Entrepreneurs and venture investors were frustrated Monday after state lawmakers again failed to limit the use of noncompete agreements, despite tantalizing signs of compromise on an issue that has deeply divided the state’s high-tech industry.
The implosion of a possible legislative deal late Sunday night was a huge setback for the state’s startup sector, which has strongly advocated new limits on noncompete agreements.
Jeff Bussgang, an investor at Flybridge Capital Partners, called the failure to reach agreement on the Legislature’s final day of work “deeply disappointing.”
“The inability to convert this broad agreement into a substantive reform bill is a blow to our innovation economy,” Bussgang said. “We have missed a tremendous opportunity to show leadership on this critical issue.”
Representatives of large employers, which generally favor using noncompetes, also said they were frustrated that some changes couldn’t be made in a year when a deal seemed likely.
“A compromise was within reach, and it didn’t happen,” said Chris Geehern, a spokesman for Associated Industries of Massachusetts.
Noncompete agreements can bar workers from taking new jobs or starting new companies in the same markets as their old employers.
The details vary, but workers can be required to sit out for a year or more — or risk being sued if they join a competitor during that period. Even laid-off employees can be subject to the limitations.
Startups and venture capitalists have argued that noncompetes stifle innovation by robbing up-and-coming companies of talented workers and keeping would-be entrepreneurs from getting their hot new ideas going.
But established companies, including the tech stalwart EMC Corp., have argued that the restrictions are a reasonable way to prevent ruthless competitors from raiding an employer’s staff in search of valuable trade secrets.
Opponents of noncompete clauses have long pointed to the West Coast as evidence that the contracts hurt entrepreneurship.
California, which long ago claimed the title of tech capital, makes noncompetes essentially unenforceable. Startup advocates say that leads to a freer flow of talent between companies and helps build “clusters” of successful businesses in key high-tech subsectors.
When he surveyed the tech industry for a study on the issue, MIT professor Matt Marx heard that companies in California exploited this difference with Massachusetts.
“One of the companies in California said, look — you can join us, or you can join our competition in Boston,” Marx said. “But if you go there, you’re stuck. If you come here and you don’t like it, you can leave. And we can’t stop you.”
Supporters of strong noncompete enforcement, however, note that Massachusetts’ tech economy is prospering. The Boston area is perhaps the nation’s leading center of biotech innovation, and the state’s software and IT companies are the envy of many other regions.
Geehern noted that the day after noncompete legislation cratered, General Electric unveiled plans for a striking new headquarters on the Boston waterfront, where the industrial giant is moving after leaving its longtime home in suburban Connecticut.
“You can measure the economy in all sorts of ways. But I think this concept that somehow we’re backward and losing ground is really myth, not reality,” Geehern said. “I think in general terms, we’re doing OK.”
House and Senate lawmakers said they got close, but a heated disagreement about how much workers should be paid during the time-out period scuttled a deal.
The House wanted to limit noncompete agreements to one year, with companies able to offer stock, cash, or other form of compensation in exchange for that time-out.
Senators voted to limit noncompetes to just three months and to require companies to pay departing employees their full salaries during that period.
One of the key negotiators, Senator Daniel A. Wolf, Democrat of Harwich, said there wasn’t enough give in the House’s position.
“Somebody needs to explain to the House that there’s a difference between negotiation and capitulation,” Wolf said. “To me, to ask an employee before they take a job to sign an agreement that prohibits them from selling their labor on the open market is really unconscionable.”
But a top negotiator from the House, Representative John W. Scibak, Democrat of South Hadley, said he was disappointed that some other protections — exempting younger and lower-paid workers from noncompetes, for example — wouldn’t be enacted because the two chambers could not agree on one issue.
“If we try to do it again down the road, are you going to have the same players involved? Are you going to be able to achieve some sort of consensus? Or are we back to square one on a bill that’s been kicking around for six or eight years?” Scibak said.