We need meaningful reform of noncompete agreements
BUSINESS IS ON a roll. Low unemployment, a robust stock market, and solid GDP growth all point to an expanding economy that is in the midst of the longest streak of job growth in US history. The Massachusetts economy — fueled by sectors built for the information age such as higher education, life sciences, and information technology — is particularly booming. Why, then, is there so much energy from the innovation community about structural reform of noncompete agreements?
Because we can’t be complacent. “Success is toxic,” Risto Siilasmaa, chairman of Nokia, admitted in a recent interview. Ten years ago, Nokia accounted for 40 percent of mobile phone sales globally. How many of us own Nokia phones today?
The risk of complacency is particularly acute when we look beyond the sunny headlines. First, labor does not seem to be benefiting from this economic boom, leading to massive inequality. Despite the topline numbers, workers have seen little income growth and the share of national income going to labor has fallen. Second, by any measure, competition and entrepreneurship in the United States are in decline, while the market power of established, large businesses is on the rise.
Just before leaving office, President Obama highlighted these concerns and called for a series of actions to increase competition. He railed against noncompete agreements, pointing out that one in five workers has restricted employment options because of them. Working closely with local leaders to develop a series of best practices for noncompete reform, Obama urged states to “enact reforms to reduce the prevalence of noncompete agreements.”
In 2016, the Massachusetts Legislature came agonizingly close to heeding Obama’s mandate, nearly enacting substantial noncompete reform. Unfortunately, final negotiations were not successful. Still, the contemplated bill favored labor, supported innovation, and had public support from a broad range of the state’s business groups. It centered on four important elements:
■ A finite duration for noncompete agreements — although the Senate wanted a shorter period, the final compromise called for a 12-month period.
■ Garden leave — requiring 50 percent of the wages be paid to the employee during the noncompete period.
■ Red Pencil — incentivizing employers to write enforceable contracts, because any unenforceable provisions would cause the entire agreement to be void.
■ Periodic Review — requiring noncompete agreements to be reviewed every few years, which helps address the inequity in power between employer and employee that is inherent before an employment offer has been accepted.
In the eyes of the innovation community, the best thing for our local economy would be a full ban on noncompete agreements (as in the country’s most thriving startup economy, California), but meaningful reform incorporating these four elements would be a step in the right direction. Our hope is that lawmakers can pick up where they left off in the wee hours of the summer of 2016. Our fear is that, absent the active engagement of labor and the innovation community, the final bill from Beacon Hill won’t provide enough meaningful reform.
More competition is uncomfortable for entrenched businesses, but it leads to a healthier and more vibrant ecosystem. Pundits and policy makers often wonder why our best and brightest leave the state so frequently (looking at you, Mark Zuckerberg and Dropbox’s Drew Houston), and why so few large tech companies are created here. There hasn’t been a single tech company created in Massachusetts worth greater than $10 billion since the turn of the century. In California — where noncompetes are unenforceable — there are dozens.
We can do better in Massachusetts. Let’s not be complacent and hang on to our Nokia phones.
Jeffrey J. Bussgang is a senior lecturer at Harvard Business School and a general partner at Flybridge Capital Partners. Jody Rose is executive director of the New England Venture Capital Association.