO, Brightcove
- Melanie Haratunian, general counsel, Akamai
- Paul Maeder, general partner, Highland Capital Partners
- Lee Fleming, associate professor of business administration, Harvard University
- Bijan Sabet, general partner, Spark Capital
- Moderator: John Palfrey, Clinical Professor of Law and Executive Director of the Berkman Center for Internet & Society, Harvard Law School

Akamai CEO Paul Sagan was definitively for non-competes when I asked him about the issue last fall... not sure where Jeremy Allaire stands... but having someone from EMC, the most active enforcer of non-competes in our state, would be good. Perhaps they'll at least attend, and contribute from the audience...

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?

Mid-week links: Convoq closing, Alliance for Open Competition, O Beverages

A couple Wednesday links...

- When I ran into Chris Herot at the Tech Crunch party last month, he told me he was hoping to sell the collaboration company he co-founded, Convoq. It looks like a sale didn't come together, and Chris has posted some reflections on his blog about the five years he invested in trying to get the start-up off the ground. It's thoughtful writing -- and worthy reading.

- Spark Capital and Bijan Sabet are creating a new group, The Alliance for Open Competition to advocate for eliminating non-compete causes in Massachusetts. They're looking for people to sign on in support of the campaign.

- Xconomy reports on a new start-up from Highland Capital Partners' Consumer Fund, O Beverages. The founder is Tom First, one of the two Toms from Nantucket Nectars. O sounds like a new twist on Vitamin Water, which Coke bought for $4 billion earlier this year.

Spark Capital's Campaign to Rid Mass. of Non-Competes

I've been on a long West Coast trip (Las Vegas first, then San Francisco), so I'd missed Carolyn Johnson's excellent piece in the Globe on Friday, about Spark Capital's campaign to get rid of non-compete agreements in the Bay State.

Johnson writes:

Noncompete agreements typically bar employees from going to work for a rival firm for a set period of time. Under Massachusetts law, they are enforceable except for specific professions, such as doctors and broadcasters. Under California law, however, such agreements are generally not valid, meaning an ambitious entrepreneur can take a chance with a new venture that may challenge the former employer without a legal cloud hanging over the move.

While a slew of factors contribute to the very different tech scenes on the East and West coasts, management and policy specialists have examined how noncompete agreements may contribute to very different culture.

A working paper from the National Bureau of Economic Research published in 2005 found that employees working in the computer industry in Silicon Valley tended to job-hop more than their counterparts in other cities with technology clusters. The paper found evidence to support the idea that California's legal climate, in which noncompete agreements are not enforceable, may contribute to the unique tech cluster in Silicon Valley.

A Harvard Business School working paper published this year also found that a 1985 legislative shift in Michigan, which made noncompete agreements enforceable, meant that inventors switched jobs less frequently.

Spark sent a letter to Gov. Patrick last Thursday. Here's an excerpt from it:

As a venture capital firm based in Boston, we are in the business of fostering innovation and building valuable companies that employ highly skilled workers, pay significant taxes, and allow the Commonwealth to thrive in the increasingly competitive national and global economic environment. We have a unique vantage point into the factors enabling entrepreneurialism in Massachusetts.

From this view point we have seen that employment non-competes are increasingly stifling the emergence of start-up companies in our State, forcing some of Massachusetts’ most innovative entrepreneurs to take on tremendous risks, and hampering Massachusetts’ ability to meet its fullest economic potential as a Commonwealth.

We respectfully request that Massachusetts legislate the elimination of the general enforceability of these non-competes in order to restore balance to Massachusetts’ labor markets and to enable Massachusetts to compete better in the national and global marketplace.

Due to the enforceability of employment non-competes in the Commonwealth, entrepreneurs must be willing to take on tremendous legal and financial risks as employers building new ventures. As a point of comparison, the State of California has largely done away with non-competes and has reaped the benefits. Just look at the vibrancy and success of Silicon Valley, which is home to more new company formations than any other location in the country. Why shouldn’t Massachusetts’ entrepreneurs have the same rights and opportunity as their counterparts in Silicon Valley?

At the end of the two-page lettter, Spark's partners commit to work toward eliminating non-competes within their portfolio of companies.

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.