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Wednesday, October 7, 2009
Industry veterans share their dealings with noncompete agreements
By Galen Moore
Companies born in the recession
MHT's Galen Moore: Hiring trends and opportunities
Flash Slideshow: Mass High Tech All-Stars Thought Leadership Roundtable
State legislators are due to hold hearings on Beacon Hill today — the latest step in long-standing efforts to change the commonwealth’s regulations regarding noncompete agreements. Depending on whom you ask, noncompetes are either a necessary part of doing high-tech business or the albatross that keeps Massachusetts from competing with regions such as Silicon Valley for technology talent and investment. We talked with engineers, lawyers, investors and executives who have seen noncompetes from every angle, and asked them to share their stories on what is, arguably, the tech community’s highest-profile legal issue.
Philip Faulkner
In Philip Faulkner’s world, noncompete contracts are sometimes an indispensible tool. Now managing director at Colospace Inc., a co-located data center provider, Faulkner has a background in high-tech sales that includes stints at EMC Corp. and IBM Corp. When it comes to intellectual property, patents and invention assignment agreements are more effective than noncompetes, he said. But there is no such way to protect the list of customer contacts an account executive carries in his or her memory. Sometimes, competitors will headhunt the salesperson who owns a pending deal to snatch away the opportunity, he said. A noncompete agreement gives a company leverage to negotiate a way to keep departing sales executives from poaching away business as they leave.
“We’ve seen employees go and work with a competitor, and we forced them to go and take a different job, where the information didn’t impact us as much,” he said.
The process almost never ends up in court.
“Most of the time, there are threats from both sides and a compromise is reached.”
Scott Johnson
New Atlantic Ventures managing partner Scott Johnson remembers the time a noncompete stood between him and the founding of a company. “It was basically a napkin-stage deal,” he said. “The company existed as an entity, but its sole operating activity was raising money.”
Attempting to close a term sheet by putting a founding team in place, the company tried to hire an employee who had been laid off by another startup that was on life support, Johnson said. But the employees had all signed broad noncompete agreements. The founder of the former company said she would stand in the way of the hire.
“This was a guy who knew how to do some things that are commonly done on the web, but not that commonly found in Boston,” Johnson said. “He was basically unemployable anywhere if this was the employer’s attitude.”
Johnson declined to name the companies or the employee involved, but said both parties hired lawyers and eventually came to a compromise by modifying the noncompete agreement.
Noncompetes may make sense in certain scenarios, but with the definition of “competition” so fluid, it may be impossible to allow them without causing harm, Johnson said. “The whole thing was a huge waste of time and a huge waste of money.”
George Seward
In 2006, George Seward’s consulting business, Arlington-based L-A Omega Inc., dropped by half in Massachusetts. The contract optics engineer does more business in New Jersey these days — because Bay State companies started demanding two-year noncompetes for every short-term consulting project.
“I’m expected to sign noncompetes during initial discussion, without any compensation,” said Seward, who holds five patents and has two more pending.
With six-month projects being the rule, a restrictive two-year noncompete would be a business-killer for L-A Omega, he said. A former engineer at Innovative Imaging Systems, Seward comes from a Massachusetts technology family. His father, Harold Seward, worked on guidance systems for the Apollo spaceship and wrote the master’s degree thesis commonly cited as the origin of “Radix Sort,” an algorithm used in most search engines. His brothers have worked at Digital Equipment Corp., Raytheon Co. and IBM, respectively.
But noncompetes are testing his roots, Seward said: “Last week, I attended a Yankees game with a client, and I must say, that Derek Jeter is quite a ballplayer.”
Mike Rosen
Mike Rosen has seen the noncompete issue from all sides. A labor and employment attorney at Foley Hoag LLP, he has represented would-be hirers, companies seeking to constrain former employees, and employees trying to make a career move.
In one case, a software engineer he represented was enjoined by a Massachusetts judge from going to work for the company that wanted to hire him. Judges have wide discretion in noncompete cases, Rosen said. In that case, like many, the outcome depended on the judge’s technical understanding of narrow distinctions between technology subsectors.
“I’ve been on both sides of cases, where the decision ended up depending on an individual judge’s ability to grasp whether the person was really going to be doing exactly what he’d been doing previously or not,” Rosen said. “That is, working in a competitive capacity or not.”
Matt Marx
Matt Marx was so affected by his repeat experiences with noncompetes, he decided to make a career studying the controversial employment agreements. An assistant professor at MIT’s Sloan School of Management, Marx looks for empirical evidence as to how noncompetes impact behavior.
His findings? Though legal experts agree most judges would throw out broad noncompetes, Marx said few cases reach the courtroom. “What’s really driving behavior is this chilling effect of people assuming the agreement is valid and then kind of taking evasive action,” he said.
Marx was a speech-recognition user interface designer who moved from California in 1995 to work at Boston-based Speechworks Inc., which later merged with Burlington-based Nuance Communications Inc. Having already moved his family, he didn’t have much choice when presented with a noncompete agreement on his first day of work.
Four years later, he left the company, and got around the noncompete by taking a business-school hiatus.
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