Non-Compete Debate Exposes Political Rift in Boston Tech Industry
Technology entrepreneurs and investors have long criticized non-competition agreements in Massachusetts, saying they stifle the ability of smart, ambitious people to create new companies and find better jobs.
But, for the most part, they’ve lacked a powerful political ally to push the cause.
That changed Thursday, when Gov. Deval Patrick said he would seek to have non-competition agreements outlawed in the state. In their place, he proposes a trade-secrets protection law that is already in place in 47 states and the District of Columbia.
The issue is just one piece of a wide-ranging economic development package from Patrick, who is at the tail end of his last term. But it’s quickly shedding light on a major rift in the Massachusetts business community, and the technology sector in particular.
By pushing to end non-competes, technology entrepreneurs and their financial backers are facing off against plenty of big companies and trade groups that have opposed similar efforts in the past. At the top of that list is data-storage giant EMC (NASDAQ:EMC), a supporter and enforcer of non-compete agreements whose $55 billion market capitalization makes it the most valuable technology company in Massachusetts by far.
As EMC general counsel Paul Dacier told The Boston Globe in response to Patrick’s proposal, “The legitimate business interests of companies in Massachusetts are well served by the longstanding case law that allows covenants not to compete.”
Non-competition agreements, which generally give a company the power to sue an employee who leaves to work for competitor, are regularly cited by entrepreneurs and venture capitalists as a brake on innovation in Massachusetts.
Supporters, however, argue that Massachusetts’ technology sector has managed to become one of the best in the country under the current rules, and that non-competes are essential to preventing unfair looting of important trade secrets by simply hiring away top workers.
But money is flowing freely in the tech sector, with a relatively active IPO market and companies like Facebook, Yahoo, and Google buying up smaller companies almost routinely, sometimes with gaudy pricetags attached. That’s intensified Massachusetts’ competition with New York, which has marshaled investment cash to help it boost a growing technology sector.
With that backdrop, some insiders say non-competes are clearly holding Massachusetts entrepreneurs back—in New York, non-competition clauses are generally difficult to enforce, while in California, where they are largely banned by law.
Bijan Sabet, a top Boston-area venture investor with Spark Capital, has invested in huge tech-industry names like Twitter, Tumblr, and Foursquare—none of which are based in Massachusetts. And while he does have some notable Boston-area investments such as RunKeeper, Sabet wrote Thursday that VCs will regularly pass on Massachusetts companies if there’s a risk of lawsuits over talent.
“Boston VCs have tremendous capital under management. Much more than NYC VCs,” he wrote. “Yet, we invest mostly out of this state. We see founders all the time that want funding but we aren’t prepared to deal with legal risk, so we pass on those opportunities.”
The early campaign against non-competes appears to have serious backing from the New England Venture Capital Association, which has set up a website to help entrepreneurs and tech enthusiasts send letters supporting a ban on non-competes to their local legislator.
The issue will be a test of the political savvy of up-and-comers in the Boston-area tech industry. Last year, small software companies and their supporters were largely clueless about a multimillion-dollar sales tax increase on their businesses until it was already signed into law. But they bombarded Beacon Hill with outraged reaction, and got legislators to repeal the tax hike in a stunningly quick turnaround.
State Sen. Will Brownsberger, who has led recent unsuccessful efforts to get rid of non-competes in the state, said Patrick’s support is a key moment that supporters of change shouldn’t waste. “The tech community and those who favor meaningful reform of non-competes need to take advantage of this opening,” Brownsberger said.
Brownsberger’s point about timing is spot-on because, although he didn’t say it, the truth is that Patrick is a lame-duck governor. Come January, there will be someone else in the governor’s office, and the former occupant’s priorities won’t mean much anymore.