employment, innovation, non-competes

CA Reaffirms that Non-Competes are Non-Starters—Will MA and WA Listen?

Robert Buderi 8/8/08

Updated with additional comment, see below: The arguments have been piling up against non-compete agreements here in the Bay State (and they’re not unknown in our sister city of Seattle, either). Over the past year, we’ve chronicled the debate several times, including an advance look at a debate about the debate held at the Berkman Center for Internet & Society at Harvard Law School. One of the biggest knocks against non-compete agreements has been that they are invalid in California, and that as a result Silicon Valley entrepreneurs are more free to move around and innovate than their counterparts around the country.

Yesterday came word that the California Supreme Court has upheld the state law (dating back to 1872, according to CNET) barring companies except in very specific circumstances from stopping their employees from going to work for a competitor—or even taking clients with them—when they leave for greener pastures.

One of Boston’s leading proponents of getting rid of non-competes is Bijan Sabet, a general partner at Spark Capital who has blogged and spoken out against the practice extensively. Here’s an interview Wade did with Sabet in December. And as the venture capitalist wrote to Wade back in May:

“My position on non-competes is pretty well-known: I don’t like them. I believe that innovation comes from interaction—and that for Massachusetts to thrive as a hub of innovation, we must follow Silicon Valley’s model where non-competes are not enforceable and entrepreneurs are free to innovate without fear of litigation.”

The issue has drawn a lot of attention in Washington state as well. As both Greg and I know from our book Guanxi, about Microsoft’s research lab in Beijing, Microsoft and Google have battled over the non-compete issue. When Microsoft’s former Beijing lab director, Kai-Fu Lee, was hired by Google in 2005, Microsoft sued to enforce Lee’s non-compete clause, which was valid in Washington. Google tried and failed to get the venue moved to California, where of course non-competes weren’t valid. Microsoft’s suit, though, was eventually settled out of court. (Though the one-upmanship continues even today, with the start of the Olympics.)

With California upholding its law, will Massachusetts (and maybe Washington) finally rethink its own practice? I wrote Sabet for his take. Here’s what he wrote back:

“I sincerely hope that MA tech leaders, CEOs, politicians and courts realize that non-competes are stifling innovation and creating a less friendly environment for entrepreneurs in our state. We need to follow CA here. They have the correct model and we don’t. Our entrepreneurs in this state do not have the same rights as their counterparts in California. Open competition creates innovation and is an essential ingredient in the silicon valley ecosystem. Also, I’m convinced that management treats their employees better if they are working in free market. I’ve worked and invested on both coasts so I’ve seen it first hand.

“I am in complete support of non disclosure agreements and non-solicitation agreements which are different than non compete agreements. NDAs and NSAs should be maintained …as they are in CA.”

Update, Aug. 8, 2pm: This just in from Paul Maeder, general partner at Highland Capital Partners in Lexington, MA:

“Non-competes make states, well… non-competitive. It looks like California has taken another step to reinforce their leadership in the innovation economy. As we see the dawn of a new innovation groundswell—cleantech—the Massachusetts political community would do well to take notice. We are the state that invented institutional venture capital and start-ups. These laws are a key piece of the puzzle to letting us re-establish that leadership role. Let’s get going.”