Start-ups stifled by noncompetes

Westwood-based Turbine is one of the state’s largest game companies, with nearly 300 employees. But because the artist was bound by a noncompete agreement that prohibited him from going to work for another game company within 200 miles of Turbine, Hyatt decided not to risk a lawsuit. The artist found another job in the game industry. He wound up working for a company in Austin, Texas, that competes much more directly with Turbine than Hyatt’s company does.

In Massachusetts, we send a wonderful message to our most talented employees and would-be entrepreneurs: Stay where you are, and don’t do anything new, unless you can afford to take a year (or more) off to wait until the noncompete clause in your contract expires. (Or simply leave the state, as the 3-D artist chose to do.) At least since 1922, noncompete agreements have been enforceable in Massachusetts courts - and the very threat of being sued can prevent employees from taking their skills to a new employer, make it hard for start-ups to build experienced teams quickly, and force potential entrepreneurs to think twice before starting a new business.

Meanwhile, noncompetes are not enforceable in California, a state that, like ours, is home to fast-growing companies in fields such as biotech, high tech, and energy. New York and Oregon have dramatically limited the power of noncompetes in recent years. In Massachusetts, House lawmakers have introduced two bills regarding noncompetes, one that would eliminate them entirely and another that would make them applicable only to employees making $100,000 a year or more. Hearings could start as soon as July.

Our state’s economy relies on innovative businesses for job creation - and what could be a higher priority right now? Yet the law around noncompetes serves to decelerate innovation - it’s like towing a mobile home behind a Ferrari.

Governor Deval Patrick hasn’t taken a position on noncompetes. When I spoke with him earlier this month, he said, “I don’t have a stake in the status quo’’ but added that he hadn’t heard a consensus view from people in the innovation economy as to whether they’re a positive or a negative for businesses: “If there’s consensus in the industry, I’m happy to support that.’’

Unfortunately, big employers like Hopkinton-based EMC Corp. love noncompete agreements because they create artificial employee “loyalty.’’ In a recent lawsuit, EMC, a titan of the data storage industry, sued David Donatelli, a senior executive who left Massachusetts to take a job with Hewlett-Packard Co. in California. EMC argued that his involvement with HP’s data storage products would violate the noncompete agreement he signed in Massachusetts. In the past, Massachusetts judges had figured that California courts would nullify any noncompete agreements signed here. But last month, a Suffolk County Superior Court judge told Donatelli he could take the HP job, but couldn’t work on storage-related products for a year. (Now, apparently, our courts want a say in whether talented people are allowed to take jobs elsewhere, and what they can do there.)

Big companies like EMC and Akamai Technologies will be a powerful force in any debate about changing the law because they have the resources to lobby elected officials. Akamai CEO Paul Sagan has joked in the past that the right solution is for California to start enforcing noncompetes, rather than have Massachusetts ditch them. At a recent event on the future of Massachusetts’ IT industry, Sagan said he’d seen no data that show eliminating noncompetes might make the state more competitive.

Luckily, we have an academic here in Massachusetts who has dedicated the past few years to looking at the impact of noncompetes. Matt Marx, who recently joined the faculty of MIT’s Sloan School of Management, has made three important findings about what noncompetes do.

First, he looked at Michigan. During the decades of that state’s greatest economic growth, from 1915 to 1985, noncompete agreements were illegal. In 1985, the law changed - and Marx found that inventors were suddenly less likely to move from one company to another, and specialized inventors were much less likely to move. (I’d observe here that the last 25 years in Michigan have not been a good era to emulate.) Marx has also surveyed inventors in the speech recognition industry around the country and found that about 25 percent of those who were bound by noncompetes often took “occupational detours’’ into other technology sectors reluctantly, to avoid getting sued.

Finally, Marx’s research has found that employees bound by noncompetes tend to take jobs with large companies rather than small start-ups - in part because they believe that a larger company might be able to defend them against a potential lawsuit. (Also, as with the Conduit example, small companies are less likely to take a risk with employees covered by noncompetes.)

Lots of people don’t like noncompetes. Hyatt doesn’t require people to sign them at Conduit, and last year Spark Capital, a Boston venture capital firm, decided it would stop asking its portfolio companies to require employees to sign them. Boston Postmortem, a networking group for game developers, is supporting the House bill that would ban noncompetes.

Colin Angle, chief executive of iRobot Corp., the state’s largest robotics company, says that while his company does ask employees to sign one-year noncompetes, it has also waived the noncompete, allowing employees to splinter off and form at least three new robotics start-ups - without waiting a year. “As an entrepreneur, I’m not going to try to discourage an employee from entrepreneurship,’’ says Angle. (Ken Olsen, founder of Digital Equipment Corp., similarly encouraged employee spinoffs.)

But not every CEO is such a nice guy, and there’s a reluctance on the part of companies (and their investors) to unilaterally disarm. Take the example of one biotech CEO I spoke to recently. He had been sued earlier in his career over a noncompete agreement when he left one company to join another. But yes, at his new venture, some employees have been asked to sign noncompetes. “I wouldn’t have done it if my investors hadn’t insisted.’’

Oddly, certain kinds of workers in Massachusetts cannot be shackled by noncompetes: doctors, social workers, and broadcasters among them. But why should a TV anchor be allowed to jump from one station to another, while we make an EMC engineer take a year of unpaid leave before he can form a new company? How does that benefit our economy? My biggest concern is that new legislation only requires noncompetes to be “reasonable,’’ rather than nixing them entirely. To ensure that we get there, individual employees will have to dive in to this debate - rather than leaving it to big companies who know how to lobby. And CEOs who are willing to think about the good of the state’s economy - beyond their own firm’s desire to avoid spawning potential rivals - should speak up.

“People should stay at companies because they like working there, they’re engaged, and paid fairly, and it’s intellectually interesting,’’ says Peter Bell, a former EMC executive and start-up CEO who is now an investor at Highland Capital Partners in Lexington. “But if they’ve got a great idea that will create a new business and new jobs, well, isn’t that a good thing for the state?’’

Scott Kirsner can be reached at kirsner@pobox.com.