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Innovation Economy

Some common sense on noncompete clauses

By Scott Kirsner
Globe Correspondent / July 3, 2011

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Logan Benson landed a pretty sweet job in early 2009: testing video game software at Harmonix Music Systems, the Cambridge company that developed Rock Band and Dance Central. Thinking there would be opportunities for promotion, he took a pay cut to work there.

But in December of that year, Benson, then 26, was laid off. Within a few weeks, he was in the running for an associate producer job at Seven45 Studios, a Boston video game company that was, like Harmonix, working on music-related video games. “It was the kind of job that felt like it would have advanced my career,’’ Benson says.

But executives at Harmonix blocked Benson from taking the new job. When he was hired at Harmonix, he’d signed a contract called a noncompete agreement, promising not to work for a rival company for a year. Harmonix wouldn’t nullify it. Benson kept looking, unsuccessfully, for another job with a local video game company. On the verge of filing for unemployment benefits, he took a job with a former employer, Boston University.

That is no way to build a cluster of video game companies in Massachusetts, and it is no way to grow an innovation-driven state economy in the insanely competitive 21st century.

On a weekend when we celebrate American independence - and all of the blood and sweat that gave us the right to life, liberty, and the pursuit of happiness - I think it’s time for a declaration of a different sort. It is talented, smart, and driven people who make Massachusetts one of the most innovative places on earth. Our residents ought to be able to take their skills where they want and start companies when they want. Dissolving the bonds of noncompete agreements in our state would not only help employees like Benson contribute to the industry they choose, it would also help start-ups grow, and it would prod our more established companies to be more competitive.

Some employees think signing a noncompete agreement is a harmless act. But it’s not tough to find examples where signing a noncompete agreement can derail an individual’s career, leading to threats, lawsuits, and problems finding future employment.

Bob Balaban of Lexington took a software engineering job in 2008 that required him to sign a two-year noncompete agreement. During the recession of 2009, he was laid off. Balaban had several interviews with managers at a prospective employer, but it had a business unit that competed with his old employer. “They informed me that their legal department advised them against hiring me because of that,’’ Balaban said. He was forced to scramble for consulting projects to pay his mortgage.

Sometimes, noncompetes are just bizarre: I heard last week from the father of a college student. His son had taken a three-month summer job at a Boston tech company, and been required to promise not to work for a competitor for one year. He asked for a list of competitors, and was told that “they change all the time,’’ according to the father, who requested anonymity so as not to jeopardize his son’s job.

Most employers, not surprisingly, like the extra barrier that noncompete agreements create against employees leaving - even though other tools such as nondisclosure agreements and non-solicitation clauses would block an ex-employee from sharing company secrets, trying to poach customers, or luring other employees away. At Harmonix, the company that laid off Benson after less than a year, chief operating officer Florian Hunziker says: “In the gaming industry, innovative creative concepts and the people who develop them are a company’s most valuable asset. No studio can afford to have employees take knowledge of future titles to direct competitors during a game’s confidential development.’’

Losing employees to rivals, or having them start their own companies, “could be devastating. It could put us out of business,’’ says Les Bowen, founder of MSI Inc., a 40-person electronics company in Littleton.

But states such as California seem to do pretty well creating large and small companies without the protection of noncompete agreements. Branko Gerovac, a Lexington entrepreneur, notes that roughly 10 percent of Facebook’s early employees came from Google - without a year-long, cooling-off period. “I’ve run companies in Boston where we just couldn’t hire the people we needed quickly enough,’’ says Gerovac. “I simply don’t think you could have built Facebook in Massachusetts.’’

Academic research also suggests that noncompete agreements can hurt a state’s economy - not just frustrate individual employees. MIT professor Matt Marx looked at what happened in Michigan when noncompetes became legal in 1985. Marx found that “noncompetes drive away those workers who are most productive and collaborative, while retaining arguably less attractive workers.’’

UCLA professor Mark Garmaise has collected data showing that companies located in states with strict noncompetes invest less in research and development.

A few Massachusetts employers don’t believe they need to use noncompetes to retain employees. The travel search site Kayak, preparing for an IPO, doesn’t use noncompetes, nor does the Boston office of Zynga, a game developer that filed to go public last Friday. Google has hired 350 people in Cambridge, and is adding more, without locking them into noncompetes. Rich Miner, a founder of the Cambridge office, says, “All of the data suggest that it is clearly better for individual workers, for the state’s economy, and for innovative start-ups.’’

There are two bills related to noncompetes on Beacon Hill this year, one that would nix them, and one that would encourage employers to write them more narrowly, limiting their duration or scope. But most business groups oppose significant changes to the status quo. “Our members strongly feel that when they make an investment in an employee, it needs to be protected as it is under current law,’’ says Brad MacDougall, at Associated Industries of Massachusetts, a trade group.

“Unfortunately,’’ observes Miner at Google, “it tends to be CEOs of big companies who have lunch with the governor, and not the guy who was laid off and can’t find work because of he had to sign a noncompete.’’

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.