The vast majority of states permit post-employment non-competition agreements. These are agreements in which employers can prohibit tech workers from competing with their ex-employer for a period of time (generally 1–2 years) after they leave their employment.
Those states, and the employers in those states that support the agreements, justify the agreements by claiming that they are necessary to protect the employer’s confidential or proprietary information (“trade secrets”) and to encourage employers to invest in training their employees.
The State of Hawaii recently reached a different conclusion, and banned such agreements in the tech industry effective July 1, 2015. I hope that we are seeing the beginning of a trend.
California is the major exception to the general rule that states allow non-competition agreements, as California has prohibited such agreements since 1872. So in California an employee can leave his employer at any time, set up a company nearby, and directly compete with his prior employer (subject to the important requirement that he does not take or use trade secrets of his ex-employer in the endeavor).
This seems to have worked pretty well for California, as Silicon Valley has become the tech innovation capital of the world. And it doesn’t seem to have hurt the Southern California based entertainment industry either.
In fact, Ronald Gilson, a Stanford law professor, wrote a law review article in 1999 theorizing that one of the main reasons that Silicon Valley became so successful, and Massachusetts/Route 128 declined in comparison, was that California encouraged the mobility of employees and the formation of new companies by banning non-competition agreements, while Massachusetts allowed such agreements.
And maybe, belatedly, Massachusetts is beginning to agree. Last year a bill in the Massachusetts legislature prohibiting non-competition agreements narrowly failed. A similar bill has been proposed this year.
Proponents of non-competition agreements rightly point out that such agreements are generally only legally allowed if they are “reasonable.” The problem is that a departing employee doesn’t know what will be deemed “reasonable” until a jury decides, and very few entrepreneurs, and their potential investors, want to roll the dice with a lawsuit.
More importantly, the mere threat of a lawsuit from an ex-employer is a huge risk and disinclination for someone considering starting a company. It’s hard enough to organize a founding team, hire the best employees and raise money from investors, without having the threat of a potential lawsuit hanging over your head.
We frequently read about states wanting to create the next Silicon Valley, or at least a miniature version of it. It isn’t easy, but it will be a bit less hard if those states prohibit non-competition agreements and thereby improve tech employee mobility.
Not only will such action benefit employees, but it will provide the societal benefit of a more dynamic and entrepreneurial tech industry, at a time when entrepreneurism and creativity are increasingly important to our economy. And in my view it will even help older established companies that often support non-competition agreements, because they will benefit from a more vibrant technology ecosystem that will attract the best and brightest to their region. And they might even begin to invest in and benefit from some of the new companies being founded by their departing employees, as California companies sometimes do.
So if you’re a tech worker or investor in a state that says it wants to promote entrepreneurism and keep their best and brightest employees in state, and attract the best and brightest from around the world to their state, you might want to ask your legislators why they permit employers to require tech employees to sign non-competition agreements.
California and Hawaii already have some pretty significant climate advantages, does your state want to provide them legal advantages as well?
Barry Kramer is a Silicon Valley based lawyer who has represented start ups and venture capitalists for over 30 years, and who can be followed on twitter at @barryjk or on medium.com. The opinions expressed in this article are those of the author only and nothing in this article should be construed as legal advice. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
