Are noncompete agreements hurting tech innovation?

July 1, 2015, 12:00 PM UTC
HBO Silicon Valley
Photograph by Frank Masi—HBO

California is known for its sandy shores, soaring sequoias, and—if you’re an employment-law wonk—its ban on enforcing noncompete agreements. The state’s prohibition on fine print that prevents employees (not owners) from working for a competitor in their next job seems to sync with California’s wild-and-free attitude. “Go, man. Jump from job to job. Experiment!”

It’s ironic, then, that the section of California’s professional code that disallows post-employment restrictions was originally written for New York State in 1865. New York never enacted the code, but in 1872, when California wanted to impose some order in its fledgling state, it adopted the language originally intended for its Eastern peer, including the ban on noncompetes. Today just three states have anti-noncompete language on the books. California, home to some of the world’s largest technology companies, is by far the one with the most economic might.

That could soon change. Massachusetts, Rhode Island, and Washington also want to prohibit the noncompete. Bill sponsors draw a straight line between California’s unregulated job market and the accelerating fortunes of Silicon Valley. Get rid of such restrictions to unleash local talent, they seem to suggest, and spark a tech boom. Opponents argue that the elimination of noncompetes would leave companies vulnerable to trade-secret theft, since employees could easily take their knowledge to a competitor. And there’s evidence that the move could create unintended consequences as companies compete for unrestricted talent. Exhibit A: the escalating wages and proliferating perks for software developers in the Valley.

“This whole noncompete scenario stifles innovation. Without the ability to take what you’ve learned and apply it somewhere else, you have no ability to make your own destiny.”

Damien Patton, CEO, Banjo

Which system better encourages innovation? The battle over the answer to that question has played out most prominently in Massachusetts, which has debated a bill to ban noncompetes at least four times in the past six years (and for which memories of a miraculous 1980s tech-industry heyday still linger). Lori Ehrlich, a state representative who introduced a recent bill earlier this year, says she wants to eliminate noncompetes because they have an “overall impact of stifling innovation.” It’s a question of fairness, she says, especially when such agreements appear as requirements for jobs in low-wage, low-skill industries. Noncompetes “are being used to control and intimidate in a realm where the power already favors the employer,” she says. It’s not a matter of preserving trade secrets, she adds; there are already nondisclosure agreements to protect against such theft.

The Associated Industries of Massachusetts, a trade group, is one vocal opponent of the bill. Testifying before a state committee on economic development and emerging technologies, John Regan, executive vice president of government affairs for the group, said that Massachusetts’s case law “strikes the right balance” between employee interests, such as career flexibility and financial incentives, and those of employers, like protection of intellectual property, trade secrets, and confidential information.

In 2007, Bijan Sabet, a general partner at Spark Capital in Boston, eliminated a company requirement that the startups in which his firm invested include noncompete clauses in their employee contracts. They have a chilling effect on the proliferation of ideas and innovation, he says. “If you’re a graduate of MIT who studied a specialty like robotics and a Massachusetts company says, ‘Come here and sign this noncompete,’ and a San Francisco company says, ‘We know this isn’t your last job—do whatever you want,’ which would you choose?” Noncompetes are one reason Boston startups have trouble finding talent, he says.

Matthew Marx, an MIT professor focused on tech innovation and entrepreneurship, says it’s premature to conclude that the elimination of noncompetes results in more innovation. “I don’t think we have the definitive answer,” he says. But there is research that suggests that information flows more freely in places without noncompetes.

“Our view is that this is a debate in search of an issue. Companies that use noncompetes still attract the biggest and brightest.”

Christopher Geehern, EVP, Associated Industries of Massachusetts

But so does money. The average salary of a software engineer in the San Francisco Bay Area is well over $100,000 a year, and companies must have the capital to compete. The absence of noncompetes means runaway salaries and a grab-bag recruiting scene where every individual—employed or not—has the potential to be poached. Combine that with the frantic pace of technological advancement, and you have a talent war waged in an otherwise calm Eden overflowing with tech ideas and talent ripe for the picking.

Damien Patton, CEO of Banjo, a social media analysis startup with offices in Las Vegas and Redwood City, Calif., says he recently interviewed (and hired) an engineer who had been wooed by 28 other companies. If the candidate’s decision had depended mostly on salary and incumbent tech firms were in the mix, the battle would have been over quickly. “We don’t try to compete,” Patton says—on the basis of cash, anyway. Startups beat the giants for talent by luring recruits with equity and change-the-world passion. Once they’re hired, ensuring that there’s “upward momentum” keeps them onboard, Patton says. Employees look for other opportunities when their work gets stale.

That’s how it should be, argues Orly Lobel, a professor at the University of San Diego School of Law. “If there was ever a competitive market,” she says, “it should be applied to our greatest resource today: talent.”


A version of this article appears in the July 1, 2015 issue of Fortune magazine with the headline “Tech Talent: Play Defense, or Take Up Arms?”

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