Part of this article first appeared in Friday's BostInno Beat newsletter. Subscribe.
Over the last month, I've been on a noncompete roadshow, meeting with over two dozen people in Boston – a mixture of VCs, executives and state legislators – to discuss Massachusetts' legacy use of noncompetes. Some are eloquent, some are emotional, and others just come right out and call noncompetes "horseshit." Whatever the delivery may be, it is clear they are fed up with the stifling effect noncompetes have on our economy. Thankfully, the scales have been tipped as we are on our way to eradicating noncompetes this year.
"The feeling is that we are at a tipping point."[/pullquote]
The people of the commonwealth elect leaders to open opportunities – not extinguish them. Rich Miner, who co-founded Android and is now a VC with Google Ventures, told me, "Our elected officials have priorities to, 1. the people of MA and, 2. to the economy of MA." In years past, we have come quite close to making noncompete agreements unenforceable in Mass., only to be stopped at the last-standing obstacle: the state House of Representatives.
State Rep. Lori Ehrlich has helped lead past efforts to ban noncompetes in Massachusetts. "The feeling is that we are at a tipping point," Ehrlich said, looking ahead to the rest of the 2016 legislative session. "I am more hopeful this session that we can get something over the line than I have been in the past. When this issue was first broached, very few people had an understanding of what noncompetes were." Ehrlich and Senator William Brownsberger have already filed their bills this year in order to ban noncompetes: 957 and 1701.
Why Is This an Issue?
Few realize that noncompetes are widespread, affecting wage workers and six-figure-earning, white-collar workers alike. Camp counselors, sandwich makers at Jimmy John’s, event planners, pesticide applicators, yogurt shop workers and others are among the employees asked to sign noncompete agreements. Some horror stories I've heard in my noncompete roadshow have included 19 year olds not being able to switch summer camps and 70 year olds being pushed out of industries for years because of noncompete clauses.
Miner has been involved with a series of startups and has his own tumultuous history with noncompetes.
He told me he once attempted to hire a CFO who wanted to join an anchor company in Boston, but was unable to because of the strict noncompete. "Holding back a CFO is silly since he doesn't even know the product, code, or specific IP that could be utilized elsewhere," he said. Another story includes Miner being forced to pay an employee for six months before she could join one of his teams because her noncompete had yet to expire.
What Happened Last Year?
Last year was the closest we've ever come to touching the sun. Business owners and employees alike voiced their concerns on the controversial subject this past summer during a legislative hearing held by The Joint Committee on Labor and Workforce at the Massachusetts State House. Actual severances were torn up and even Google wrote a letter to Speaker of the House Robert DeLeo explaining the negative externalities of noncompetes.
This hearing resulted in a compromised version of the bill passing the senate and being attached to the Bay State's economic development bill. The house still chose to not pass it. Some notes on the compromised version: hourly workers would not be subject to noncompetes and people below a certain income level would receive noncompetes only lasting six months.
DeLeo did not return several messages left seeking comment on the issue.
State Sen. William Brownsberger, another longtime leader for noncompete reform, explains the two routes that a noncompete bill can take. "One is through a committee process, which is the best route," he said. Joint rule 10 requires these bills to be reported out one way or the other by the fourth Wednesday in April. Either the bill gets "put on study" (aka buried) or recommended to the House. The second route is to amend it to our yearly economic development bill.
Past efforts have faltered at one step or another in that process. Brownsberger cited opposition from the Greater Boston Chamber of Commerce, the Associated Industries of Massachusetts and EMC, who are against any change to the current noncompete system.
From here, it looks like EMC's shortsightedness with noncompetes slowed its own ability to innovate. (An EMC spokesman could not immediately be reached for comment.) EMC's influence may be diminished once its acquisition by Dell is complete, later this year. But Boston tech has a new anchor-scale company in Boston tech, GE. Our new Boston anchor citizens have this to say about noncompetes: "We use targeted noncompetes in order to protect trade secrets, IP and know-how," a spokesperson said in a statement.
Exceptions to the Rules
It's crucial to note that noncompetes and nondisclosure agreements (NDA) are separate. IP, trade secrets, and anti-poaching clauses are still valid if noncompetes are banned. "There are acknowledged exceptions to the rule," notes Miner. "For example, when a large company makes a significant acquisition, it's fair to restrict the founders or C-level executives from starting a competitive company soon after the acquisition." Ehlrich and Brownsberger have already accounted for this exception in their bill:
noncompetition agreements made in connection with the sale of a business or partnership or substantially all of the assets of a business, when the party restricted by the noncompetition agreement is an owner of, or partner with, at least a ten percent interest of the business who received significant consideration for the sale.
Silicon Valley is the perfect case study for what happens when noncompetes are abolished in an innovation community. Water the plant and watch the flowers grow. Matthew Marx, Associate Professor of Technological Innovation at MIT, puts it this way: “Where noncompetes are not enforced, there’s a more open labor market — companies compete for talent. We used to have a saying at the Silicon Valley start-up where I worked, ‘You never stop hiring someone.’"
"They can go where they want," he said. "People are free to leave and start companies if they’re not happy.”
Bye Bye Noncompetes
With many of the best minds in the country gathered here, great companies and vital ideas are possibly trapped in someone's head right now—but they cannot leave their current position in fear of a noncompete lawsuit. As Marx notes, nearly one third of tech workers who sign noncompetes end up in entirely different industries when they take subsequent jobs.
Keep reading BostInno for updates on this particular issue throughout the year. You can also locate your local legislator to write them a letter regarding noncompetes.