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Cutting Off Innovation to Spite Your Competitors

Non-compete clauses in high tech employment contracts are standard fare. But these defensive efforts may actually backfire where they work most effectively.

To be sure, I haven't reached this conclusion by analyzing reams of data, but it passes the "sniff" test. At a recent panel discussion on the subject at Harvard, several speakers agreed that companies hurt themselves in the long run when they try to block ex-employees from working. When experienced programmers, engineers, and scientists can't work in the areas they know best, the overall technical "ecosystem" suffers. Instead of working in start-ups and jump-starting innovation, more experienced people often head for large companies:

Some instead seek employment in large companies that can defend them against litigation related to non-compete agreements, said Lee Fleming, an associate professor at Harvard who is conducting a research project into the subject."They tend to avoid startups, which don't have the resources to protect them," he said. Others leave their field entirely, according to Fleming.
As a result, the companies reduce the overall amount of innovation in their geographic area which has a dampening effect of everyone. It's as though everyone's boats float on the same bodies of water. Punch a hole in the container and drain the water, and there is less overall for everyone. A great example is the old Route 128 circle around Boston. At one time, the entire area was hot with software and hardware research, but Massachusetts allows aggressive enforcement of non-competes, and over the years, much of the economic activity has faded. But in California, where non-competes are largely unenforceable, companies have remained innovative and competitive.

(An interesting side note: Apparently the organizers of the Harvard forum couldn't find anyone in the Massachusetts high-tech community to defend non-competes. Akamai general counsel Melanie Haratunian was apparently initially slated to fill that role, but according to blogger Scott Kirsner, she backed out a few days before the event. Supposedly Haratunian begged off because Akamai is suing to enforce a non-compete, and worried that the former employee's lawyer might attend.)

Strong non-competes can damage competition in two ways. On one hand, such agreements make it difficult for highly experienced and talented technical personnel to take jobs in startups and other innovative firms hoping to break new ground, because the only way those businesses can compete with larger, established companies is to hire the best people they can.

On the other hand, companies that think they've hamstrung potential competition get lazy. One of the great advantages businesses enjoy is adversity. When they have to solve problems, they get smart, wily, and tough. When things are easy, they go to pot. The companies that excel are those moving so fast that competitors can't keep up. Instead of trying to hinder others, high tech businesses might instead put their resources into doing something so remarkable that it slows other companies â€" by leaving them stunned.

For instance, consider what panel participant Paul Maeder, a VC at Highland Capital Partners, had to say at the forum (as related by Kirsner):

Maeder observed that Washington State, where non-competes are enforceable, has produced two great tech companies: and Microsoft. But he noted that there had been no great operating system spin-offs from Microsoft, or online bookstore spin-offs from Amazon.

Maeder also compared non-competes to indentured servitude, and said they foster "sleepiness" here in Massachusetts. He advised employees to ask about them at the beginning of the interview process, not on the first day of work -- when it's too late to negotiate anything different (like six months instead of a year).