To Compete or Non-Compete

I was going to post some practical information about the effect and validity of non-compete agreements in California (they’re generally not enforceable) and alternatives that California businesses have to non-compete agreements to protect their businesses from employees who go to work for competitors (hint: it has to do with confidentiality agreements and non-disclosure agreements–which are enforceable), but there is an interesting exchange occurring right now on the net regarding overall policy relating to non-compete agreements which was started by some comments of Bijan Sabet last weekend (Mr. Sabet is a partner at Spark Capital in Boston, Mass.).

Essentially, the invalidity of non-compete agreements in California has been a source of consternation for many business owners trying to protect their businesses from employees leaving for competitors. On the flip side, proponents of non-competes have pointed to the explosion of businesses and technology in Silicon Valley as evidence that the California legislature got it right when they invalidated the non-compete agreement because of its function as a barrier to free markets. So who’s right?

Bijan Sabet, partner at Spark Capital, weighed in on the side of doing away with the non-compete completely and has declared on his website and in an Xconomy interview that his company would no longer require non-competes from start-up companies even though he is based in Boston where non-competes are valid.

“The non-compete clause is a significant barrier to startups and innovation,” Sabet wrote. “I believe it significantly hurts business in the state of Massachusetts and other states that have not followed California on this issue. I’ve heard from many successful entrepreneurs that haven’t started a new company in this state because of their non-compete. Some have actually moved to California because of this.”

Venture capitalist Fred Wilson disagreed that the non-compete was the reason for the explosion of growth in California–according to Mr. Wilson, it was just one such reason. Mr. Wilson states on his blog, “It’s not a good thing when one of your key employees, particularly one that knows your entire customer base or your entire code base, or worse knows your entire employee population and who is a superstar and who is not, leaves to join a direct competitor. It’s in the company’s interest to stop that from happening. So I am in favor of non-competes for senior members of a management team and key employees.“

Many more people have weighed in on this issue, including Mike Masnick of Techdirt, who said that he has done the research and it overwhelmingly supports the idea that Silicon Valley emerged as a more dynamic economic region than Boston specifically because non-competes were invalid in California. According to Mr. Masnick, “noncompetes destroy businesses when competing against more nimble, more open technology clusters.“

My own feelings about this are that I agree with Sabet and Masnick. I think that you can protect your business without artificial barriers to the free market (which is what a non-compete is). In fact, as I alluded to earlier, that was going to be the point of my post initially–that you can protect yourself in California through alternatives other than a non-compete. In summing up this complex issue, VentureBeat’s Matt Marshall says it best: “maintaining strict non-disclosure agreements and confidentiality with regards to trade secrets and intellectual property is good enough. Those are also enforceable within California, and should be enough to do the job in protecting value that is rightfully the company’s. Dropping non-competes doesn’t mean employees are free to do as they please. Free movement is one thing, but the ideas you carry with you are another.” Amen.

The take-away message in all this is that you can protect your business from competitors through means that don’t place barriers on the functioning of a free market. California was justified when it invalidated non-compete agreements.

For more information on this very topic, Bijan Sabet has started an independent blog called Alliance for Open Competition. Very interesting reading.