Time to get rid of ‘noncompete’ agreements
Getting fired, being laid off, and quitting a job to start your own business are among life’s most stressful experiences.
How could it possibly get more stressful? Well, what if you could be hauled into court because of what you choose to do next? In Massachusetts, that’s a very real possibility, because many employees are required to sign a contract called a noncompete agreement when they start a job. These contracts seek to prevent workers from going to a competing company, or starting one of their own, often for a year or more. They affect a wide range of professions, from software developers to advertising execs to personal trainers.
Noncompete agreements are wonderful for employers who want to keep workers from jumping ship — and for lawyers who earn money from the legal wrangling that results when a worker does depart. But they’re bad for Massachusetts workers and the state economy.
Earlier this month, Governor Deval Patrick said he would support banning noncompetes in the state, as part of a set of economic development proposals. A ban may face an uphill battle in the Legislature, since many companies are content with the way things are. But here’s why we should do it.
In a world where the cycles of innovation are spinning faster than ever, shackling smart employees with noncompetes is akin to driving a Ferrari with the emergency brake on. Massachusetts needs its knowledge-driven economy to move as fast as any other.
I had coffee last month with Bart Riley, a Weston resident who holds a PhD and more than 40 patents. He was a leading technical executive at two fast-growing Massachusetts companies, American Superconductor and A123 Systems, a maker of batteries.
After A123 went bankrupt in late 2012, Riley took a job last year with a fledgling California clean-tech company that he didn’t want to name; it’s still in “stealth mode.” He travels to Silicon Valley every other week.
Riley had support from his new employer to open an office in Massachusetts, hire about 10 engineers, and grow it over time. But once he started focusing on qualified candidates, he realized most would not be able to switch jobs because of noncompete agreements. The plan was shelved, and Riley is still commuting to California. That state and a handful of others do not allow courts to enforce noncompete agreements.
“Silicon Valley and Boston are expensive places to relocate people into,” Riley says. “You want to draw on the talent base that exists in the area.”
In California, startups can hire quickly. In Boston, noncompete agreements create a barrier to building a team fast. My favorite example: Pinterest.
In October 2012, I dropped in on the San Francisco startup, which lets users create and share online pinboards of things they like. A number of Pinterest’s early employees came from Facebook. They understood how to get millions of people onto a social network.
Since there are no noncompetes in California, they did not have to take a yearlong vacation. Did the defections hurt Facebook? Its stock is up 38 percent since my visit. And Pinterest, with 70 million users, is expected to go public soon. Building great companies is not a zero-sum game.
Massachusetts companies that are staunch enforcers of noncompete agreements, most notably storage giant EMC Corp. of Hopkinton, somehow manage to hire and retain thousands of employees in California, who can walk out the door at will. Why do we not want EMC alumni to be able to start their own ventures here? Because the status quo is just fine with most employers. Let competition spring up elsewhere — just not here, not with our precious people.
Then there are just the ridiculous ways noncompetes hassle employees. The day before Patrick proposed getting rid of noncompetes, I got a call from a father who told me his teenage daughter had signed a noncompete as a summer camp counselor — and that was hindering her from taking a job at a different camp. Was the first camp worried she would poach its proprietary s’mores recipes?
Daniel McKinnon is a hair stylist who got fired by a South Shore salon. When he tried to take his skills to another salon, his old employers sued because he had signed a noncompete. He represented himself in court, because he couldn’t afford an attorney, and lost. For a year, he collected unemployment. Today, he’s cutting hair once more, and his old employer is still doing fine. The point of all that was what, exactly?
There’s a growing body of academic research that highlights the negative impact of noncompetes. University of Toronto researchers suggested the fluid movement of employees in Silicon Valley contributed to that region’s success, at the expense of our Route 128 cluster. Use of noncompetes can drive more productive and better-connected workers out of state, or force highly-educated employees to take “career detours” from their areas of expertise, according to research by MIT professor Matt Marx.
I talked to Susie Kim Riley last Thursday. Her husband, Bart, was in California. Susie runs a 15-person mobile startup in Boston called Aquto. She says noncompetes hinder her ability to hire.
“I’ve had people accept job offers, but then they get a threatening letter from their former employer and they back away. And I think, ‘Do I really want to spend $500,000 defending myself in court when I am doing a startup?’ ”
Susie Riley says she would like to live in a world where “people stay in companies because they want to stay,” and companies compete fiercely — without assuming that every departing employee will inevitably steal intellectual property.
Yet today, all of Aquto’s employees sign noncompete agreements. Few CEOs want to stop using them if everyone else does. Susie Riley explains, “It’s standard operating procedure.”
So let’s change that.