New England VCs Grab Major Role in Campaign Against Non-Competes

5/15/14Follow @curtwoodward

This week, the New England Venture Capital Association threw a big party to celebrate the Boston innovation sector, complete with awards for the hottest startups, rock n’ roll-themed costumes, and hundreds of people packed into a big downtown theater.

It’s exactly the kind of fun event you’d expect from such a trade group, whose members want to promote Boston as a fertile seedbed for high-tech entrepreneurs. But across town, in the more buttoned-down hallways of the Massachusetts capitol, venture capitalists are also engaging in some pretty serious public policy spadework.

Some of the activity is behind the scenes, with advice from political strategists and visits to the offices of lawmakers on Beacon Hill. Some of it’s quite visible, including social media campaigns and online tools that allow supporters to send automated letters to their local legislators.

These are the elements of a serious, modern lobbying campaign. And they’re being deployed around a single issue: getting rid of non-competition clauses in employment contracts.

The topic certainly isn’t new to the Massachusetts innovation community, and to VCs in particular. But the fact that the region’s venture investors have taken a very visible, highly organized leading role marks a new phase in the long-running campaign.

“The folks who were rallying about this before were individual VCs at individual firms, individual entrepreneurs at individual companies. There was no collective. There was no one to staff it,” says C.A. Webb, the NEVCA’s director. “I have made this what I am spending 85 percent of my time on now.”

It’s unclear whether this new phase of political organizing will get the result that VCs and some entrepreneurs are hoping for. But they have a strong ally in Gov. Deval Patrick, who has made junking non-compete agreements a centerpiece of his final term’s economic development agenda.

Like most states, Massachusetts allows employers to hold workers to non-competition agreements, which restrict a person’s ability to leave their company for a competing business, whether that’s an established company or a startup in the same market.

Employers who use such agreements find them vital because they keep competitors from poaching key workers who know intimate details about a company’s business. But venture investors and entrepreneurs have complained that such agreements are overused, and tamp down on the free flow of talent that helps fast-growing, innovative companies stay in business.

As I’ve previously noted, the NEVCA’s emergence as campaign organizer has put a spotlight on some policy fractures in the Massachusetts technology sector. Data storage giant EMC, the biggest tech company in the state by market capitalization, is notably in favor of keeping non-compete laws in place.

Patrick’s proposal would try to soothe some complaints by replacing non-compete agreements with other protections, including adoption of a widely used trade-secrets law, that could give companies the ability to sue workers who are believed to be using confidential information against their former employer.

Such a change would make it more difficult and more expensive for companies to put a lid on secret business information, notes Michael Rosen, a Boston-based employment law specialist with Foley Hoag.

A trade-secrets case, pursued in states like California that ban non-competes, is “generally a much more difficult proposition that takes a lot of time and literally can cost millions of dollars in fees, between lawyers’ fees and experts’ fees,” he says. “You’re trying to unravel whether a competitor has used your information to compete with you.”

So, would junking non-compete agreements make Massachusetts more competitive with California’s booming high-tech economy? It’s impossible to know, but it’s also easy to deduce that no single policy factor has made California the nation’s tech and innovation behemoth.

And recently, Massachusetts has actually seen increasing competition for the No. 2 slot from New York, which has attracted a surge of dollars from tech investors—despite its own enforcement of non-competes.

“They are enforceable here but judges are reluctant to enforce them, and you have to have a good case for enforcement. And I don’t think we’re all that different from New York in that regard,” Rosen says. “It’s not like you go into court and the judge says `OK,’ it’s a rubber stamp.”

However the issue plays out, it’s clear that the early stage technology sector in New England has become much more politically mature.

Last year, software developers and investors were caught by surprise when the state imposed a new sales tax on certain tech services. Although they shouldn’t have been startled—Patrick and legislators had been publicly debating the issue for months—the sector’s quick reaction and loud public lobbying resulted in a stunning repeal of the tax.

Now, it appears the innovation sector is seeing the value of staying engaged with the political world before the laws are already written.

“We’re not going to have an annual platform of issues that we’re trying to rally the Legislature around,” Webb says. “But I think there are a few key issues that help to stimulate innovation across the state, and we’re going to be vocal about those.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • Hyoun Park

    The question isn’t whether a judge will “rubber stamp” a non-compete, but whether you can fight it. My own case: I have a 12-month noncompete. My day in court is scheduled for 17 months after I left my old company. I don’t have the financial means to legally fight this (and fighting a noncompete is a non-trivial matter for an individual to pursue), and there’s currently a “preliminary injunction” prohibiting me from pursuing my line of work, meaning that I’ve already lost no matter what the court finds. And my business idea has just been sitting on the shelf the entire time. That’s the reality of noncompetes: a way for companies with millions of dollars to prevent former employees with thousands of dollars from building a better mousetrap.

    I have no intention of using trade secrets or any information proprietary to my former company, but none of that matters in a non-compete, where former employees are prohibited from simply competing in a free market.