Venture capitalist Paul Maeder said that non-competes bar innovation and even result in the stillbirth of companies because their would-be founders are delayed from competing against their former employers, according to June 8 article in the New York Times.
On the other side, Joe Kahn, the co-founder of a New England summer-camp chain that uses non-competes, insists in the same article that such provisions are needed to protect his company's substantial investment in the training of its staff.
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Will Route 128 be exalted with the elimination of non-compete agreements? Consider what would have happened if California had never enacted its bar on non-compete agreements. What if California, like virtually every other state, had adopted a rule enforcing non-compete agreements that are reasonable in duration and geographical scope? Do such agreements so discourage innovation that Silicon Valley would never have emerged from its agricultural roots as the heart of the fast-moving tech industry?
Enforceable non-compete agreements do not prevent an individual from ever competing against his former employer. They make the employee wait. Enforceable agreements also do not keep an employee from using his ingenuity to develop a business beyond the geographical boundaries of the agreement. Moreover, non-competes do not apply to those who never sign them, namely entrepreneurs with no pre-existing ties who start their own companies.
A California that enforced non-compete agreements would still prohibit the misuse of trade secrets, defined as information, broadly speaking, that has actual or potential economic value because it is not generally known and that the employer makes reasonable efforts to keep secret. California also would impose a duty of loyalty on an incumbent employee, prohibiting her from competing against her employer while she is employed.
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The enforcement of non-compete agreements would have encouraged companies in the burgeoning tech industry to invest in developing their employees without fear that such investments could be redirected immediately into the service of a competitor. Non-competes fill a gap left by the legal protection of trade secrets alone.
Legal protection for trade secrets does nothing to protect the employer's investment in time and resources to train their employees in the art and craft of what it takes to make the business and the employee a success. That is true in any industry, whether the business is in micro-processing, paper manufacturing, or, even summer camping. Mentoring is not a trade secret.
It overstates the impact of a single variable to say that California's adoption of a legal rule that prefers employee development to employee mobility would have resulted in a technologically-barren dystopia in what became Silicon Valley.
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William Hewlett and David Packard founded Hewlett-Packard on January 1, 1939 in a Northern California garage. That was the first of many garage-success stories and an industry that would become known as Silicon Valley. But the location of that garage had no more to do with the state's policy on non-competes than the same policy had on the birth of Hollywood hundreds of miles to the south. A policy permitting non-competes did not result in the stillbirth of J.P. Morgan that spawned the financial center known as Wall Street in New York or the stillbirth of Koch Industries in Kansas in 1940, the year after Hewlett-Packard was founded.
This is not an argument for allowing non-compete agreements in California. It is only to question the wisdom of reflexively swapping one set of policy preferences for another.
The talents and ingenuity of this country's men and women have led to the birth and growth of iconic industries in states that allow non-competes and states that do not. The development of those talents and those industries does not rise or fall on the reed of a single law.