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In the making: A revolution to rid Massachusetts of noncompete agreements

Posted by Scott Kirsner  July 7, 2011 09:07 AM

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My most recent Sunday Boston Globe column declares that we need an employee- and entrepreneur-led revolution to rid our state of noncompete agreements. These contracts foster the illusion of helping to preserve the market position of established enterprises, but their real effect is to impede the creation and rapid growth of new businesses in our state.

Sharing here a few resources on the topic, along with a longer version of the noncompete column than appeared in print:

- The Alliance for Open Competition
Group of entrepreneurs, business leaders, and venture capitalists trying to ban (or at least discourage) the use of non-compete agreements in Massachusetts.

- Among the Boston-area employers who don't require employees to sign noncompete agreements: Google Cambridge, Zynga Boston, Kayak, Boundless Learning, Buzzient, LuckyLabs, Greentech Media, Assembla, and GaggleAMP. (Know of others? Add them in the comments.)

- Bills to ban noncompetes have been introduced in the Massachusetts House and Senate this year; there's also a House bill seeking to curtail the way they're used, rather than nixing them entirely.

- State Rep. Will Brownsberger maintains a page on his site about noncompete-related legislation.

- Attorney Russell Beck's blog, Fair Competition Law, tracks the noncompete issue closely, including examples of how noncompetes are used by Massachusetts employers like hair salons (who no doubt have lots of valuable IP to protect).

- MIT professor Matt Marx's research on "noncompetes and brain drain."

- Mark Garmaise of UCLA finds that companies in state's where noncompetes are strictly enforced invest less in R&D and human capital.

- From the Rotman School of Management in Toronto: "Silicon Valley's eclipse of Route 128 helped by lack of non-compete clauses, says new study"

- Entrepreneur and blogger Branko Gerovac's testimony to the Massachusetts legislature's Joint Committee on Labor and Workforce Development (with scads of data and charts)

- A blog post of mine from 2009: "Dear Captains of Industry: Where Is the Data to Support Your Position on Noncompetes?"

- Tim Rowe of the Cambridge Innovation Center writes, "It's (Really) Time to Ban Noncompete Agreements"

- Looking at the impact of noncompete agreements on inventor mobility in Michigan (work by Marx, Harvard's Lee Fleming, and Deborah Strumsky of UNC.)

- Longer version of my Sunday, July 3rd Globe column, "Some common sense on noncompete clauses."

Logan Benson landed a pretty sweet job in early 2009: testing videogame software at Harmonix Music Systems, the Cambridge company that developed “Rock Band” and “Dance Central.” Thinking there’d be good 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 videogame company that was, like Harmonix, working on music-related videogames. “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 non-compete 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 videogame 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 videogame 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 that make Massachusetts one of the most innovative places on earth. Our citizens ought to be able to take their skills where they want, and start companies when they want. Dissolving the bands of non-compete agreements in our state would not only help employees like Benson contribute to the industry they choose, but it’d help start-ups grow, and it would prod our more established companies to be more competitive.

Some employees think that signing a non-compete agreement is a harmless act. But it’s not tought to find examples where signing a non-compete 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 non-compete 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.

Kate Martin says she was let go and then rehired several months later by a financial services software company that was trying to deal with threats from her former employer related to a non-compete she’d signed. Eventually, the companies worked out a deal — after Martin had lost out on tens of thousands of dollars of income. “I think it was all vindictive on the part of my former employer,” she says, adding that she’d been awarded a salesperson-of-the-year trophy there.

Sometimes, non-competes are just bizarre. A father wrote an e-mail to me to let me know that his son, a sophomore in college, recently took a paid summer job at a Boston-area tech company — with no guarantee of future employment. (He asked me not to use either of their names, to avoid creating issues with the employer.) The son was asked to sign an agreement promising not to work for a competitor for a year after he left. “He then asked whether they could provide a list of competitors, but was told that they couldn't, because the competitors change all the time,” the father wrote.

Russell Beck, an attorney at Beck Reed Riden LLP in Boston, says that Massachusetts courts routinely enforce non-competes against employees who left voluntarily, were laid off, or fired, in businesses ranging from data network monitoring to hair styling.

Most employers, not surprisingly, like the extra barrier that non-compete agreements create to keep employees from jumping to a rival — even though other tools like non-disclosure agreements and non-solicitation clauses would block an ex-employee from sharing company secrets, trying to poach customers, or recruiting other employees.

Les Bowen says he asks some employees of MSI Inc., his 40-person Littleton company, to sign one or two-year non-competes. (The 20-year old company makes components that go into sonar and ultrasound systems.) His employees gain knowledge of customer needs, Bowen says, and they work with some of MSI’s un-patented technologies. Losing employees to rivals, or having them start their own companies, “could be devastating. It could put us out of business,” he says.

Jack Salerno, president of an optics technology company in Woburn, notes that his company invests in significant training to its employees — many of whom, he notes, have earned PhDs — and non-competes ensure that they don’t take that training and use it for a competitor. When I asked Salerno whether his company, Agiltron Inc., would have invested more in a person after a year’s employment than that person had invested attaining a PhD, his answer was, “I don’t know, but they know about this non-compete issue coming in.”

But some entrepreneurs will acknowledge that even as they require their employees sign non-compete agreements, they find that the non-competes that shackle employees of other companies can make it hard for them to grow. “There are two specific instances I can think of where we missed out on hiring someone we felt would really add to the team,” says Richard Tibbetts, co-founder of StreamBase Systems, a Lexington software company. “But as an individual start-up, it’s very difficult to move away from the status quo when it comes to non-competes.”

There’s a growing body of academic research showing how strictly-enforced non-compete agreements are bad for individual companies and the economy. MIT professor Matt Marx has shown that smart people flee states where they’re required to sign non-compete agreements. The contracts “drive away those workers who are most productive and collaborative while retaining arguably less attractive workers,” he writes. The state he studied? Michigan, which unintentionally legalized non-competes in 1985. A UCLA professor, Mark Garmaise, found that companies operating in states with tough non-competes invest less in research and development than those where employees can move freely from firm to firm, and start their own businesses at will. Simply put, the absence of non-compete agreements forces companies to stay on their toes.

Some state economies, such as California’s, seem to do pretty well at creating major companies without the protection of non-compete agreements. Branko Gerovac, an entrepreneur who writes the blog Empirical Reality, notes that roughly 10 percent of Facebook’s early employees came to the company immediately after leaving 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.”

I often wonder why our home-grown Massachusetts companies think it’s better that their next-generation competitors spring up in Shanghai, Seattle, or San Diego, rather than down the street. After all, it’s much easier to keep an eye on rivals when they’re nearby. And if you ultimately decide you need to acquire them, weaving them into your organization is much easier.

A few Massachusetts employers don’t believe they need to use non-competes to retain employees, and there’s a group called the Alliance for Open Competition that hopes to persuade others. The travel search site Kayak, currently preparing for an IPO, doesn’t use non-competes, nor does the Boston office of Zynga, a game developer that filed for an IPO last Friday. Google has hired 350 people in Cambridge, and is still adding more, without locking them in place with non-competes. Rich Miner, a founder of the Cambridge office, says, “All of the data suggests that it is clearly better for individual workers, for the state’s economy, and for innovative start-ups.”

There are two bills related to non-competes on Beacon Hill this year, one which would nix them, and one which would try to encourage employers to write them more narrowly, limiting their duration or scope. But business groups like the Smaller Business Association of New England and Associated Industries of Massachusetts 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, who oversees public policy at AIM.

“Unfortunately,” says 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 non-compete.”

If the people who make Massachusetts an innovation world power – that’s you – prefer to let corporations shape policy, we won’t see much change. What we need is a revolution, and those are never led by the entities in power.

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About Scott Kirsner

Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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