MA Won’t Change Noncompete Law, VCs Pledge to Continue Campaign

7/31/14Follow @curtwoodward

Startups and technology investors in Boston are finding out that political change usually doesn’t happen very fast.

Despite a heavy lobbying campaign coordinated by the state’s venture capital firms, Massachusetts legislators have once again declined to restrict the use of non-competition agreements in the state.

Employers use those contracts to ensure their workers won’t jump ship to join or start a competing company. By signing a non-compete agreement, employees typically pledge they won’t take a job in the same field for a period of months or even years after leaving their current company. They can be sued for breaking the deal.

Technology industry startups and growing companies—and the venture investors who back them—have become increasingly unhappy about the use of non-compete agreements in Massachusetts, saying the contracts are used far too liberally.

Since workers are afraid of getting sued, the argument goes, they’re much less likely to found or join startups and other innovative companies, which are increasingly hungry for engineering talent.

It’s an argument that makes a lot of sense on its face: if you have to threaten your employees with lawsuits to keep them on board, your company probably has a lot of problems. And there are some academic studies backing up the notion that noncompetes can crimp innovation by putting a brake on the free flow of labor to new ventures.

MIT business professor Matthew Marx, for example, surveyed more than 1,000 engineers and found that about a third ended up switching industries entirely after leaving a job that included a non-compete agreement. Marx’s study also found that 70 percent of those surveyed only found out about a non-compete agreement being part of their hiring process after accepting a job.

But employers that enforce non-compete agreements—a group that includes EMC, by far the state’s most valuable tech company—argue that the contracts are needed to keep key employees from walking away with valuable information that could be exploited by competitors.

Supporters of the current law also are able to point out that Massachusetts has one of the best high-tech sectors in the country, and is the epicenter of the current boom in biotech—their counter to the argument that California, the clear leader in the technology industry, has pulled ahead of Massachusetts in part because it makes non-competes much harder to enforce.

Lawmakers deserve “tremendous credit for recognizing that the current law governing non-compete agreements in Massachusetts is working just fine,” said Richard Lord, president of the business lobbying group Associated Industries of Massachusetts.

New England Venture Capital Association director C.A. Webb, who was spending almost all of her time pressing for change to non-compete laws on Beacon Hill, pledged to continue working for reform in the years ahead.

“The interests of our citizens and our state’s economic well-being must come before the protection of power that a few companies enjoy wielding. Our community of entrepreneurs and investors will continue to fight to ban non-competes in Massachusetts,” she said.

It had looked like a compromise change to the law was possible in recent weeks, with the state Senate supporting a policy that would have limited non-competes to salaried employees and barred them from lasting longer than six months, while also adopting new laws protecting trade secrets.

Technology entrepreneurs engineered a stunning 11th-hour political victory last fall, getting the Legislature to overturn a tax on software services that many said would have made their services unable to compete with the prices of companies in other states.

With this issue, however, they’re grappling with a fundamental truth of American government: the system is set up on purpose to make changes slowly, if at all. And when you’ve got major disagreement about an issue within a particular industry, it’s really difficult to collect lots of votes in favor of making major alterations.

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

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