Free labor market

INTRO TEXT when caroline huang remembers her first job out of graduate school, tension creeps into her soft-spoken voice even now, almost 20 years later.

The speech recognition scientist went to work for a Massachusetts software company in 1991, and inside two years, she was eager to move. “It was very stressful,” says Huang, of Belmont, who is now 48. “It got to a point where I didn’t feel I was getting much out of it, and thought I could advance my career better by being somewhere else.”

Caroline Huang was
unable to find a new job
in her specialized field.

Twenty-somethings often job-hop, but Huang couldn’t — at least not without leaving the field in which she’d just earned a Ph.D. She had signed a “covenant not to compete,” which prohibited her from working for any other speech-recognition companies or starting her own company for a full year after leaving her post. Employers typically use non-compete agreements so that workers can’t take proprietary information to competitors, or use it to launch competing ventures themselves. Huang felt trapped. She couldn’t work elsewhere in her highly specialized field and didn’t want to keep working where she was.

She went ahead and quit her job, and a few months later, she found lower-paying work with a small start-up in another field. Two years after that, she found her way back into speech recognition, but she now wonders how that time away affected her career trajectory. “Those two years — did they slow me down for the rest of my career?” she muses.

That’s the kind of question that can keep even the happiest, sanest of people up at night, and it’s the reason Huang’s state representative, William Brownsberger (D-Belmont), has filed a bill to prohibit the use of non-compete contracts in Massachusetts. “There’s a great many people who are severely disadvantaged by these non-competes,” says Brownsberger, who is in his second term on Beacon Hill and also works as an attorney.

But the issue is bigger than a given individual’s career path. Brownsberger and the bill’s other supporters raise a hypothetical question similar to Huang’s, only with implications for the state’s whole economy: How many start-ups were never created in Massachusetts because the would-be founders were tied to existing companies by non-competes? How many went to California instead, since non-compete agreements are unenforceable there? And — most tantalizing of all — if Massachusetts gets rid of these contracts, could we finally see our high-tech sector trounce Silicon Valley’s, erasing all our 20-year-old insecurities about the demise of Route 128?

Advantage: Silicon Valley

Ah, Silicon Valley. The phrase conjures up the image of energetic upstarts inventing Google between games of foosball. Since the 1960s, there’s been a technology rivalry between the Bay State and Bay Area that’s not unlike the baseball enmity between Boston and New York. In both cases, we care more about the competition than our rivals do because we see ourselves as the underdog.

In her influential 1994 book, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, AnnaLee Saxenian hypothesizes that California’s anti-authority, free-wheeling culture allowed it to dominate Massachusetts in the early days of the computer age. Employees changed jobs more, swapped ideas with each other more, and started more new companies in the Bay Area. But Massachusetts companies tended to be more hierarchal, with little cross-pollination of ideas. Mobility led to innovation, Saxenian argues, so Silicon Valley spawned Hewlett-Packard and Intel — which in turn spawned other start-ups — while our own employers, like Digital Equipment Corp., failed to keep up with changing technology and went bust.

Twenty years later, some entrepreneurs and venture capitalists have latched onto non-competes, and Brownsberger’s bill, as a way to make the Massachusetts entrepreneurial climate as open and mobility-friendly as they perceive California’s to be. Opening up a business culture is no easy task in a state where clinging to the same pair of jeans for 25 years is a point of Yankee pride. We are never going to be San Francisco — not without a weather transplant (and possibly electroshock therapy). But evidence suggests that getting rid of non-compete agreements, and publicizing the change, would be a good start in fostering entrepreneurship — not to mention giving everyone from software developers to hairdressers more control over their own destinies.

Non-compete agreements sound more feudal than capitalistic, implying a culture of worker loyalty and employer benevolence that seems out of whack in an era when college-educated Americans hold an average of 11 different jobs between the ages of 18 and 42, according to the Bureau of Labor Statistics. “People don’t necessarily understand the agreements,” Brownsberger says. “Then months or years later, they find themselves out of a job and unable to look for another in their field. That includes situations where they might have been fired.”

The agreements are legal in most of the US, though there is great variety in what different states allow, and the extent to which courts enforce the contracts. Under Massachusetts law, certain groups — such as doctors, lawyers, and broadcasters — cannot be asked to sign them, but the agreements are applicable to most professions. Western states tend to restrict their use more than Eastern states do, says Michael Garrison, a business professor at the University of St. Thomas in Minnesota. “There seems to be a sort of underlying cultural reason for it,” he says. “I think in the West, there is this notion about individualism. The West has a sort of libertarian streak that doesn’t exist in the East.” The two states with the strongest laws against non-compete agreements, Garrison says, are North Dakota and California. (New Hampshire, despite its “Live Free or Die” ethos, has no such prohibition.)

Non-compete agreements frequently end up in court when a high-level employee moves to a competitor. Some cases — like the Microsoft executive who decamped to Google — involve the courts and laws of multiple states. (“It’s a quagmire,” Garrison says of overlapping jurisdiction, but he believes those account for a very small percentage of non-compete agreements.) Still, high-level employees are usually the lucky ones, more likely to be offered compensation in exchange for agreeing to a non-compete agreement. Fashion designer (and Gloucester resident) Sigrid Olsen is waiting for a two-year non-compete to expire, but she’s being paid her same salary to sit on the sidelines. Nonetheless, the arrangement rankles. “When you’re in the forefront of an industry, two years off can be devastating,” says Olsen.

It’s not just high-flying software executives or fashion designers who end up in court. Maria Petti owns a Bridgewater hair salon called Exhale. In 2006, she hired a new hairdresser who turned out to have signed a non-compete agreement at her old job, promising not to work within a five-mile radius of her former salon, and Exhale fell within that limit. Petti says the agreements are common in her industry because owners don’t want customers to follow a departing stylist to a nearby salon. Instead, they want patrons to stay with the salon and choose a new stylist. But Petti — who eventually settled the case out of court — doesn’t require her own employees to sign non-compete agreements. “I feel they violate the consumer’s right to spend their money where they choose. If they’re happy with our salon, they see another stylist. If they want the stylist, they follow the stylist,” she says. “It’s like saying that if you buy pizza from me and my chef leaves, you can’t go to the new restaurant. It’s unfair to the consumer.”

Lost opportunities

It’s hard to gauge how many Massachusetts residents sign non-compete agreements or what percentage end up in court, though those who study the issue believe most agreements are either obeyed or broken without any legal consequences. A common experience may be that of a 29-year-old software consultant named John, who asked that his last name not be used because he’s job-hunting. John moved to Boston upon finishing college, and after he landed his first job as a software consultant he was asked to sign a contract promising not to work for a competing firm for a year. “I was like ‘well, that sucks,’ but I wanted a job,” says John. “I was young and just out of school.” He signed it, even though it offered him no compensation if he had to sit on the sidelines for a year, and he didn’t fully understand which jobs or companies it covered.

Like Caroline Huang, John got itchy after a few years, but wasn’t sure what he was allowed to do. He says he didn’t want to ask human resources for fear they’d see him as a guy with one foot out the door. (“They’re people you want to avoid unless you have a question about health insurance,” he explains.) So he stayed, not very happily, until he went back to graduate school. Now a little older and wiser, John suspects he probably could have ignored that non-compete agreement, and that he was too low-level to pose a particular threat to his employer. But — and this is a key issue for opponents of non-compete agreements who believe they hurt the state’s entrepreneurial environment — he didn’t know for sure. He was young, and a little scared, so he stayed too long in a job that had gotten stale.

“Non-competes are like high blood pressure. It’s a silent killer,” says Paul Maeder, a venture capitalist with Highland Capital Partners in Lexington. Maeder has been in the VC business for 25 years and says that “every couple of months” he gets interested in funding a start-up, only to discover that the founder is bound to an existing company by a non-compete agreement. That puts the would-be entrepreneur at risk of lawsuit, so Maeder won’t fund the venture.

“That’s 150 companies in Massachusetts that didn’t happen,” he says. “Some of them might never have gotten off the ground, but if even 20 of those were big successes, they’d have given rise to others.”

Maeder’s firm also has offices in Silicon Valley where, he thinks, companies have a head start developing energy-efficient and environmentally-friendly technologies (sometimes called “clean-tech”). “In California, people develop some new market or product, and take it to one level,” he says. “Then, someone goes to the CEO and says, ‘Hey, I’ve got a great idea about how to take it to the next level.’ The CEO says ‘Oy. It’s a lot of work. Why bother.’ So the guy leaves and starts another company.”

In Massachusetts, Maeder says, the same employee will go to the employer, get turned down, and then be unable to start her own outfit. “We have experts and rock stars at a company, and they can’t take it to the next step,” says Maeder, who estimates that his firm now pumps “five to six” times as much capital into Silicon Valley as it does into Massachusetts.

“They’re taking clean-tech from us,” he sighs. “They already took the personal computer from us.”

A necessary evil?

Not all venture capitalists share Maeder’s feelings, and even those who do often insist that any venture they fund use non-compete agreements for its future employees. Still, it’s hard to find any companies who will go on record as actually liking the agreements. Several large technology employers, like IBM, declined to speak on the topic. Kenneth Bello, a Boston attorney, thinks they are a necessary evil in high-tech. “An employer can spend millions and millions on research development, then have individuals who have knowledge and who have been involved with the jewels of the company go to a competitor,” he says. So many employers use them because they can, and because other employers do — even though some confess to personal qualms about limiting their workers’ options.

“It’s a rat’s nest,” says Emily Green, who has been on both sides of this issue in California and in Massachusetts. Green is the chief executive officer of Yankee Group, a Boston–based research firm. Yet 30 years ago she was a young technology employee in Los Angeles who wanted to establish her own company. Her employer threatened to stop her, but when Green talked to a lawyer, she learned that she had every right to compete against her former firm.

Fast forward to the present: Green now asks future employees to sign non-compete agreements. “We wrestle with how to ensure that we don’t foster businesses that end up competing with us,” she says. “It’s probably two-faced of me to acknowledge that as an employee I benefited from California’s position, and now I’m in the position of asking employees to sign them.”

Green is in that position partly because the agreements are legal here, she says. As long as her competition uses non-compete agreements, she will use them. She knows other state laws prevent employees from stealing trade secrets or soliciting Yankee Group clients, but says, “It’s just easier to say that if I hire you and you leave us, I don’t want you to work for my major competitors for a while.” She adds that her firm “generally” doesn’t enforce them if an employee is fired or laid off.

Green, who is part of an effort to organize the technology sector’s legislative priorities, is open to the possibility of getting rid of non-compete agreements for everyone, though she’s not convinced that such a change would spur significant new investment or entrepreneurship in the Commonwealth. “I think it’s a red herring,” she says. She suspects Silicon Valley’s dominance has as much to do with greater risk-taking among venture capitalists there and lack of access to broadband in parts of Massachusetts.

Balance of power

Prohibiting non-compete agreements may not prompt cataclysmic change here, but it could cause the beginnings of a cultural and economic shift. Garrison, the University of St. Thomas professor, says he thinks Brownsberger’s bill could help the state’s economy. “The empirical work on this is not conclusive, but there’s a strong indication that in high tech, [non-competes] stifle innovation and stifle the economy,” Garrison says.

Lee Fleming and Matt Marx, a professor and doctoral student, respectively, at Harvard Business School, have found that the absence of non-compete agreements does indeed foster more mobility among employees, which is what is believed to have led to the collaborative spirit of Silicon Valley. “Many people see Silicon Valley as successful because it’s a very free labor market,” says Marx. “Whereas for a single company, it might be to their advantage for people not to leave, it might be to the benefit of the economy in general for people not to be trapped.”

Still, any change to the state’s laws would need to come along with some serious publicity. Marx says many people in both states are unaware of the laws; Californians are sometimes asked to sign non-compete agreements since employers assume many workers don’t know the agreements are unenforceable. The experience of Caroline Huang and John, the software consultant, show the psychological effect of these agreements, so the right to work elsewhere doesn’t matter if people don’t know they have it. But with the right communications tools, a change in the law could lead to something else that’s especially good for the young and the laid-off in this state: a better balance of power in the relationship between employer and worker.

Meet the Author
Matt Marx, the Harvard graduate student, formerly worked as a technology manager in both California and Massachusetts, and he says the difference between the two states was pronounced. “In Boston, I could pretty much count on people being around as my employees because our company had locked everyone up for two years with non-competes,” he says. “You didn’t have to worry about people leaving. In California, I knew I didn’t own any of these people. Someone once came to me and said, ‘You know, it’s been fun, but I think I want to go somewhere more stable than a start-up.’ And all I could say was, ‘What can I do to keep you?’”

“That led me to be a better manager,” he says.