Monday, February 11, 2008

The noncompete conundrum: Holding back Bay State tech, or preserving IP?

By Keith Regan

As an entrepreneur who later became a venture capitalist, Bijan Sabet has seen technology innovation up close and personal. As someone who spent a decade in Silicon Valley and now works in Boston, where he's a partner at Spark Capital, he's also seen geographical differences.

"I saw it in California -- a startup evolves, someone leaves and starts a new company. When I moved back to Boston, I had a feeling the high-tech scene was lagging a bit," said Sabet. He cited statistics that show New England falling behind Los Angeles in terms of tech investments, which he says is evidence that such as discrepancy remains in place.

While policy-makers and politicians have a host of ideas for how to make Massachusetts more competitive, Sabet believes one key policy change could unlock significant innovative energy. Late last year, he helped form the Alliance for Open Competition, a group of venture capitalists and businesspeople who want to see Massachusetts eliminate the enforcement of noncompete agreements -- legal documents that prevent someone from working for a competitor or closely related company after leaving one tech firm.

"Trade secrets need to be protected," Sabet said. "My belief is that things like nondisclosure and nonsolicitation agreements have a role in doing that. But the notion that people can't work in their specialty just doesn't make sense."

Sabet believes the stakes are getting higher for Massachusetts-based companies as more tech firms from outside the region set up offices here to attract the area's talent. "If you're a young grad from MIT and you have a choice to go to work for Google, where there's no restrictions or a local company that's going to restrict where you can go after you leave, that might help make your decision," he said.

In addition to working through lawmakers, the alliance has asked Massachusetts Gov. Deval Patrick for assistance and he has told them the administration would review the issue. Sabet is also hoping firms themselves re-examine the issue.

The issue is getting fresh research thanks to Lee Flemming, an associate professor at the Harvard Business School. Flemming and a doctoral student, Matt Marx, have been studying employment trends in the state of Michigan, which did away with enforcement of noncompete agreements in 1985.

The research has shown that noncompetes do restrict the movement of professionals, and that those who have the most experience are among those who are most impacted, said Flemming, who says that nondisclosure agreements, or NDAs, can be more difficult to enforce than noncompetes.

For Massachusetts, the risk is that people will avoid taking jobs with companies that require signing noncompetes, he added. The most sought-after talent may tend to leave states that enforce those agreements and that will have a "knowledge spillover" impact. Flemming and Marx conclude in a paper on the Michigan example, in fact, that the disparate enforcement of noncompetes "might help explain an agglomeration of talent in nonenforcing areas such as Silicon Valley."

Any legislation to change how Massachusetts approaches the agreements would likely face opposition, as noncompete agreements are still widely used in the region.

"We know there are people who say they need this tool," Sabet said. Many agreements also have a time limit on them, enabling workers to return to the field after six months or a year, though in a true innovation economy, even that amount of time can be costly, Sabet contends.

Patrick Cooley, a spokesman for Hopkinton-based EMC Corp., said "most U.S. employees" sign a noncompete as part of their larger employment agreement.

The Associated Industries of Massachusetts has discussed the issue, but has yet to take a stand on behalf of its members, which include a range of businesses in a variety of fields, said Brian Gilmore, AIM's vice president of public affairs.

While many companies say noncompete agreements are needed to help protect their intellectual property, shifting corporate thinking about IP may actually be more effective at preventing the loss of both ideas and the workers who help develop them, said Nancy Edwards Cronin, principal of ipCapital Group Inc., a Williston, Vt.-based consulting firm.

"If these companies are focused too heavily on attrition and heavy-handed control of the intellectual capital leaving, they very well may not be properly encouraging innovation" themselves, Cronin said.

If companies can find ways to treat their employees and the ideas they help foster in a way that allows for personal development within that company, the noncompetition issue "becomes less relevant" as workers choose to stay and innovate in their existing positions.

A cultural change around the way intellectual property is treated may in fact "ultimately mitigate the need for a noncompete clause," Cronin said.

Keith Regan is a freelance writer in Grafton.