Patrick Administration Questions the Case for Changing Noncompetes; Community Reacts

[Updated with extensive comments—see pages 2 and 3] In a message posted yesterday on his “Mass Innovation” blog, Massachusetts Secretary of Housing and Economic Development Gregory Bialecki says the case for outlawing noncompete clauses in employment contracts in the state is not yet “sufficiently proven” for Governor Deval Patrick’s administration to throw its weight behind proposals to ban or modify them.

It’s the first time a member of the Patrick Administration has come down on either side of the noncompete debate, which has been heating up in business, investment, and legislative circles over the past year.

In past comments, Governor Patrick himself has said that his administration has no particular stake in preserving existing Massachusetts law, which allows employers to make new workers promise they won’t switch to competing companies or start their own competing businesses for a year or more after they depart. Critics of the practice argue that it retards innovation, and that states where courts don’t enforce such clauses, such as California, have an economic advantage over Massachusetts.

In his post, Bialecki says the Administration is “aware of the arguments in favor of changing our current situation,” including the California example, academic studies showing that noncompete clauses slow entrepreneurial activity, and arguments lodged by local business and investment leaders such as Tim Rowe of the Cambridge Innovation Center and Bijan Sabet of Spark Capital. (Rowe, Sabet, and State Representative Will Brownsberger have all shared their reactions to Bialecki’s post with Xconomy; see below.) Bialecki calls a change in the law around noncompetes a “potentially intriguing” way to support innovation in the state.

However, the post also lists seven reasons for leaving the current law around noncompetes intact. To boil them down: change would be disruptive; many technology industry insiders are against it; even some small startup executives and venture capital partners favor the clauses; employees harmed by noncompete agreements are often the victims of “unreasonable or overzealous abuses”; it would be better to wait for economic recovery to make such a change; and the market might correct the problem on its own, “if companies that don’t require non-competes make a big deal of this issue and thereby recruit talent more successfully than those that do.”

Bialeck concludes: “On balance, we don’t yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem. But we will continue to keep on top of the debate.”

In remarks yesterday at Microsoft’s New England Research and Development Center, Massachusetts Attorney General Martha Coakley (an elected official who is not appointed by the governor) appeared to take a somewhat more favorable stance toward changes to employment law. “If the perception is—and the perception can become the actuality—that Massachusetts is overly burdensome to individual innovators, and therefore companies don’t come here or stay here, that is a problem for us,” Coakley said.

We’ve received comment on Bialecki’s post from State Representative Will Brownsberger, who called last year for an outright ban on noncompete agreements and has now drafted a compromise bill that would roll them back while preserving some protections for employers. We’ve also heard from Tim Rowe and Bijan Sabet; see their remarks below.

[Update 10:30 a.m. July 29, 2009] Tim Rowe comments by e-mail:

“First of all, I enormously respect Greg’s point of view, and I appreciate his willingness to speak about this, rather than just to step back, which might have been easier for him.

“Greg is absolutely right that it would be much worse to create a situation that is less clear than today, that would invite litigation. The threat of litigation is a terrible thing for innovation—startups can’t afford it, most venture investors won’t back startups that are under a cloud of litigation, and thus it can literally kill them.

“So, if changes are made, they should be made in such a way as to reduce the chance of litigation.

“I don’t agree that the market can address this issue. It is near impossible for job seekers to bring up this issue (‘Excuse me, Mr. Employer, but I wonder if you’d be OK with giving me the right to compete with you in the future…’), and because of the tragedy of the commons nature of this problem, any individual firm that doesn’t use non-competes, on a playing field where others do, will be penalized for their laudable stand. Going back to the ancient example, while it is bad for all when farmers over-graze the town commons, any individual farmer who says he will send fewer cows into the commons simply reaps less of the common wealth.

“I am pleased that Greg and his office are focusing closely on this.

“The sticking point in the entire debate seems to be around lack of sufficient research to justify a policy change. Given the importance that everyone, pro and con, seems to ascribe to this issue, I wonder if one thing Greg’s office could do would be to reach out and work with the appropriate parties to get underway some additional, in-depth research on this topic.”

[Second update, 12:15 p.m., July 29, 2009] Bijan Sabet comments by e-mail:

“We have a real challenge in our state.

“Venture funding is dropping and iconic firms are leaving (i.e. Greylock).

“Venture firms that were started here and invest hundreds of millions of dollars are investing more money outside of MA than inside MA. This used to be the state that created huge tech companies like DEC, Lotus, etc.

“It’s a real issue. I’ve written about it quite a bit on my blog and encouraging others to get involved in this important matter.

“One thing we should fully recognize is that entrepreneurs in other states have the freedom to innovate while at the same time respecting trade secrets, NDA & NSAs by law. Our entrepreneurs are forced to sit on the sidelines because they are bound to non compete agreements that [they] signed. To make matters worse, they may not have even realized that they signed them to begin with either. And on top of it all, studies have shown that courts in MA enforce these types of agreements aggressively (see UCLA study).

“No one has convinced me that CA companies are hurting because they aren’t able to lock up their employees under a non-compete. You never hear CA CEOs complain about this. And you don’t hear local VCs or PE folks say that they won’t invest in a company on the west coast because employees aren’t bound by non-competes.

“Somehow our local companies (mostly big) have convinced some elected officials that non-competes are critical to their business. Instead the real motivation could be that they get to pay their employees a lower salary as a result of these lock ups and at the same time stifling innovation.

“We need to create more companies not protect the few we have.”

[Third update, 6:20 p.m., July 29, 2009] Rep. Will Brownsberger comments by e-mail:

“We will continue to work to improve the venture climate and protect employees better by changing our non-compete laws.  I’m hopeful that the administration will ultimately support the responsible bill that we have been developing.”

[Fourth update, 8:30 a.m., July 31, 2009] Secretary Bialecki has published an additional blog post clarifying his position on proposals to change the law around noncompete agreements.

Bialecki writes in part: “I have seen a number of responses to my blog entry on non-competes earlier this week, including one Tweet that summarized it as ‘Bialecki…argues for the status quo.’ I don’t think that’s what I said, but on re-reading my own post, I can see why someone would say that…I think Rep. Will Brownsberger and his colleagues got it right by deciding to limit/regulate non-competes, as opposed to attempting to eliminate them in Massachusetts…[That] does send the discussion down a challenging path, because the limitation/regulation approach means that a lot of lines need to be drawn in places where there is no clear answer…Does that mean the limitation/regulation approach is not worth trying? Absolutely not. We welcome the efforts of Rep. Brownsberger, his colleagues and other stakeholders in the MA innovation economy to explore the possibilities for non-compete rules that work better than the ones we have today, and we will certainly keep an open mind.”

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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2 responses to “Patrick Administration Questions the Case for Changing Noncompetes; Community Reacts”

  1. Pearl Freier says:

    If there isn’t a bigger lobby in the MA tech community against non-competes, status quo will remain. It sounds like the Patrick administration is hearing only from a small number of people on why non-competes are hurting innovation in Massachusetts. There’s plenty of evidence to support why change is needed- but not enough people are coming forward.

    Look at what happened when word got out that the Zoo may have to close- when Patrick administration announced budget cuts. The public response forced the change in plans.

    Or perhaps a fair compromise would be to have a bill that limits non-competes to 3 to 6 months.

    Otherwise the curse of Rte 128 is going to continue to haunt us, and we can continue to follow Michigan’s example of how well non-competes work for innovation and growth. And not learn from this.

    Status quo if we’re lucky. That’s the best case scenario probably.

    Just my two cents.