Will Massachusetts finally ban non-compete agreements?
One of the key plot developments in the season finale of HBO’s “Silicon Valley,” Season 2, hinges on the reality that non-compete agreements are not enforceable in California.
In fact, thanks to the 2008 California Supreme Court decision in Edwards v. Arthur Anderson, they are illegal.
One interesting thing to note is that, were the show based almost anywhere but Silicon Valley, it would have turned out very differently. Only in California and two other states are non-competes banned outright.
The lack of non-compete enforcement is considered by many to be one of the main reasons that Silicon Valley has thrived as a tech hub while others, like my home city of Boston, have struggled. The issue is especially charged in Massachusetts, which, in the circa 2000 days of the “Silicon Highway” of Route 128 outside Boston, saw companies like Digital, Wang Laboratories, Data General, Analog Devices, Cullinet, and later Lycos competing with their California brethren. These companies not only enforced non-competes, but did so fiercely.
Today, Massachusetts has certainly become ground zero for the non-compete debate. While many influential state senators, and even the former governor, have pushed for the elimination of the clauses in worker’s contracts, a bill to ban non-competes has never been able to be passed in the legislature -- seemingly because of the influence of a cabal of very deep pocketed and powerful local employers like data storage giant EMC.
In recent years, the enforcement of non-competes in Massachusetts has reached ludicrous extremes. Last year, it was reported that a summer camp called LINX was demanding that its counselors, many of whom were teenagers, sign a non-compete that prohibited them from working at other summer camps and even from babysitting for certain families for a full year after their employment ended. And yet, even in the face of examples like that, a ban on non-competes once again failed to be passed by the state legislature.
When even the absurdity of teenagers being prevented from babysitting couldn’t sway Mass. politicians from changing the law, it seemed like the opportunity to ban non-competes had passed. Especially after Deval Patrick left office and his successor, Governor Charlie Baker, showed no interest in wading into the debate.
Depending on who you talk to, this is either the third, fifth, or tenth consecutive year that the issue has been debated in the halls of the State House. As so it was again this past Monday afternoon when I headed down to watch a session of the state’s Joint Committee on Labor and Workforce Development.
Led by vocal non-compete critic C.A. Webb, the New England Venture Capital Association and its members were out in full force, promoting an alliance of VC firms and tech companies called the Fair Employment Alliance. The group includes many local firms including Highland Capital, Spark Capital, and CommonAngels Ventures, as well as potential IPO candidates like Actifio, Acquia, and Veracode.
One after another, those pushing for an end to non-competes spoke in front of the committee -- citing specific examples of how businesses or entrepreneurs had chose to leave the state to avoid the non-compete mess. Among those were Jeff Bussgang, a general partner at Flybridge Venture Partners and senior lecturer at the Harvard Business School, and Tom Erickson, the chief executive of open-source content platform Acquia, which has eliminated non-competes for all employees.
The session also featured a very candid and eye-opening talk from Matthew Marx, an associate professor of technological innovation, entrepreneurship, and strategic management at MIT. Marx confessed without hesitation that he advises students who have built startups at the school to head to California, rather than stay in Mass., specifically because of the climate created by non-compete enforcement.
“Through 10 years of research,” Marx told the committee, “I’ve never met someone who said they were glad they signed a non-compete.”
Another serial entrepreneur, Mark Pearson, said that he has been affected five different times by non-competes, and that the most recent clause prohibited him working in the same industry for five years.
Fed up, Pearson said he was moving to start his next company in Austin, Texas -- a state which also doesn’t ban non-competes, but doesn’t necessarily enforce them aggressively either.
“Non-competes are representative of what is wrong here in Massachusetts,” Pearson said. “I would like to stay here, but I cannot because these documents are preventing my freedom here."
One of the more dramatic moments of the entire debate came when Mike Newman, a former employee at speech recognition company Nuance -- the company behind Dragon Naturally Speaking -- tore up a severance agreement which would have prohibited him from working at another startup.
While the majority of those who spoke were in favor of a ban, not all speakers were on that side. Mark Gallagher spoke as a representative for the Mass High Tech Council, an organization that includes startups, colleges and universities, law firms, and, most important to yesterday’s debate, large and influential companies such as HP, iRobot, Shire Pharmaceuticals, Biogen, Monster, Vertex, and Pfizer.
Gallagher argued that non-competes should remain a way to protect companies that, “have a legitimate concern for their intellectual property and the investments they make in hiring and training their employees.”
I spoke with Gallagher after the meeting. He explained that his organization’s position was that an outright non-compete ban goes “too far,” and is an “extreme position.” He believes that there is a middle ground that can limit non-competes without taking away an important tool for businesses to protect themselves.
Gallagher also believes that the perception that there is a public interest in banning non-competes is overstated and a product of campaigns from organizations like the NEVCA, whose constituents would benefit from their portfolio companies being able to poach or hire as they please.
“VC firms are a critical part of this ecosystem, but that doesn’t mean that VC firms and the NEVCA don’t have their own self interests in this argument,” Gallagher said. “I know that there were a number of people that spoke [against non-competes], but they were all associated with NEVCA. But I didn’t see a lot of small companies standing up and saying we employ 100 to 500 and we want non-competes banned.”
“I think the appearance of the groundswell of getting rid of these is not reflective of the entire picture,” he added.
When I asked him if keeping non-compete laws in place would benefit the law firms that are part of his organization, Gallagher said that the firms who are part of Mass High Tech deal more in tech finance and the like, and not employment law or employee rights. “The law firms have not been vocal in expressing a viewpoint on this,” he said.
And while Gallagher was the most audible dissenting voice, he was not the only one.
As Callum Borchers reported in The Boston Globe, the 4,500 member Associated Industries of Massachusetts, sent a five page letter from vice president Douglas A. MacDougall that said a ban on non-competes would “send a clear message to the businesses community that intellectual property, the jobs and significant investments made to invent and manufacture here by small and large firms alike, is not sufficiently protected in Massachusetts.”
Also, Borchers reported that the major force in keeping non-competes legal in the state, the hypocritical EMC, is also continuing to use the law firm Nutter McClennen & Fish to lobby on its behalf.
The whole non-compete issue -- while highly entertaining and a window into the preference of some cold-blooded Massachusetts companies to litigate rather than innovate to keep their industry leadership position -- may become a moot point in the end.
Earlier this month, senators Al Franken (D-Minnesota) and Chris Murphy (D-Connecticut), as well as Mass. senator Elizabeth Warren, proposed legislation to ban non-compete clauses throughout the country for low-wage employees. Campaigners against non-competes hope that the move is a first step toward banning the agreements on a national level, potentially creating a California-like working environment everywhere.