Noncompete pacts called bad for tech innovation

Employee noncompete agreements have stifled tech start-up development in Massachusetts, where the pacts are aggressively enforced, but they've failed to hold back the IT industry boom in states like California, where they are mostly unenforceable, a panel at Harvard University concluded Thursday.

Noncompete agreements, which generally seek to prohibit workers who leave a company from taking a job with a competitor for a fixed period of time, don't necessarily affect new graduates entering their first jobs, according to a panel that included venture capitalists, a Google executive and academics.

But the agreements can stifle innovation because they particularly hurt experienced, specialized workers -- the type of individuals who are often recruited to help guide a start-up, panelists said.

Some instead seek employment in large companies that can defend them against litigation related to noncompete agreements, said Lee Fleming, an associate professor at Harvard who is conducting a research project into the subject.

"They tend to avoid start-ups, which don't have the resources to protect them," he said. Others leave their field entirely, according to Fleming.

However, Fleming repeatedly cautioned that empirical data regarding the effect of noncompete agreements is scant.

That didn't stop Paul Maeder, a general partner in venture firm Highland Capital Partners, from calling them "destructive."

He laid out a hypothetical scenario that banked on the premise a successful company will, over time, spawn five successful start-up companies.

Maeder posited that individuals from those organizations in turn will form their own enterprises, creating a geometric progression resulting in hundreds of companies after just a handful of "generations" -- even accounting for the fact that many start-ups will fail.

"Now what happens if we have noncompetes that discourage start-ups before they even get started? They're the silent killer," he argued.

Other problems surround the way noncompete agreements are created and enforced, said investor Bijan Sabet, a general partner at Spark Capital.

"The experience we've seen is that the employer keeps [the definition of a competing company] really vague, and it causes confusion," Sabet said. The terms of noncompete agreements are often confused or conflated with other types of restrictive contracts workers sign, such as nondisclosure agreements, he added.

While noncompete agreements ostensibly protect a company's interests, legislation is in place to handle "anything tangible that a company would own," said Rich Miner, vice president for mobile technology at Google. "All of that stuff is either patented, copyrighted or somehow protected."

"They don't have the noncompete agreements, and West Coast high-tech companies seem to be doing just fine," he added.

Maeder noted how different the tech climate can be, however, in certain West Coast states that see more enforcement of noncompete pacts.

"I haven't seen any competing operating system companies that came out of Washington," he said, alluding to Microsoft, "or any other online booksellers that are competing with Amazon."

Massachusetts, meanwhile, has a wealth of intellectual and financial capital, but its growth is hindered by noncompetes, Maeder argued.

"It also affects [existing] companies. They get lazy. We really have to think about how sleepy Massachusetts companies have become," he said.

If there is to be any shift in the way noncompetes are handled in Massachusetts, it probably won't come through legislation, Maeder predicted.

"If [any politician] raises their hand on this issue, they will be group-tackled by the CEOs of longtime companies in Massachusetts, and it will quickly die," he said. "Talking to the government is good, but it's not the agent of change here."

Workers need to become savvier, and venture fund officials should convince companies they invest in to stop demanding noncompete agreements, Maeder said, adding that he's going to do more in this regard himself.

One attendee suggested it will be tough to effect change in the state.

"The incumbent companies are vested [in the concept]. It's a cheap way of preventing people from walking out, and it's a cheap way of keeping the cost of engineers down," said Stephen Chow, a Boston attorney.

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Copyright © 2008 IDG Communications, Inc.

  
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