High Tech Hubs & Post-Employment Restrictions
Noncompete clauses have become a standard feature in many employment contracts. California however has been the great outlier – until recently, California was the one state which deemed all employment non-compete contracts unlawful restraints on trade and thereby void. If historically the Californian prohibition was based on an intuition that free competition of talent reflects the vibrant spirit of the rising west, today empirical research lends support to such a regime.
My recent book,Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids, and Free-Ridingoffers an analysis of the law and economics behind non-competes, non-solicitation agreements, and other contractual and regulatory which restrict the use of knowledge and skill post-employment. My research suggests that while non-competes are designed to protect an employer from competition by former employees, they can suppress innovation and overall economic growth. Indeed, new empirical studies on innovation, which Talent Wants to Be Free explores, show that California’s Silicon Valley has benefited from increased job mobility in the region and the relative ease in which start-ups can recruit new talent.
Jurisdictions React to Innovation Research
Several jurisdictions have reacted to this new body of innovation research. In late June 2015, Hawaii passed a law banning noncompete and non-solicitation clauses from employment contracts in the high technology industry. The law applies to businesses “that derive[] a majority of [their] gross sales from the sale or license of products or services resulting from its software development or information technology development, or both.” [1] Hawaii’s legislature considered specifically the challenge of a maintaining a robust talent pool in a small island geography.The law bans not only noncompete clauses, defined agreements prohibiting an employee from working within a specific geographic area for a specific period of time after leaving employment, but also nonsolicit clause, which prohibit an employee from soliciting former employees after leaving employment.
The Hawaii legislature reasoned that in the small geographic area of the state, the effects of such agreements barring former employees from working within the borders of the island would create undue hardship on employees and discourage high skilled employees from moving to Hawaii. Similarly, investors and entrepreneurs would be discouraged from starting up new businesses in the islands because of the difficulty non-solicitation clauses impose on new talent recruitment. As described above, these insights find empirical support in recent research. For example, when Michigan began to allow the enforcement of non-competes in the mid-1980s, it experienced a brain drain effect: valuable human capital moved out of the state in higher frequency than before, seeking to employ their skills elsewhere, in particular in California where non-competes continued to be banned.
A More Balanced Regime
States like California and Hawaii (as well as Colorado and Oregon), which limit the enforcement of non-competes continue to actively protect trade secrets but strike a more balanced regime between the right of employers to prevent loss of confidential information and the encouragement of job mobility and knowledge flows. At the same time that Hawaii passed its new bill, the Massachusetts State Senate introduced a similar bill that would restrict the use of non-competes.[2]
At the federal level, a new bill to ban certain non-competes focuses less on the negative effects of such restrictions on innovation and economic growth and more on the effects on vulnerable employees. The federal bill, the Mobility and Opportunity for Vulnerable Employees Act (MOVE) was introduced before Congress also in June 2015. The MOVE Act would prohibit non-compete clauses in contracts for any worker earning less than $15 per hour. The bill focuses on low-wage workers because it views non-compete clauses as doing nothing other than preventing low-paid workers from leaving a job for higher pay.[3]The federal bill was motivated by reports on agreements in low wage workplaces such as Jimmy John’s sandwich shops, requiring employees to sign “two-year non-compete agreements prohibiting them from working at retail stores that make at least 10 percent of their sales from sandwiches.”
Banning Non-Competes in All Sectors and All Positions
These two aspects of non-competes, suppressing the efficient employment of skills and the job opportunities of workers, suggest that California has it right in banning the use of non-competes in allsectors and all types of positions, from vulnerable low-wage workers to high skilled high tech workers. Banning non-competes altogether has aided California’s tremendous high-tech industry and has brought massive entrepreneurship to the region.
[1] Haw. Rev. Stat. § 480-4(d) (West)
[2] Callum Birchers,Noncompete debate Flares Up In Tech Sector Again, The Boston Globe (June 23, 2015),http://www.betaboston.com/news/2015/06/23/tech-sector-to-revive-noncompete-debate/; Rebecca Strong,The Bid to Ban Noncompetes Shows Promise at a State House Hearing, BostInno (June 25, 2015, 5:38 PM),http://bostinno.streetwise.co/2015/06/25/noncompete-hearing-boston-tech-effort-to-ban-noncompete-agreements/. A version of the same bill was introduced last session, but the Senate declined to enact it. Dennis Keohane,Mass Legislators Pass on Change to Noncompete Laws, The Boston Globe (July 31, 2014).
[3]Dave Jamieson,Democrats Want To Ban Noncompete Agreements For Low-Wage Workers, Huffington Post (June 3, 2015, 6:51 PM),http://www.huffingtonpost.com/2015/06/03/non-compete-bill_n_7506156.html; Lydia DePillis,Can the Senate Stop Low-Wage Employers From Tying Up Workers with Non-Competes?, The Washington Post: Wonkblog (June 2, 2015),http://www.washingtonpost.com/news/wonkblog/wp/2015/06/02/can-the-senate-stop-low-wage-employers-from-tying-up-their-workers-with-non-competes/.