Clause for concern

July 12, 2009

THE HIGH-TECH economy in Eastern Massachusetts depends heavily on the creation of intellectual property - medical treatments, equipment designs, computer software, complex mathematical algorithms. But not every way of protecting that property is beneficial for the employees who help develop it, or for the region as a whole.

Companies in high-tech industries often require employees to sign so-called noncompete clauses - agreements not to work for a direct competitor for, say, a year after leaving the company. In practice, though, these clauses may also discourage start-ups, exile employees from the labor force, or push them into unrelated fields where their training and experience are wasted.

Tales of confusion and high legal bills abound. One man faced a lawsuit after joining a company that, he says, his old employer never mentioned as a competitor. A group of laid-off website workers signed three-year noncompete clauses in exchange for severance pay, but the agreements did not spell out which companies were off-limits - thereby exposing them to litigation. Another man at a different company jumped ship to a competitor, but only after his salary was cut sharply. In one case, a hair salon sued a stylist for violating her noncompete clause.

Doctors, lawyers, TV personalities, and social workers aren’t subject to noncompetes under Massachusetts law. A few state lawmakers are seeking a new balance between the needs of employers and workers in other fields. Some reforms are in order.

To enforce a noncompete agreement in Massachusetts, a company has to persuade a judge that the agreement serves legitimate business interests. Legislation filed by Representative Will Brownsberger and Senator Patricia Jehlen would instead emulate the law in California, where most noncompete clauses are unenforceable. Meanwhile, Representative Lori Ehrlich has introduced a measure that would allow the agreements only for employees who earn above $100,000 a year. After hearing from business groups, Brownsberger and Ehrlich are now working on a compromise measure.

Everyone in the debate understands that companies need to protect some information. At many firms, employees must also sign agreements not to disclose confidential information, and the proposed legislation wouldn’t affect these agreements. But violations of nondisclosure agreements may be hard to spot, so many employers prefer the simplicity of noncompete clauses. To Paul Dacier, general counsel for EMC, the question is clear: “Does a company have the right by contract to have certain terms with its employees?’’ The data-storage firm pays “extremely competitively,’’ he says, and expects employees to honor their pledges.

But the effects of noncompete clauses extend far beyond the world of intellectual property. They reduce movement in the labor force - which serves the immediate interests of established employers but discourages entrepreneurship. Much of the dynamism of California’s Silicon Valley, experts say, comes from those who leave bigger firms to start smaller ones and can hire from a large pool of available talent.

Such claims might not move Massachusetts lawmakers who have to balance the interests of hypothetical start-ups against existing tech firms that employ thousands of people. More persuasive, perhaps, are the travails of real workers.

One problem is that a worker might not be asked to sign a noncompete until after turning down other job offers. Matt Marx, an assistant professor at MIT’s Sloan School of Management, found that only 30 percent of employees with noncompete clauses were asked to sign them upon being offered a job. Another 22 percent learned of the clauses only after accepting the offer; 25 percent upon reporting for their first day of work; and 23 percent at some later time. Firms that require noncompete clauses should have to disclose that up front.

Without abolishing noncompetes altogether, lawmakers can make it easier for employees to recover legal fees in disputes over noncompete clauses. At a minimum, the Legislature should stipulate that laid-off employees are freed from noncompete restrictions. Jay Shepherd, an employment lawyer in Boston who works for corporations, said he discourages clients from enforcing the clauses against employees whom they lay off. “It’s kind of like when you break up with someone,’’ he said, “and then you tell them they can’t see other people.’’

EMC’s position is that legislation is unnecessary, and that departing employees should negotiate changes to their noncompete clauses on a case-by-case basis. But why not eliminate any uncertainty - and spare laid-off employees the fear of being sued and the stiff cost of defending themselves?

Few people work at the same company for their entire careers. Protecting intellectual property is vital, but Massachusetts should also discourage agreements that make it impossible for people with specialized skills to find work in their chosen fields.