Are Non-Competes Hurting the Massachusetts Economy?

In the January 24-31, 2013 “Business View” section of the Boston Business Journal,  State Senator William Brownsberger and State Representative Lori Erlich claimed that one reason Massachusetts is losing jobs to Silicon Valley is that California law prohibits non-compete agreements, whereas in Massachusetts they are routinely enforced.  The authors then use this conclusion to argue that the Commonwealth should legislate the elimination, or at least curtail the enforceability, of non-compete agreements. 

While I have no reason to doubt that Senator Brownsberger and Representative Erlich genuinely believe that eliminating or curtailing the enforceability of non-competes would be beneficial to the Commonwealth, their argument is deeply flawed.  As an initial matter, the legislators’ starting point is the “dozens of stories [they have been told] of young workers whose careers were delayed or substantially derailed by overreaching noncompetition agreements.”  Even assuming all of these stories are true, if the issue is the impact non-competes are having on the Massachusetts economy, the real starting point should be the number of people who actually left the Commonwealth simply to avoid signing a non-compete agreement.  Further, while Senator Brownsberger and Representative Erlich provide no empirical or even anecdotal data with which to make such a determination, an article by Jason S. Wood in the Fall 2000 Issue of the Virginia Journal of Law and Technology does.  That article discussed a study examining the impact that non-competes had on four high technology regions (including Boston and Silicon Valley), and found that there was no correlation between “California’s prohibition of noncompetition clauses… [and] the development of Silicon Valley culture and its associated success…”  

Second, any implication that Massachusetts “routinely” enforces non-competes is misleading.  Under Massachusetts law, a non-compete agreement will only be enforced to protect a company’s confidential information, trade secrets or goodwill.  A non-competition agreement that merely stifles competition is not enforceable under Massachusetts law.  In addition, a former employee may seek to challenge a non-compete on a wide variety of other bases, in which case her right to compete may not be impacted at all unless a judge specifically rules against her.

Third, while California law may preclude non-competes in most instances, the California Court of Appeals, in The Retirement Group v. Galante, makes it clear that even in California, and even without any non-compete agreement, a company can prevent a former employee from competing with it if the former employee is using the company’s confidential information or trade secrets.  So, how much does Massachusetts law really differ from California law in this regard?

Finally, while an enforceable non-compete agreement may very well limit the options that an employee has after leaving a company, if a Massachusetts company was unable to enforce a properly drafted non-compete agreement, an individual might be able to work for just long enough to procure the company’s goodwill and then use that goodwill to give a competitor an unfair advantage over the true owner of that goodwill.  Is that really good for the Massachusetts economy?  A 2009 paper by Joseph E. Coombs and Porcher Taylor suggests otherwise.  In fact, that paper ultimately concluded that:

[T]he legal structure in California that places no restrictions on post-employment activities hinders [biotech] firms’ research and development activities. 

In sum, it would be a mistake to conclude that simply because non-competes have led some Massachusetts employees to have limited options for future employment, non-competes necessarily are bad for the Commonwealth’s economy.  Like many laws, non-competes have pros and cons, and their overall impact can be difficult to quantify.