Before You Sign that Non-compete Agreement

Last Updated Jul 12, 2011 3:06 PM EDT

On being offered a lucrative new electrical engineering job near Boston, a friend was required by his future employer to sign a non-compete agreement. The deal would have prevented him from joining a competitor for a year, and maybe up to three depending on how you understood the wording, after leaving the company. He kicked back, but ultimately relented and signed.

Turns out he didn't need to worry. The non-compete wouldn't have prevented him from joining a competitor in California or nine other states that generally refuse to enforce such agreements. (The others: Alaska, Connecticut, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Washington, and West Virginia.)

Recent research from academics at MIT, Harvard Business School and INSEAD demonstrates that such policies create a brain drain toward those states from others, such as Massachusetts, where non-competes are alive and vigorously enforced. And it's the brainiacs with the most and highest-impact patents who are most likely to emigrate.

"It's clear that inventors are leaving states that enforce non-competes for states that don't," says Lee Fleming, a professor at Harvard Business School, in an interview with HBS Working Knowledge's Carmen Nobel.

Followed to its logical conclusion, non-competes ultimately hurt the firms that use them to bind employees because they chase talent away from their states. So why use them at all? The argument is that companies need to be able to protect their secrets, that otherwise the best ideas developed in their labs and offices would walk out the door and over to the highest bidder.

To MIT researcher Matt Marx, one of the coauthors of the forthcoming study, such reasoning is only an excuse to treat employees like chess pieces. In California, he notes, "There's an open labor market. People can leave when they want. They're not trapped at companies the way they are in Massachusetts. And that's what changed the way I worked as a manager. I realized that I couldn't treat employees like resources. I had to work to keep them excited to stay around."

Another argument against NCs is that there are plenty of laws on the books in the form of copyright and patent protections that guard a company's vital secrets.

What's your take on non-competes? Necessary protection for employers, or an excuse to mistreat employees?

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(Photo by Flickr user Mark Coggin, CC 2.0)
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.