The West Coast has a reputation for being more relaxed than the East, and in at least one respect that is certainly true. California has all but done away with non-compete clauses in employment contracts, a legislative change that is loved by the startup community in Silicon Valley and despised by others around the country that are under pressure to do the same. ((Callum Borchers & Michael B. Farrell, Patrick Looks to Eliminate Tech Noncompete Agreements, Boston Globe, Apr. 10, 2014, available at http://www.bostonglobe.com/business/2014/04/09/gov-patrick-pushes-ban-noncompete-agreements-employment-contracts/kgOq3rkbtQkhYooVIicfOO/story.html.)) As other jurisdictions compete for startups and the business communities that surround them, the legal framework around non-competes has been heavily disputed. In one East Coast city in particular, this issue is a priority for the legislature. Boston is home to a booming startup sector and legislators are trying to make sure that those companies and individuals stay.
Proposed legislation limiting non-competes in Boston is vigorously supported by the venture capital community, whose leaders see the elimination of non-compete enforcement as a way to increase entrepreneurship and overall economic growth through increased employee mobility. ((Id.)) Governor Deval Patrick had initially introduced an original plan to eliminate non-competes, but his efforts were met with incredible hostility from much of Boston’s business community who has used non-compete law for about as long as Boston itself has been a standing city. ((Id)) Patrick, seeing the need to compromise, introduced a new bill this past summer that is currently being held in committee in the House. ((H.B. 4401, 188th Gen. Court (Mass. 2010).))
In a 2010 study, Professors Sampsa Samila and Olav Sorenson measured the effect of non-compete laws by examining the results of injecting venture capital into differing legal regimes nationwide. ((Sampsa Samila & Olav Sorenson, Non-Compete Covenants: Incentives to Innovate or Impediments to Growth, SSRN (2010), http://ssrn.com/abstract=1411172.)) The results showed that those states where non-competes were not rigorously enforced enjoyed higher rates of patenting and new business creation, which the professors used as indicators of innovation and entrepreneurship respectively. ((Id.)) The study also showed that overall employment and income numbers increased more dramatically in those states where non-competes were less strictly enforced. ((Id.))
The results of the 2010 study support the Boston venture capitalists’ claim that strong enforcement of non-competes can stand in the way of growth. One particular concern is that employees currently choose not to leave their jobs because non-competes inhibit the ability to stay in their field of expertise. ((Matthew Marx, Non-Compete Agreements and Their Impact on Employees, MIT Sloan Experts (October 27, 2011, 11:17am), http://mitsloanexperts.mit.edu/matthew-marx-non-compete-agreements-and-their-impact-on-employees/.)) Opponents of the bill, however, remain steadfast in their belief that non-competes are essential to companies that want to invest in employees without the fear that those individuals will simply leave once they are trained. Additionally, non-compete agreements have always helped firms to protect important trade secrets and client relationships when employees do decide to leave.
Governor Patrick’s bill attempts to strike a compromise. He asks for adoption of the Uniform Trade Secrets Act, which strengthens trade secret protection, while introducing The Noncompetition Agreement Act, which greatly limits the scope of non-competes that can be enforced. The bill sets out strict criteria for entering into non-competes, greatly curtailing the amount of agreements that would be allowed to stand under the current “rule of reason” test enforced by courts. ((H.B. 4401; Samila & Sorenson, supra note 5, at 5.))
Going forward, the fate of Boston’s non-compete law is uncertain. However, if Boston’s leaders want to cater to the startup community, they will have to think hard about the legal framework that they are providing. Boston is its own city, and maybe should not aim to copy everything that Silicon Valley does. Peter Thiel shared this point recently when he claimed that; “You don’t want to be the ‘Silicon Valley of Massachusetts’ just like you don’t want to be the ‘Harvard of North Dakota.'” ((Lauren Landry, Boston Doesn’t Want to be the ‘Silicon Valley of Massachusetts,’ Says Peter Thiel, BostonInno (Sept. 21, 2014, 8:30am), http://bostinno.streetwise.co/2014/09/21/peter-thiel-on-zero-to-one-and-the-city-of-boston/.)) While this is true, Boston has reason to be concerned with maintaining its venture capital and startup communities. As Martha Coakley and Charlie Baker face off in the current Governor’s race, they will need to form a coherent opinion on this issue – something that they do not appear to have done up to this point. ((Adam Vaccaro, Here’s Where Martha Coakley Stands on Noncompete Clauses. Oh Wait, Nobody Has Any Idea, Boston.com (Sept. 30, 2014, 12:28pm), http://www.boston.com/business/news/2014/09/30/here-where-martha-coakley-stands-noncompete-clauses-wait-nobody-has-any-idea/2zIAhktR93Wt4IjUS1p3nN/story.html.))