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© 2016 By Boston StartUp CFO

Massachusetts Just Stole An Important Page From Silicon Valley's Playbook

 

In the 1980s, the United States had two major hubs of technology innovation. Everyone knows about Silicon Valley, but the East Coast had a "Silicon Valley" of its own, located along Route 128 in the suburbs of Boston. When Gov. Michael Dukakis touted the "Massachusetts Miracle" in his 1988 presidential campaign, he was largely talking about Boston's high-tech boom.

 

Unfortunately, the Massachusetts Miracle didn't last. During the 1990s, Silicon Valley boomed while Route 128 companies faltered. And researchers have pointed to a surprising culprit: Massachusetts law strictly enforces agreements that prohibit employees from taking jobs at competing companies. In contrast, California law banned these restrictions, making it easier for Silicon Valley startups to form and to recruit talent from larger companies.

 

But Massachusetts policymakers are now re-thinking the state's permissive rules on noncompete agreements. On Wednesday, the state House passed a bill placing new limits on the enforcement of noncompete agreements that will now go to the state Senate for consideration.

 

And other states have undertaken similar endeavors. Their efforts have been driven not only by concerns about innovation but also by concerns about basic fairness. Noncompete deals have also been used against low-wage workers making sandwiches and packing boxes in warehouses.

 

"Employees are increasingly asked to sign noncompete agreements across all industries, across all types of positions," says Orly Lobel, a legal scholar at the University of San Diego. "In the past it was only very sensitive jobs. Now we're seeing them as standard clauses in so many employment contracts."

 

More research is needed, but the evidence so far suggests that these agreements are bad for innovation, entrepreneurship, and worker freedom. The question is whether states will follow California's lead and refuse to enforce them.

 

High-tech thrives in a non-noncompete state

 

Route 128 was the home of computer companies like Digital Equipment Corporation, Wang Laboratories, and Prime Computer. They made minicomputers — washing machine–size devices that were only "mini" compared with the room-size mainframes that preceded them.

 

These companies faced growing competition from dramatically cheaper "microcomputers," known today as PCs, some of which were designed by Silicon Valley companies like Apple. Route 128's tech giants never found a good response to the PC threat, and it drove most of them out of business by the end of the 1990s. At the same time, of course, Silicon Valley was thriving.

 

Why did Silicon Valley boom while Route 128 fizzled out? In an influential 1994 book, political scientist AnnaLee Saxenian argued that the difference was cultural. In Boston-area technology companies, engineers expected to work for one company for life. In the San Francisco Bay Area, by contrast, it was common for workers to hop from one company to another — and even to found new startups that competed with their old employers.

 

In 1999, legal scholar Ronald Gilson identified a key reason for this cultural difference: Most states, including Massachusetts, enforce noncompete agreements. California doesn't. The result was a strikingly open culture in the Bay Area. Companies couldn't prevent their employees from going to another company — or starting their own — which in practice meant it was very difficult for companies to keep secrets.

 

Not everyone is convinced by this story, however.

 

Ted Sichelman, a scholar at the University of San Diego, is one skeptic. "The major reason we posit for Silicon Valley's ascendence is that Route 128 was focused on the minicomputer and Silicon Valley was focused on the PC," Sichelman told me in a recent interview. "We all know what won out."

 

But the Bay Area technology cluster has proven resilient to the declining fortunes of the PC industry in the face of competition from smartphones, and Silicon Valley's job-hopping culture might be an important reason for this. Intel, for instance, was started in 1968 by former employees of an earlier electrics firm called Fairchild Semiconductor, which in turn was founded by employees of Shockley Semiconductor. More recently, members of the "PayPal Mafia" went on to found Tesla, YouTube, LinkedIn, and Yelp.

 

This gives Silicon Valley a resilience that was absent from the Route 128 technology cluster. Because employees are free to jump ship to work at or even found a startup, whenever an established company stumbles there are plenty of hungry new ones eager for talent.

 

Noncompetes for low-wage workers

 

Critics of noncompete agreements have been pointing to the Silicon Valley experience for more than a decade. But more recently, they've also raised the alarm about low-wage workers being forced to sign noncompete deals.

 

Take Benny Almeida, for example. He was thrilled when he got an offer for an $18-per-hour cleaning job in the Seattle area — a big step up from the $15-per-hour job he had taken a few months earlier at a competing company.

 

There was just one problem, as the Seattle Times explained in a 2014 story: Almeida had signed an agreement promising not to work for a competitor in the area for two years. After Almeida switched jobs, a lawyer from his old employer, ServiceMaster, sent him a letter threatening a lawsuit if he didn't quit.

 

The company told the Seattle Times that the noncompete agreement was necessary because ServiceMaster had provided Almeida with valuable training. Almeida says that's nonsense — it was an entry-level cleaning job that didn't require much in the way of specialized skills or knowledge.

 

"I’m a helper," Almeida told the Times. "I come to work and get my orders and follow them. I figured I was way too far down the ladder to matter."

 

The same year, the Huffington Post reported that Jimmy John's was requiring its sandwich makers and delivery drivers to sign a contract promising not to work for a competing sandwich maker — "any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches" — within 3 miles of any Jimmy John's location for two years after leaving the company.

 

I WASN'T ABLE TO FIND ANYONE WHO WOULD DEFEND IMPOSING NONCOMPETES ON PEOPLE WHO MAKE SANDWICHES OR PACK BOXES IN A WAREHOUSE

 

Amazon has required even temporary, minimum wage workers in its warehouses to sign noncompete agreements. A Massachusetts summer camp banned its counselors from working at a competing camp the following summer.

 

While experts disagree about the merits of noncompetes for high-tech workers, I wasn't able to find anyone who would defend imposing them on people who make sandwiches or pack boxes in a warehouse. It's hard to believe that Jimmy John's is really worried about its sandwich-making secrets leaking to a competitor. Instead, Orly Lobel argues, noncompete agreements simply give low-wage employers more negotiating power by making it harder for employees to switch to another company offering higher pay or better working conditions.

 

Making things worse, less-educated low-wage workers are less likely to fully understand contract language and much less likely to be able to afford a lawyer to help advise them.

 

There's growing momentum to limit noncompete agreements

 

Massachusetts — where the once-great Route 128 innovation corridor may have been strangled by noncompete agreements — is one of several states where legislators are considering action against noncompete abuse.

 

The new Massachusetts proposal doesn't go as far as California's law and ban noncompetes outright. But it does include several important reforms, according to the Springfield Republican. Under the legislation, noncompetes could not last for more than a year, and could not be imposed on college students, employees who are fired or laid off, or most hourly employees.

 

If approved by the Massachusetts Senate and signed by the governor, the legislation could be among the most ambitious in the country. Hawaii banned noncompete agreements last year — but only for technology jobs. New Mexico banned noncompete agreements for health care professionals. Oregon recently banned noncompete agreements longer than 18 months, while Utah limited the agreements to one year.

 

However, none of the states that have reformed their laws recently have gone as far as California, which bans noncompete agreements outright. Proposals to do that in Pennsylvania and Washington state have not gained traction, in part due to opposition from business groups.

 

There is also interest in this issue at the federal level. Last year, Sen. Chris Murphy (D-CT) and Sen. Al Franken (D-MN) introduced legislation to ban the use of noncompete agreements nationwide for workers making less than $15 per hour. The Treasury Department released a study in March examining the problems created by noncompete agreements and suggesting modest reforms to the agreements.

 

The best argument against noncompetes is about freedom

 

Could the success of Silicon Valley simply be a coincidence that has little to do with its noncompete law? There are a few empirical studies looking at the economic impact of states' noncompete rules. One study found that Michigan suffered from "brain drain" after it began enforcing noncompetes more strictly. Another found that venture capital goes further — leading to more startups and more job creation — in states that don't enforce noncompetes.

 

Still, Evan Starr, an economist at the University of Maryland who has studied the economic impact of noncompete agreements, describes the evidence on the impact of noncompete agreements as "relatively thin."

 

The strongest argument against enforcing noncompete agreements might have less to do with innovation than with freedom. We generally think it's a good thing for employees to have the freedom to work where they like. And the courts have generally looked with suspicion on contracts that limit competition.

 

So absent compelling evidence that noncompete agreements promote innovation — and at a minimum, California proves that noncompete agreements aren't necessary for a thriving high-tech economy — there should be a presumption in favor of preserving people's freedom to join a new company or start one of their own.

 

 

 

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