Non-competes and innovation

Much has been written about non-competes in MA and whether our tech sector is at a disadvantage compared to CA. The debate is moving slightly forward (and to the side, unfortunately) with recent comments from the state, which Xconomy covers.

I can see both pros and cons but there is no doubt that non-competes hinder labor mobility and startups’ access to talent. My experience from the recent past:

  • One lawsuit preventing an engineer from joining one of my companies. The judge upheld the non-compete. The engineer had a rare and very valuable skillset acquired over decades in the industry. He worked with me in a previous company. I seriously doubt he learned that much new material at the company that went after him. The opposite is probably true–he contributed tons based on what he already knew. That didn’t matter. The domain was deemed “close enough.”
  • Two execs barred by former employers from discussing potential CEO or executive chairman roles at another one of my companies looking for funding. No, the company is not a direct competitor of their previous employer. It’s more likely a future partner. Again, however, because the domain is close-enough, the non-compete may be enforced and nobody wants to go to court or have their reputation tarnished by a previous employer talking behind their back about how they violated their non-competes and acted without integrity. It’s hard-enough to find experienced C-level leadership willing to jump into companies before investment, let alone leaders with any specific domain experience. Restricting the pool further leads to fewer companies getting funded, less innovation, less jobs and less revenue for the state.

In technology, velocity of execution is everything. The pace of innovation is accelerating. Twenty years ago, when release cycles took 18-36 months, a one year non-compete wasn’t such a big deal. Today, when agile startups can ship every week, a year-long non-compete can have a significant impact on a company’s ability to compete for and recruit great talent and on individuals’ ability to apply their talents and skills early in the development of new markets.

The other issue is the scope of non-competes. Since the typical wording is along the lines of “don’t do anything similar to what your previous employer did at the time you left,” it risks putting employees in a position of ever-expanding restrictions due to industry consolidation. Startup X is in the block level continuous data protection business but it gets acquired by EMC which is in anything having to do with data and storage. Startup Y is in the mobile geolocation ad targeting space but is acquired by Microsoft which is in everything that’s big.

I wish more people realized that while non-competes haven’t changed that much over the years, the tech industry has. I can appreciate some arguments for non-competes but, if they were to stay, I’d like to see them capped to a reasonable timeframe of 3-to-6 months max and scoped tightly to a core domain.

About Simeon Simeonov

Entrepreneur. Investor. Trusted advisor.
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7 Responses to Non-competes and innovation

  1. As I have noted elswhere, I don’t believe that making noncompetes illegal will change much. Employers can get most of the “benefit/protection” from nonsolicits, nonhires, nondisclosures, and invention agreements. I believe the big difference between the Valley and Boston is cultural and not related to what are ultimately nuances of noncompete law.

  2. Dave, two questions related to this:

    1. If employers can get most of what they need from non-competes then why are so many of them so reluctant to drop them?

    2. I’m all for non-solicits, non-disclosures, non-hires, invention agreements, etc. An employer can/should go after employees who are breaking these agreements. However, the burden of proof is higher, isn’t it? So, doesn’t it all come down to how easy it is to go after an employee based on a non-compete agreement just because of the fear of the “inevitable breakage” of these other agreements?

    • With respect to your first question, two things ocurr to me. First, lawyers, like me, have been advising clients to get noncompetes since dinasaurs roamed the earth and old habits die hard. Second, and this lead into your second question, employers and investors believe that they get some incremental protection from noncompetes — in addition to what is covered by the other agreements I mentioned. And, in fact they do.

      With resect to your second question, as you noted in your post, noncompetes do have some harrassment value. I think the standard of proof is the same in all these contracts, but violations of nonsolicits, nonhires, etc. are, I think, likely to be more clear cut and therefore easier to avoid and less likely to be asserted in the absence of a clear violation. Because the definition of “competition” in these agreements is often not crisp, violations can be asserted when the evidence is not perfectly clear. Law suits are by their nature expensive and unpleasant. The deck isusually stacked against the potential employee because the former employer usuallly has more resources. As you point out, often the threat of a suit is enough to discourage hiring of an engineer or other person.

  3. Dave, yes, non-competes definitely give some extra protections to an employer. So, assuming they won’t be made illegal by the state, the only thing that would make employers non require them is a cost that exceeds the benefit. The cost may come in terms of perception, access to talent, etc. Very hard to compare and quantify…

    Have you thought about ways to quantify the added value of having the non-compete in place?

    • I don’t know how the value of a noncompete could be quantified in dollars. But, isn’t what drives the pervasiveness of noncompetes a race to the bottom. If you extract noncompetes from your employees and I don’t then my employees can go work for you and undermine my business and I can’t fight back by hiring your employees. Therefor I have to have what you have.

  4. I feel like any time an attorney posts an opinion about non-competes, they ought to mention that attorneys are not covered by non-compete agreements. This seems like an interesting disclaimer.

    One of Dave’s colleagues at Foley Hoag explained it to me thusly:

    It’s actually built into our rules of professional conduct, rather than a Massachusetts statute (Rule 5.6: A lawyer shall not participate in offering or making: a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship…”). It’s very similar to a model rule promulgated by the American Bar Association. The comment to the rule states that such a restriction “not only limits [lawyers’] professonal autonomy but also limts the freedom of clients to choose a lawyer.” There is an exception for sale of a law practice.

    Interesting, don’t you think, that attorneys can enjoy the financial rewards of representing companies enforcing non-competes, or the financial rewards of defending employees who are bound by them — but that the attorneys themselves have no worries about non-competes…?

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