Panel Discusses Whether Noncompetes Stifle Innovation in Massachusetts

This blog previously described a proposal being advanced by some in the Massachusetts venture capital community to abolish noncompetition agreements in Massachusetts. (See links to previous posts: December 7, 2007, February 11, 2008, February 27, 2008) The two most visible proponents of that proposal, Bijan Sabet of Spark Capital and Paul Maeder of Highland Capital Partners, participated in a panel discussion on noncompetes and innovation at Harvard’s Berkman Center for Internet & Society on June 19, 2008. The substance of the discussion is pretty well summarized here.  All of the panelists – Sabet and Maeder as well as Lee Fleming, a Harvard Business professor, Rich Miner, a Google executive based in Massachusetts, and John Palfrey, Executive Director of the Berkman Center – espoused a similar negative view of noncompetes. (Palfrey noted that they sought but were unable to obtain an opposing viewpoint on the panel.)

The basic argument is now familiar: the Massachusetts technology economy fairs poorly in direct competition with California (particularly Silicon Valley) at least in part because of the two states’ differing laws on noncompetes, with Massachusetts being an “enforcing” state and California prohibiting noncompetes except in very limited circumstances. The academics on the panel acknowledged that the subject has not yet been studied thoroughly and that there is little quantitative evidence to support the argument for a causal link between enforcement of noncompetes and economic disadvantage.

Maeder, of Highland Capital, is most blunt on the subject. His view is that every successful technology company naturally acts as “breeder” of multiple new start-ups, with a multiplier effect across successive “generations” of technology companies. He believes that a legal environment in which noncompetes are enforced acts as a “silent killer” of this multiplier effect, resulting in fewer start-ups and less innovation. Using the Massachusetts internet success-story Akamai Technologies as an example, Maeder stated summarily that “the next Akamai will be in California,” because those employees who leave Akamai and wish to form new companies will be forced by the legal framework in Massachusetts to move to California, beyond the reach of Massachusetts noncompete law.

In response to a question I posed about the current status of political efforts to change Massachusetts law, both Maeder and Sabet thought it unlikely that any change will occur. Their proposal has been politely received by the Patrick administration, which apparently is considering it, but there is no hurry to introduce legislation altering the current common law framework. Maeder said that the political approach is “not going anywhere.” Instead, Maeder and Sabet are hoping for a “grassroots” effort within the venture capital and technology communities to turn away from blanket use of noncompete provisions in employment agreements. Stay tuned for further developments.

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