Non Compete Clauses Reduce Innovation

http://marginalrevolution.com/marginalrevolution/2014/06/non-compete-clauses.html

by spenrose • 12 years ago

102 52 12 years ago

marginalrevolution.com

hga• 12 years ago

Discussion of the NYT article: https://news.ycombinator.com/item?id=7866634

igorgue• 12 years ago

That's such a genius statement...

inanutshellus• 12 years ago

non-competes are like antibiotics. You want to be the only one that uses them.

trhway2• 12 years ago

until you understand Nash equilibrium.

Protection of moonlighting and non-recognition of non-competes is that makes CA leaving other "Silicon Valley wannabes" in the dust. Creative free people who flock to whoever pays better and/or offers more interesting job vs. enslaved ones who wouldn't be able to get a new job if kicked off from the current one - your choice.

wavefunction2• 12 years ago

There are a fair number of intelligent people (and me) who think that Silicon Valley is a joke.

kourt• 12 years ago

The "Minnesota Model" on IP owership is also very important.

swasheck• 12 years ago

Maybe I'm ignorant or maybe I'm skeptical but I'd always assumed that was their sole purpose: to protect current employer's interests by legally forbidding novel approaches to solving problems within their current purview.

gphil2• 12 years ago

I think the most common use case of a non-compete is to prevent employees who have developed strong customer relationships during their time at a firm from leaving that firm and bringing those customers with them.

hnal943• 12 years ago

I think that these are specific examples of the same general case: there are some assets that are easy to "walk out" of a company with, and a non-compete is a way to deal with that fact.

danielweber• 12 years ago

That's what non-solicitation is for, yes?

Sometimes employers even know that they aren't enforceable but are still doing them "because our lawyers say so." Which is a standard negotiating tactic, but there you go.

tptacek2• 12 years ago

This blog post makes a pretty good public policy case against engineers and product designers being subjected to noncompetes, but I don't think the logic ports over very well to salespeople --- who, correct me if I'm mistaken, are the most important targets of noncompete enforcement.

cloverich• 12 years ago

Yes - that and any client-based operation where an employee can leave and take their clients with them. The Dentistry field is notorious for this; my wife is barred from working in an entire half of the city for several years after the end of her contract.

tptacek2• 12 years ago

Even in these cases there's a balance of interests that probably needs to be evaluated. A dentist might be responsible for generating substantially all of the value in their customer relationships, and there might be no good public policy case to support noncompetes for them. On the other hand, an insurance brokerage might as a firm be generating 95% of the value in their customer relationships.

psychometry• 12 years ago

If it's the employee generating value and that value includes customer relationships, shouldn't the customers follow that employee to their new job?

dredmorbius4• 12 years ago

Then make the noncompete subject to very specific actions, and compensate the individual for the period of the noncompete at a multiple of present earnings.

If it's worth it for you to deny someone their livelihood, then pay for the privilege.

twic• 12 years ago

I recently signed a contract with a sort of non-compete clause in it, so i'm quite interested in how enforceable they are under English law.

Some lawyers reckon [0]:

"When considering restrictions the general rule is that they are void as they are in illegal restraint of trade and therefore against public policy. However, the courts recognise that some legitimate interests can be protected by reasonable clauses. [...] Although the types of business interests capable of protection are not fixed the usual ones that are protected are customer connection and goodwill, trade secrets and confidential information and the maintenance of a stable workforce (no poaching). Preventing competition is not really a legitimate interest on its own but a non-compete clause may be upheld if it may be the employer's only means of protecting the business."

So, under English law, it's quite likely that there would have been no Fairchild Semiconductor. I believe the crucial test would have been whether the Traitorous Eight were basing their new business on trade secrets they had learned at the Shockley Semiconductor Laboratory, or on know-how they had acquired there. The distinction between those is probably a topic for another day.

[0] http://www.steenandco.co.uk/thomas-v-farr-plc---important-co...

ggreer• 12 years ago

It sounds like Shockley would have had a decent chance of winning in the UK. In that case, he would have tied things up in court for years to drain resources. Even if he didn't win, Fairchild (and the rest of us) would lose.

USNetizen• 12 years ago

Non-competes that remain in effect beyond the term of employment are useless in 90% of current use cases, and only create legal headaches for both employer and employee. They are often ambiguous and may vary in terms of your ability to enforce them from state to state (or country to country). They also have a tendency to be drawn up merely to satisfy the insecurities of paranoid executives.

Don't waste your time with long term non-competes unless you're doing something so cutting edge that it is the commercial equivalent of performing work for national security. To put it plainly, if you're that concerned about a person who USED TO work with you competing against you, then you're not exactly very confident in the core capabilities and innovation potential of your company.

Intellectual property is one thing, but non-competes beyond the tenure of one's employment are too often a complete waste of time, money and effort to create and enforce.

marcus_holmes• 12 years ago

Don't forget that the threat of legal action can often be a deterrent even if the legal action has little chance of succeeding.

jpatokal• 12 years ago

The linked-to NYT article has a story about a hairdresser whose previous employer went to court and succeeded in banning them from working for any "nearby town" for a year -- even though this is unreasonable by any sane standard.

http://www.nytimes.com/2014/06/09/business/noncompete-clause...

Insert "cutting edge" joke here, but at the end of the day, if you've signed a non-compete, there is at the very least an element of risk in willfully ignoring it.

qnaal• 12 years ago

Any artificial limit on intellectual property will reduce innovation, and we can only hope that targeted government efforts to regulate/legislate (eg patents) have a net-positive effect on the environment, for very specific reasons (eg allowing small competitors time to develop their network before letting market-breaking 'big business' forces use the technology).

cwbrandsma• 12 years ago

In my state (Idaho) they are legally unenforceable....but still exist in many employment contracts. So, you can add the non-compete to a contract, and sew for infringement, but there is no way for the corporation to win the suit.

I've only seen the threat of lawsuit hit once. An employee left to work for a company he was contracted to work with (it was a year prior, but with a different department of a large corporation). The consulting company threatened lawsuit against the former employee. At that point, a number of employees threatened to quit, the story went viral in town, and that company had enormous trouble hiring for several years after that.

TLDR: unless you are a company that people are dieing to work for, non-competes will only work against you.

lukifer4• 12 years ago

I completely agree, and yet I feel thinking this way misses the point: non-competes are blatantly disrespectful of human rights, and so on some level, the effects on innovation shouldn't matter.

If you take voluntary contracts to the extreme, it would include the ability to sell one's self into servitude, which is something that used to happen, in addition to the more violent and coercive forms of slavery that are more often remembered. Today we would consider the notion of owning someone, even with their permission, to be morally repugnant, and so we have defined limits on how much of yourself you can sell, both in the present and the future.

I understand that it is a problem to invest in people and have them leave. But them's the breaks: you don't get to have your cake and eat it too when you want to harvest the ruthless efficiency of a capitalist market. Maybe those employees should have that much negotiating leverage, or maybe the greater economy is better off if they poach a few coworkers and start a new company. If you can't stand the heat, get out of the kitchen; someone else will be happy to take your place, and give your workers a good enough deal such that they have no interest in leaving.

sheepmullet• 12 years ago

"I understand that it is a problem to invest in people and have them leave. But them's the breaks"

In reality it is easy to keep the people that you have invested in. Pay them significantly above market rate and treat them well.

If an employee who has been with you for 3+ years isn't worth 5x market rates to you then you haven't invested in them and trained them properly. If they are worth 5x market rates to you then pay them 2x market rates and most will stay.

javajosh• 12 years ago

I like what you're saying, and wish companies thought like that, but most lots of companies look at devs like fruit to be squeezed until dry, then discarded. This is particularly true in game dev. Granted, the devs are partly to blame for going along with this terrible plan, allowing themselves to be pushed to work 80 hour weeks, all-nighters, etc. A smart employer would actively prevent their employees from working like that, because you're right when you say that a dev can be worth a great deal more if they stick around a while.

jaredhansen• 12 years ago

non-competes are blatantly disrespectful of human rights

No, they aren't, and this kind of statement trivializes things that actually are. The world is full of truly appalling rights violations, and voluntary actors signing noncompetes really are not among them.

Compare: A: "I want to come work for you!" B: "OK, but we have a lot of secrets here, so if I hire you, no working for my competitors for a while, OK?" A: "OK!"

with

A: "Anyone who criticizes the regime shall be imprisoned!"

These are not merely differences of degree.

lukifer4• 12 years ago

I beg to differ; at the risk of appealing to authority, Article 23 of the UDHR [1] states that free choice of employment is a basic human right. Just because an injustice is mild compared to extreme cases, it does not mean it is not injustice.

Even if non-competes are only intended to prevent Wonka employees from selling recipes to Slugworth, the end result is vendor lock-in for humans. If your skill set involves deep specialization, the transaction cost of seeking new employment is abandoning your skills completely, and/or stalling your career for N years. Though I can understand guarding specific trade secrets, I don't think anybody has the right to dictate how another human spends their productive hours.

[1] http://www.un.org/en/documents/udhr/

jroseattle• 12 years ago

There is some discussion about the validity of non-compete agreements in Washington state at the moment. I'm completely on the side of eliminating non-compete agreements, but as with everything there are always scenarios where it's not so clear.

Case in point: when Kai Fu Lee left Microsoft for Google, Microsoft sued Google and Lee to enforce their non-compete. It took a bit to sort things out, some injunctions and whatnot, and they eventually settled out of court. By hiring Lee, Google was able to establish presence in China. When Microsoft originally hired Lee, he moved to China and established their (MSFT) research division in Beijing. Presumably, Microsoft had to invest resources to learn how to do business in that part of the world and for Lee to learn what was necessary to succeed.

Did Microsoft have a claim to say that what Lee learned in China during his employment with them was a competitive advantage? Certainly, but Lee also could lay claim to those skills as well (after all, it was he who had to learn them.) He had a reasonable expectation to be able to move to another company, but Microsoft likely should have a reasonable expectation to protect their investment in learning how to procure and develop that market as well.

In some scenarios, I can appreciate arguments from both sides.

Source: https://en.wikipedia.org/wiki/Kai-Fu_Lee#Move_from_Microsoft...

nitrogen2• 12 years ago

...Microsoft likely should have a reasonable expectation to protect their investment in learning how to procure and develop that market as well.

Shouldn't it be enough that they got a head start with their research division, and that the research division would still be there after its founder left the company?

Non Compete Clauses Reduce Innovation

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