Today marked a milestone in the legislation relating to non-competes in Massachusetts. The Joint Committee on Labor and Workforce Development held its public hearing on two house bills that would attempt to redefine the rules governing “restrictive employee covenants and non-compete agreements.”

This effort began in early January when Rep. William N. Brownsberger (24th Middlesex District) filed House Bill No. 1794, which would effectively prohibit restrictive employee covenants in line with similar provisions in the State of California. Rep. Lori Ehrlich (8th Essex District) also filed House Bill No. 1799, which made significant clarifications to non-compete agreements in line with the State of Oregon. Subsequently, compromise legislation was drafted by Rep. Brownsberger and Rep. Ehrlich.

A good summary of the salient points of this bill can be found at the Trade Secret and Noncompete Blog that is run by Russell Beck of the Foley and Lardner law firm, who participated in the drafting of this legislation.

The hearings on non-competes began with introductions by Rep. Ehrlich and Rep. Brownsberger, who cited complaints over abusive and over-reaching non-compete agreements. They highlighted the fact that the current law is over 200 years old and the rewrite has been long overdue. Attorney Russell Beck and Robert Mantell of the Massachusetts Employment Lawyers Association provided a detailed summary of the compromise legislation and described the key provisions of the bill.

At one end of the spectrum, the committee heard from those who made the argument that the original Brownsberger-Jehlen Bill No. 1794 was “the only ethical thing to do.” The committee also heard testimony from those who felt that the “200 years of jurisprudence” was perfectly adequate and did not need any change.

Up until now, the discussion of these changes has been largely in the blogosphere, and the participants represented members of the high technology sectors of the industry. At the hearing however, members of the non-high technology sectors and small businesses presented strong argument against the proposed changes.

“Talented individuals are leaving the state in large numbers because they see non-competes as unfair,” said one concerned individual who favored changing the current law. “I am willing and able to work but no one will hire me because of the …Next Page »

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A bill proposing restrictions on non-compete agreements in employment contracts in Massachusetts will have its first hearing on Beacon Hill next week, after nine months of discussion, revision, and compromise.

The state legislature’s Joint Committee on Labor and Workforce Development will hear comments on the bill, introduced by State Representatives Lori Ehrlich and Will Brownsberger, on October 7. Called the Noncompetition Agreement Act, the bill would make non-compete agreements unenforceable for employees of Massachusetts companies who earn less than $75,000 per year. The agreements—which are often used by employers to prevent former employees from going to work for competitors or from starting competing firms during the first year or so after they leave—would still be enforceable for employees who make more than $75,000, but only when employers can show the agreements are needed to protect trade secrets, confidentiality, or goodwill.

It’s the third such bill to circulate on Beacon Hill this year. Two related bills, one from Ehrlich that would have prohibited non-compete agreements for employees making less than $100,000 a year and one from Brownsberger that would have banned the agreements altogether, will technically be up for discussion at the hearing. But Ehrlich and Brownsberger are focusing their reform effort on the new, joint bill, a revised version of which was released this week.

The bill itself hasn’t changed much since the previous revision, which we wrote about in July; the big news then was that Brownsberger, in an effort to round up more support for non-compete reform and head off objections from the business community, had joined with Ehrlich in calling for restrictions—rather than an outright ban—on non-compete agreements. Russell Beck, an attorney with Boston-based Foley & Lardner who has been helping Ehrlich and Brownsberger …Next Page »

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Gregory Bialecki is Massachusetts Governor Deval Patrick’s Secretary of Housing and Economic Development, and leads an ungainly collection of agencies charged with everything from promoting affordable housing in Massachusetts to attracting international business investment to the state. Here at Xconomy, we cross paths with Bialecki quite a bit, since he’s also responsible for many of the state’s initiatives to support high-tech innovation and greater collaboration between business, academia, and government.

I interviewed Bialecki at length last week, and in Part One of our conversation, published yesterday, I asked him how his work as an attorney specializing in real estate development and land-use permitting related to his current business-development role for the state. We also talked about the roles state government can play in promoting innovation. Bialecki said the Patrick Administration has spent much of the past two years simply helping players in various technology sectors to recognize that when it comes to working with business, state government can play a supportive rather than an adversarial role.

In particular, we were talking as Part One closed about the state’s obligation to help business by improving the quality of science, technology, engineering, and math education for young people. In this second half of the interview, I pressed him for more examples of things state government can do to accelerate innovation. And we went on to talk about the need for more funding to move ideas from the lab bench to early-stage commercialization, the debate over non-compete agreements in employment contracts, and the Administration’s progress drafting new business regulations on protecting consumer data.

Xconomy: I think it’s pretty easy for everyone to agree on the importance of science and engineering education. But what are some of the other parts of this innovation agenda—things that maybe are not so easy to agree on?

Secretary Bialecki: There are other aspects of the innovation ecosystem, if you will, where I think we can play a partnering role. When it comes to thinking up great ideas, Massachusetts is fantastic. But when it comes to converting those good ideas into commercial products and services, we need to do a better job. The way to do that is a collaboration between business and academia and government to look systematically at the ways we do that. In other words, what great ideas are behind the university walls right now that aren’t coming out? When I describe the state government [as] having a partnering role, in many cases it’s as simple as being a convenor or facilitator. So, for example, the Governor, who is very interested in innovation, has the capacity to say to all of the public and private universities, “Can we get together and compare notes and talk about how we are commercializing our ideas? Who has the best practices and are there things we can learn from each other? Are there things the state can do to make public universities better at it?”

That’s one of the things we are focused on—learning from universities and businesses the ways we can make these connections better and literally get good ideas out of the lab and into …Next Page »

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If you’ve seen from the inside how technology startups get created and funded, you know that law firms are involved at every step in the process. But to outside observers, it might be surprising just how central a role the attorneys can play—not just by helping entrepreneurs with incorporation papers and the other legal rigmarole of starting a business, but by connecting them with the right venture capital firms and making sure investments are structured fairly for both the founders and the venture funds. And while nobody likes to pay legal fees, a good outside attorney can literally save a company when things start to go south: an experienced firm can help straighten out founder-investor conflicts or line up emergency financing, for example.

Given that Boston was the birthplace of venture financing, it’s probably not surprising that it’s also home to a large group of law firms specializing in company creation and financing. Indeed, you can’t go far in the startup world without bumping into names like Cooley Godward Kronish, Edwards Angels Palmer & Dodge, Foley Hoag, Foley and Lardner, Goodwin Procter, Mintz Levin, Proskauer Rose, Ropes & Gray, Nutter, and Wilmer Hale (see tables on this page and page 4). Several of these firms are home to former partners from Testa Hurwitz, the Boston firm that more or less invented the modern corporate technology practice; Testa launched and represented scores of Boston-area startups, venture capital funds, and technology giants between its founding in 1973 and its dissolution in 2005.

Last week I sat down with Tom Burton and Lewis Geffen, two attorneys from the corporate practice at Mintz Levin’s Boston office, to hear more about how law firms fit into the local innovation ecosystem. Founded here in 1933 by Herman Mintz, Benjamin Levin, and Haskell Cohn—three Harvard Law School graduates turned away by Boston’s white-shoe firms because they were Jewish—Mintz Levin now has nearly 500 attorneys, making it Massachusetts’ fourth-largest law firm. It has long represented Biogen Idec—one of the first big biotechnology success stories—and was intimately involved in AOL’s acquisition of Time Warner in 2000. The firm also has major operations in San Diego. And under Burton’s direction, it has developed a booming practice representing clients in the energy and clean technology sectors on both coasts. Many of the firm’ clients turn up regularly in these pages, including EnerNOC, Greatpoint Energy, FloDesign Wind Turbine, General Catalyst, and Rockport Capital.

At Mintz Levin’s office near San Diego’s Carmel Valley, partner Carl Kukkonen tells Bruce, “We represent a lot of small, pre-funded venture-backed companies as well as multi-nationals.” Kukkonen, who was among the lawyers to open the San Diego office in 2006, adds, “I like to tell people I was working with solar, fuel cell, and battery companies before I ever heard of the term ‘cleantech.’”

From Mintz Levin’s 43rd-floor conference room at One Financial Center in Boston, one can peer down on the Federal Reserve building, the Custom House Tower, and every downtown landmark. It’s a far cry from the brick warehouse district of Kendall Square where we scribes at Xconomy spend most of our time—but the visit was an interesting reminder, for me, of all the high-level networking, negotiation, advice, and other homework that goes into getting a technology startup off the ground.

In my interview with Burton and Geffen, portions of which are transcribed below, we covered everything from the state of the cleantech industry and the challenges of working for both startups and venture funds to non-compete agreements and that old chestnut, the difference between East Coast and West Coast investing cultures.

Xconomy: Explain to me how Mintz Levin wound up developing an energy and cleantech practice.

Tom Burton: One thing that’s interesting about Mintz is the entrepreneurial nature of the firm itself, and the way it moves into markets that other firms haven’t placed a bet on. I was pitched that back when I joined the firm in 1996, and I chose Mintz over a lot of safer bets like the Skadden Arpses of the world.

Lewis Geffen: At Sherman and Sterling in New York, where I spent my first five years, no one ever thinks “I have to produce business somehow.” At Ropes & Gray or Wilmer Hale, new associates are simply given work. Whereas we teach “business development 101″ to our associates. It’s part of our fabric here.

TB: For me, all I knew was that I wanted to build something that hadn’t been built before. I wasn’t sure what it was going to be, but I trusted in the firm’s pitch, and took advantage of some luck. When I was a second-year associate, I brought in my first client, who …Next Page »

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The argument over non-compete clauses in employment agreements is front and center in most discussions over ways Massachusetts can square up better against Silicon Valley. Proponents of getting rid of non-competes argue that they curtail innovation. Fearful of getting sued when they leave their employers, so the theory goes, would-be entrepreneurs either forego starting their own companies or move to places like California where the courts don’t enforce non-competes.

Massachusetts state Representative Will Brownsberger and Xconomist Tim Rowe, CEO of the Cambridge Innovation Center, have both advocated getting rid of non-competes. Brownsberger filed a bill early this year seeking to outlaw them altogether, but last month teamed with fellow representative Lori Ehrlich to file a compromise bill that would limit, but not outlaw non-competes. Just five days before news of the compromise bill came out, Rowe contributed a post to the Xconomist Forum detailing his own views on why non-competes should be banned.

Rowe’s post attracted quite a few comments. But this past Saturday, Brownsberger kicked off a new round of discussion in the comment stream by raising a question about Rowe’s interpretation of venture investment trends in California and Massachusetts.

Rowe responded right away, and both dived deeper into venture data to come to an interesting and very collegial understanding that they also shared with readers. One conclusion was that if you look at venture investment data over the past 15 years, there really isn’t evidence one way or another that non-competes hinder Massachusetts startups. As Rowe wrote: “I agree with Will’s analysis: measured from 1995-2009, the ratio of VC investment in California to New England is almost exactly flat, and since non-compete policy didn’t change over this period, we can’t infer anything about non-competes relative to VC investment.”

Their discussion raised other questions—including wondering why Massachusetts seems to have lost share in more recent years to California after gaining ground from 1995 to 2002. In the end, Rowe and Brownsberger seem to agree that the venture data itself is ambiguous, and that it’s important to look at other information—such as the actual experiences reported by employees, investors, and business leaders—to gauge the impact of non-compete agreements. Since this all happened on a summer Saturday, and since they are looking for some more insights from others, I thought I’d point it out. You can find the comment stream here.

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[Updated with extensive comments---see pages 2 and 3] In a message posted yesterday on his “Mass Innovation” blog, Massachusetts Secretary of Housing and Economic Development Gregory Bialecki says the case for outlawing noncompete clauses in employment contracts in the state is not yet “sufficiently proven” for Governor Deval Patrick’s administration to throw its weight behind proposals to ban or modify them.

It’s the first time a member of the Patrick Administration has come down on either side of the noncompete debate, which has been heating up in business, investment, and legislative circles over the past year.

In past comments, Governor Patrick himself has said that his administration has no particular stake in preserving existing Massachusetts law, which allows employers to make new workers promise they won’t switch to competing companies or start their own competing businesses for a year or more after they depart. Critics of the practice argue that it retards innovation, and that states where courts don’t enforce such clauses, such as California, have an economic advantage over Massachusetts.

In his post, Bialecki says the Administration is “aware of the arguments in favor of changing our current situation,” including the California example, academic studies showing that noncompete clauses slow entrepreneurial activity, and arguments lodged by local business and investment leaders such as Tim Rowe of the Cambridge Innovation Center and Bijan Sabet of Spark Capital. (Rowe, Sabet, and State Representative Will Brownsberger have all shared their reactions to Bialecki’s post with Xconomy; see below.) Bialecki calls a change in the law around noncompetes a “potentially intriguing” way to support innovation in the state.

However, the post also lists seven reasons for leaving the current law around noncompetes intact. To boil them down: change would be disruptive; many technology industry insiders are against it; even some small startup executives and venture capital partners favor the clauses; employees harmed by noncompete agreements are often the victims of “unreasonable or overzealous abuses”; it would be better to wait for economic recovery to make such a change; and the market might correct the problem on its own, “if companies that don’t require non-competes make a big deal of this issue and thereby recruit talent more successfully than those that do.”

Bialeck concludes: “On balance, we don’t yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem. But we will continue to keep on top of the debate.”

In remarks yesterday at Microsoft’s New England Research and Development Center, Massachusetts Attorney General Martha Coakley (an elected official who is not appointed by the governor) appeared to take a somewhat more favorable stance toward …Next Page »

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[Editor's Note: Bijan Sabet of Spark Capital has kindly allowed us to cross-post this entry from his blog reacting to news today of a draft bill proposing compromise language on noncompete agreements in Massachusetts.]

My partners and I have been pushing to end the use of employee non-compete agreements for some time now.

We passionately believe in this issue and back in late 2007 I wrote that we should end these non-compete agreements. We planned on starting with our firm and then encourage our portfolio companies, entrepreneurs and other VCs to end this practice as well.

A few months later I wrote a guest post on GigaOm and also we started the Alliance For Open Competition. The idea was to start a grass roots effort to get rid of these things (n.b. we believe in protecting employers through the use of non-disclosure agreements, non-solicitation agreements and intellectual property governed by patent law). We were thankful that in a relatively short period of time prominent investors and entrepreneurs joined the cause and started speaking up.

Recently the Boston Globe Sunday Editorial took on this issue in their column—”Clause For Concern.”

I was pleased earlier this year when I was contacted by Rep. Brownsberger who was leading an effort for reform on this issue. Rep. Brownsberger and a team created House Bill 1794 which as originally drafted would give employees and employers the same protections that exist in California. I participated in a few sessions and was thrilled with the leadership of this bill. As a result our firm, Spark Capital formally endorsed this bill. I have huge respect and admiration for Representative Brownsberger.

Sometime over the last week or so that bill was modified significantly. The revised draft is on Rep. Brownsberger’s website. In our view, the revised changes won’t solve the problem in our humble opinion because they simply don’t go far enough to reform and create real change.

Here’s the principle changes they made last week:

1. Employees who make under $50k are free of non-competes. If you make more than that you are subject to a non-compete.

2. The revised draft requires that employers give advance notice that they will require non-competes in their offer letter.

3. Punish overreaching by employers by awarding attorney fees to the employee whenever an agreement is reformed or found unenforceable.

* * *

My reaction:

1. I don’t understand or agree with this new threshold of $50k/year. It will leave out plenty of entrepreneurs and employees.

2. The advance notice doesn’t help if every Massachusetts company requires non-competes.

3. Point #3 puts a huge risk on the entrepreneur/employee on the expense front. Who wants to fund a lawsuit? Even if it’s frivolous. Legal fees are expensive and they create a …Next Page »

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On snowy days in certain neighborhoods of our great city it is not unusual for someone to put an old trash can in an on-street parking space that they have recently cleared. We all know there is threat implied: if you take the spot, you will regret it. Given the effort expended to clear the spot, the person who did all the work may feel justified in blocking others from taking it. But we all know that this tends to screw things up for everyone. Pretty soon cars circling looking for parking spaces clog the roads, and nobody can get home, even if they have blocked a spot.

This is a textbook example of the classic “tragedy of the commons” problem, in which following our personal self-interest eventually screws things up for everyone.

I believe the use of non-competes falls into the same category. By laying claim to our best employees, and keeping them from working for others, our economy becomes less agile, many of our best employees get tied up in what may not be the best job for them, and their only option is to move to a state that prohibits non-competes.

Don’t get me wrong. I use non-competes in my business, and nearly everyone else I know does, too. Non-competes are in our individual self-interest. The problem is just that they probably aren’t in our collective interest.

In states where non-competes are unenforceable, such as California, we know from our brethren there that employees rapidly gain experience, moving from company to company in quick succession. One of the results of this is that the best people quickly flock to the best companies as they start to show promise. This may be one reason that the world’s tech powerhouses like Google and Cisco disproportionately come from California.

While one could argue that banning non-competes hurts California companies individually, empirical evidence seems to suggest that the system benefits to society collectively outweigh this. In addition to the observation that the Googles and Ciscos of the world tend to grow more commonly in California, it also appears that investors are most happy to put their money there. Venture capital investment there has grown much faster there in the past decade than it has in Massachusetts, reaching a level now that is about three times that of Massachusetts.

This problem is not just theoretical. It is practical, and personal. Twice in the last few months, I have seen cases where great employees were prevented from working for the company that could make the best use of their talents. In one of these cases, the current employer was effectively out of business, although not yet legally dissolved, and for reportedly emotional reasons suggested it would litigate if the employee in question moved to a healthier company in the same industry. This scared off the new employer, who simply didn’t want the legal risk. The employee had to switch industries to take a new job.

Years ago, one of our executives left my employ at Cambridge Innovation Center. I was somewhat concerned that he would help others compete with us, and I reminded him of his non-compete. Not long after, I learned he had moved to California. While this may have benefitted my firm, it was clearly not good for Massachusetts.

I believe movement from company to company is a form of innovation pollination, and we should encourage it. It is time for our lawmakers to ban non-competes.

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The directors of Foundry Group, a Boulder, CO-based venture firm, have signed on as supporters of the Alliance for Open Competition, a group lobbying to outlaw the use of non-compete clauses in employment agreements in Massachusetts and other states.

The alliance, founded last year by partners at Boston’s Spark Capital, argues that the non-compete clauses imposed by many Massachusetts employers stifle innovation by preventing entrepreneurs with good ideas from setting up new businesses that might be seen as competing with those of their former employers. Such agreements are unenforceable in California—a fact that may aggravate brain drain from New England to the West Coast, in the view of many people active in the local entrepreneurial scene.

Today Foundry managing directors Brad Feld, Seth Levine, Jason Mendelson, and Ryan McIntyre added their names to the list of venture capital partners supporting the alliance. Spark partner Bijan Sabet announced the additions in a Twitter post today.

But why would a Colorado firm care about non-compete clauses in Massachusetts? I pinged both Sabet and Feld today for answers.

In an e-mail, Feld explained: “Since we invest all over the US (including MA) we are motivated both by MA specific reasons as well as our strongly held beliefs that broad-based non-compete agreements are inhibitors of innovation.”

And as Sabet pointed out, Feld is a founding member of TechStars, a Colorado-born startup incubator program that recently opened a Boston branch. “So he cares about this state,” Sabet said.

Here’s a rundown of all VC partners who have now joined the Alliance for Competition:

Bijan Sabet, General Partner, Spark Capital
Brad Feld, Managing Director, Foundry Group
Dennis Miller, General Partner, Spark Capital
Gwill York, General Partner, Lighthouse Capital Partners
Jeff Fagnan, General Partner, Atlas Venture
Michael Feinstein, Managing Director, Sempre Management
Michael Greeley, General Partner, Flybridge Capital Partners
Mike Tyrell, General Partner, Venrock
Jason Mendelson Managing Director, Foundry Group
Paul Conway, General Partner, Spark Capital
Paul Maeder, General Partner, Highland Capital
Ryan McIntyre, Managing Director, Foundry Group
Santo Politi, General Partner, Spark Capital
Seth Levine, Managing Director, Foundry Group
Todd Dagres, General Partner, Spark Capital

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The X Factor, which debuted last week without yet having a name, is a mostly weekly column featuring conversations with local innovators, entrepreneurs, and investors.

It’s a legendary story of doom here in Boston (folks around here kind of like gloomy stories)—how the local VCs passed on this idea called Facebook, the kids from Harvard moved west, and…the friggin’ Valley beat us again. It’s safe to say this story is trotted out dozens of times each year to show how Boston VCs don’t take risks, don’t do early stage, don’t understand consumer Internet businesses. In short, it’s the poster child for how New England missed the social media revolution.

But let me say here and now that this hackneyed story is passé, as old and behind the times as analog dialup.

I’ve felt this way for some time, but it was driven home to me during the recent Twitter craze. For one thing, although Twitter is based in San Francisco, its first venture investors were from the East Coast—and Bijan Sabet, a general partner at Boston-based Spark Capital, is nicely perched on its board.

But the presence of Boston-based VCs on the social Internet and new media scene hardly ends with Twitter. Depending on how you define the field, you can find Boston VCs behind a host of such investments, both in East Coast firms like Eons and Hunch (General Catalyst), and in West Coast companies such as social news site Digg (Highland led the Series C round last fall) or Metacafe (also Highland), and even Facebook (Greylock Partners, albeit out of its San Mateo office with partner David Sze, who also invested in Digg and LinkedIn). And that’s a quickly culled, very short list.

Among local firms, Spark, Polaris Venture Partners, and (to a slightly lesser extent) General Catalyst Partners, which has just brought in Facebook co-founder Chris Hughes as entrepreneur-in-residence, are leading the way in social media. I profiled Hughes in his new role at GC in last week’s debut column. So this week I am going to look at Spark and Polaris (I promise Web/media investments are not the focus of this column—I just want to get us beyond this Facebook meme once and for all). Between them, the two have amassed an array of new media investments that run from tweeting to blogging to Internet TV. (See my still-incomplete lists at the end of this article.)

The two most prominent social media investments by these firms are Twitter, in Spark’s case, and, for Polaris, Automattic (the company behind WordPress, the leading blogging platform). So I sought out the partners who made these investments—Sabet and Polaris general partner Mike Hirshland—for their take on my premise that it’s time to put the Boston-Facebook story behind us. I also asked them how their social media/consumer Internet deals came about, where they think Boston stands now in this arena, and whether New England could ever hope to compete with California in grooming social media companies (there is some reason for optimism on this front—read on).

Here’s my report.

Both Sabet and Hirshland agree that the center of gravity for social media companies is clearly on the West Coast—no surprise there—and tell how it takes a concentrated effort on …Next Page »

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Massachusetts Representative Will Brownsberger filed a bill today calling on the state legislature to outlaw the non-compete agreements that prevent many Massachusetts residents who leave their employers from finding work at similar companies.

The brief bill, entitled “An Act to Prohibit Restrictive Employment Covenents,” would amend Section 19 of Chapter 149 of the General Laws of Massachusetts, which deals with general employment provisions. It renders void and unenforceable “any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended.” Violators would be liable for the affected employee’s attorney fees. (We’ve reproduced the full text of the bill on Page 2.)

I first wrote about the pending bill last month. Brownsberger, who represents the 24th Middlesex district, including parts of Belmont, Cambridge, and Arlington, said then that he’s primarily interested in helping service workers such as telephone agents, who often leave their positions only to find that the non-compete clauses in the employment agreements prohibit them from finding comparable positions in their industries. “I’m concerned that these agreements are often entered into by employees who are at a substantial bargaining disadvantage,” Brownsberger said.

But non-compete agreements are also the subject of debate in the entrepreneurial community. Critics such as Bijan Sabet, a general partner at Spark Capital in Boston, have said that they retard innovation and hurt Massachusetts startups relative to their rivals in states like California, where non-compete agreements are illegal.

In a recent blog post, Richard Tibbetts, a co-founder and software architect at Lexington, MA-based StreamBase Systems, called Brownsberger’s proposal “a simple legislative change which will cost the government little and have a big impact on Massachusetts competitiveness.” Tibbetts posted the text of a letter he wrote to his Congressional representative, Sean Garballey, urging him to support Brownsberger’s effort. The letter says in part:

In some cases, potential employees have declined to pursue discussions with me, fearing legal repercussions from their previous employer. In other cases, employees have requested that they not work with certain customers or on certain lines of business, in order to avoid the appearance of impropriety…While these agreements are seldom enforced, their existence and the legal grey areas surrounding them are a drain on our economy. They hurt workers, who are not able to change jobs freely and make use of their skills in the best jobs possible. And they hurt companies, making it harder to recruit the best employees. Removing noncompetes will help everyone in Massachusetts benefit more from our skilled workforce.

According to Tibbett’s post, Massachusetts Senator Patricia Jehlen plans to sponsor a Senate version of Brownsberg’s bill. Other legislators wishing to co-sponsor the anti-non-compete bill have until February 6 to add their names to the bill. The bill is expected to be referred to the House Committee on Labor and Workforce Development, which will likely hold a hearing on the proposal this spring, Brownsberger said last month.

Update, January 16, 2009: New blog posts applauding Brownsberger’s initiative have been published this week by Scott Kirsner of the Boston Globe and Angelo Santinelli of Dakin Management and North Bridge Venture Partners.
…Next Page »

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Many Massachusetts companies require new employees to sign agreements saying that if they leave, they won’t go to work for a competitor for at least a year. The idea behind these non-compete agreements is to prevent a company’s competitors from gaining access to trade secrets and key personnel. But there’s a growing chorus of entrepreneurs, venture investors, labor-rights activists, and others saying that the agreements are unfair to employees. They not only make it harder for workers to switch jobs, the argument goes, but they retard innovation, and make Massachusetts a less attractive place to work than California, where a statute makes non-competes illegal and employees can switch employers and start new companies at will, as long as they respect traditional confidentiality agreements.

Now the debate is about to make its way anew to Beacon Hill. State Representative Will Brownsberger of Massachusetts’ 24th Middlesex district, which includes Belmont, north Cambridge, and east Arlington, says he plans to introduce a bill in the upcoming legislative session that would abolish non-compete agreements in the Bay State.

Brownsberger says he’s primarily interested in shielding average laborers from the effects of the agreements. Often, he says, these are low-level service workers such as telephone representatives who probably don’t have any valuable trade secrets, but are nonetheless prevented by the agreements from seeking other positions inside their industries. “I’m concerned that these agreements are often entered into by employees who are at a substantial bargaining disadvantage, and that they end up inhibiting those employees from making appropriate job changes,” Brownsberger told me yesterday.

But he says he also worries that non-compete agreements in Massachusetts may steer talented engineers and other innovators toward other states where they feel they will have more freedom to pursue their work. “I am concerned that these agreements in Massachusetts may be a barrier to recruitment of the best technology talent,” he says.

Brownsberger is drafting the bill—which he plans to file in the Massachusetts House of Representatives in mid-January—with help from employment lawyers and from Caroline Huang, a Belmont resident and speech scientist who has become active on the issue recently. “I’ve always felt it was unfair,” Huang says. “I approach this as a labor rights issue.” (Caroline Huang is the sister of Greg Huang, who is Xconomy’s Seattle editor.)

Huang says she first encountered a non-compete agreement back in 1990, when joining her first employer, Dragon Systems. (The maker of a well-known speech recognition system called NaturallySpeaking, Dragon was later acquired by Lernout & Hauspie, whose assets were eventually acquired by ScanSoft, which later changed its name to Nuance.) “It bothered me, because I was worried about getting my next job,” says Huang. “We are very specialized in my field, being speech scientists, and we need to work in speech. I signed it, but my recollection is that I felt very boxed in.”

And, in fact, the non-compete agreement came back to haunt her. After leaving her position at Dragon, Huang went without work for several months, then took a job at a text processing company rather than risk violating the agreement by looking for work with other speech companies. “The agreement seemed very broad, and I was in no mood to see where the limits were,” she says. “They were telling me that I could not work for a direct or indirect competitor, whether it was for compensation or not, in any business that competed with their current business, even with a business being planned. It was very hard to tell what was still in speech that would not have fallen under this.”

Much later—last fall, in fact—Huang says she began to notice that other people were talking and writing about the effects of non-compete agreements. One of these was Bijan Sabet, a general partner at Boston’s Spark Capital who believes the agreements hurt business in Massachusetts; a year ago, Sabet announced that Spark was dropping …Next Page »

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When it comes to non-compete clauses in employment contracts, it seems timing is everything. In the early stages of a tech industry, keeping employees from jumping ship and working for competitors might actually drive growth. But once the industry has matured, the same non-competes can hamper growth by restricting labor mobility. This might help explain a longstanding puzzle in innovation clusters—the rise of Route 128 in Massachusetts in the 1950s and 60s, and its subsequent slowdown relative to Silicon Valley in the 1970s and 80s.

That’s according to a new paper from April Franco and Matthew Mitchell of the University of Toronto’s Rotman School of Management. In their report, entitled “Covenants not to Compete, Labor Mobility, and Industry Dynamics,” the researchers use a mathematical model to compare tech-industry growth in the Northeast, which had (and still has) laws to help enforce non-compete clauses, with that of the Bay Area in California, which does not.

Franco and Mitchell argue that Silicon Valley gained the upper hand because its workers could spin out more businesses based on skills and knowledge developed at other companies. That much fits with conventional wisdom. What’s surprising is that their analysis also suggests non-competes encouraged young companies in the Northeast to come up with more ideas and inventions in the early days. And non-competes also kept workers in their original companies long enough for their ideas to become established, the research suggests. “There are times when you want to allow non-compete clauses and times that you want to allow labor mobility,” Mitchell said in a statement. “Now we have a structure to evaluate the two forces involved.”

Here at Xconomy, we’ve covered the non-compete debate a fair amount over the past year. Earlier this month, for instance, Bob reported on the local reaction to a California Supreme Court ruling affirming that companies can’t stop former employees from working for competitors.

So we wanted to hear what people are saying about the latest finding—it’s certainly controversial. “I don’t buy it,” said Bijan Sabet, general partner at Spark Capital in Boston, MA, and a leading proponent of getting rid of non-competes, when we reached him by e-mail. “Look, we have a very successful market & environment that doesn’t restrict innovation as long as NDAs [non-disclosure agreements] and NSAs [non-solicitation agreements] are maintained. It’s called California. And it works very well. California entrepreneurs have more rights than those in MA, WA and other states. Is that fair? Is that healthy?”

Sabet argues that regardless of timing or an industry’s stage of growth, non-competes limit the open market. “How is locking up employees better for the market as a whole and how is it better for the ecosystem,” he writes. “Startups challenge big companies which creates competition. Competition creates new ideas, new markets, new technologies and innovation. Without competition we don’t have an open market.”

And whether or not non-compete clauses helped Route 128 companies keep their most innovative employees in the decades after World War II, there’s no such argument for them in Massachusetts or Washington today—or so the Toronto researchers’ analysis would suggest, though Franco and Mitchell don’t say so explicitly.

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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.”

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We got an interesting note this week from Bijan Sabet, a general partner at Boston’s Spark Capital who’s been on a campaign to get rid of non-compete agreements, the clauses in many employment contracts that prevent people who’ve left their jobs from engaging in similar businesses for a certain period. We interviewed Bijan on the subject back in December, and now he sends word that Spark and the Berkman Center for Internet & Society at Harvard Law School are organizing a debate on non-competes and how they affect the innovation economy in Massachusetts. Bijan’s note follows:

“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.

“But I can also admit that the issue is not a simple, cut-and-dried no-brainer. That’s why my firm—Spark Capital—is teaming up with the Harvard Law’s Berkman Center for Internet & Society, for the upcoming panel discussion on the merits and drawbacks of non-competes—the contracts routinely used in Massachusetts (and many other states) by employers that force employees to sign away their rights to engage in any business of a competitive nature when they leave their present jobs.

“The Berkman Center’s Executive Director John Palfrey, a clinical professor of Law at Harvard Law School, will be moderating the discussion, which in addition to myself, will include Brightcove founder and CEO Jeremy Allaire, Akamai general counsel Melanie Haratunian, Harvard University associate professor Lee Fleming, and Highland Capital general partner Paul Maeder. That’s a good mix of opinions which should make for a lively and intelligent conversation.

“It’s an important topic. Ask anyone who isn’t free to accept an ideal job offer because of a non-compete. Or who essentially can’t work in their field of expertise at all for a year or two, since it’s so specialized that every company in the market segment is considered a competitor. Or, who has a great idea for a totally new business, but worries that the non-competes hammer will smash them if they try to make it real. (Those are the ones that we in the VC business come across most frequently.)

“Of course there are arguments for the other side as well: Have you heard about key members of a company’s engineering department leaving en masse to start at a new company? Or a talented employee who created an innovation only to leave his present job to bring that innovation to market? There are legitimate issues of protecting intellectual property and trade secrets at stake.

“If innovation is truly the engine of our ongoing economic growth and well-being—and I believe it is—then we need to take a hard look at this issue, and come with something better than what we have now.

“Here are the full details:

Employee Non-Compete Agreements: Protecting Innovation or Stifling It?

Thursday, June 19th, 3:00-7:00 pm 4:00-8:00 pm

Ames Courtroom, 2nd floor of Austin Hall, Harvard Law School

There will be a panel discussion, followed by a cocktail reception. Anyone is free to attend. You just have to register by June 12 (a week before the event) by emailing your name, title and company to Amar Ashar at the Berkman Center: ashar@cyber.law.harvard.edu.”

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