Christopher Herot's Weblog

The end of non-competes in Massachusetts?

Don't hold your breath.

Boston Globe columnist and champion of local entrepreneurs Scott Kirsner took up the cause of Massachusetts competitiveness in his column today, Start-ups stifled by noncompetes.

Since last summer's Berkman panel on the issue a growing body of evidence has shown that non-competes are inimical to economic growth. Paul Maeder of Highland Capital presented a model (right) showing how the negative effect of non-competes compounds over time. More recently Matt Marx of the Harvard Business School documented how Michigan's enforcement of non-competes reduced job mobility there.

There is some hope on the horizon with a bill introduced in the Massachusetts House to restrict non-competes. Unfortunately, it doesn't go nearly as far as the California statute which has outlawed non-competion agreements there.

Consider the law in California: 

Except as provided in this chapter, every contract by which
anyone is restrained from engaging in a lawful profession, trade, or
business of any kind is to that extent void.

The California law does make some exceptions around the selling of a business, but is much more comprehensive than the proposed Massachusetts version, which goes on for several pages and merely requires non-competes not go "beyond that necessary to protect the employer’s legitimate business interests. There's a very informative Web site on this issue at www.prohibitrestrictiveemploymentcovenants.net.

And you can find out how to contact your elected officials at www.wheredoivotema.com/bal/myelectioninfo.php.

Employee Non-Compete Agreements: Stifling Innovation

On Thursday I went to a panel sponsored by the Harvard Berkman center on the effect of non-compete agreements on the high-tech business in Massachusetts.  Unlike California, where such covenants are illegal, in Massachusetts they are both enforceable and quite commonplace.  The consensus of the panel was that these restrictions are bad for the economy and whatever small benefit they may have for a company seeking to retain its employees is more than offset by the difficulty that same company will have in recruiting.  Prof. Lee Fleming of the Harvard Business School presented some research which showed that non-competes reduce employee mobility by 20 to 30 percent and Paul Maeder of Highland Capital Partners put forth a model that showed how this could reduce the formation of new companies and the growth and innovation they could have provided.  Bijan Sabet of Spark Capital added that his firm discourages companies in its portfolio from demanding non-competes.  Maeder does the same for companies where he sits on the board, but so far has not persuaded his partners, or colleagues in neighboring firms, to take the same stance.  Rich Miner added that Google, which is headquartered in California does not require non-competes from its Massachusetts employees.

WIth all this agreement on the negative effects of non-competes, the mystery is why they persist.  The panelists were not optimistic that the Massachusetts legislature would change the law, since there was not a powerful constituency lobbying for change but there were large employers in the state who like things as they are.  More likely the change would come as newly educated employees weigh job offers in Massachusetts and California and refuse to work at companies that want them to sign.  Also enlightened VCs such as Maeder and Sabet stated they would continue to lobby their collegues at other firms.

Other coverage:

• PC World
• Bijan Sabet's blog
• Scott Kirsner's video

Berkman Panels Thursday on Massachusetts Competitiveness

The Berkman Center at Harvard will be presenting two panel discussions this Thursday on the Massachusetts high tech environment.  The first is on the issue of non-compete agreements, something that we see often in Massachusetts but which are illegal in California.  Is this difference the cause or the result of the relative success of the two regions in fostering new companies?  Find out here on Thursday, although I notice that all of the panelists are from the East Coast.  The second panel takes on the case of Massachusetts' competitiveness in general.

Admission is free, but pre-registration is required.

4:00 Employee Non-Compete Agreements: Protecting Innovation or Stifling It?

• Rich Miner, VP for mobile technology, Google
• 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

5;15 Making Massachusetts More Competitive

• Lita Nelsen, Director of Technology Licensing, MIT
• Pano Anthos, CEO, Hangout Industries
• Bill Aulet, Senior Lecturer and Entrepreneur-in-Residence, MIT Entrepreneurship Center
• Moderator: Paul Maeder, Highland Capital Partners.

Time: Thursday 19 June 2008 4:00 pm EDT
Place: Ames Courtroom, Austin Hall, Harvard Law School