Why do most states still allow for Non-Compete Agreement?

[Rasulis]

I was listening to several venture capitalists on TV talking about the proliferation of places which labeled themselves as “the next Silicon Valley.” Such as when Mike Pence declared Indiana as Silicon Prairie. The reality is that none come even close right now. This tiny strip of land between the Pacific Ocean and San Francisco Bay account for 40% of the US venture capital funding. More deals and investments occurred here than the next ten top venture capital states combined.

How did this specific geographic area managed to get to this point? Stanford? Railroad? Defense contracts? Shockley Labs? Fairchild? All important factors. However, the panels agree that without California ban on Non-Compete Agreement, Silicon Valley would not be Silicon Valley.

The ban on Non-Compete Agreement is incorporated into the California State Constitution in 1872. At the start of Silicon Valley in the 1950s, California was the only state in the Union with this ban. Even now, only North Dakota and Hawaii have ban on Non-Compete Agreement. Hawaii's version was only adopted in 2015 and only applies to high tech company. If one look at the history of Silicon Valley, one quickly come to the conclusion that without the ban, the events that lead to the formation of Silicon Valley could not have occurred.

Why did William Shockley opened Shockley Lab in Mountain View? Because, if he had tried to do this in the East Coast, Bell Labs would have sued him because of the non-compete agreement that he signed with Bell Labs. When he attempted to hire some of his former colleagues from Bell Labs, none were willing to move to the West Coast. He ended up hiring a bunch of young engineers.

When Noyce and seven other engineers left Shockley Labs to form Fairchild Semiconductor, this was something unprecedented at the time. The nickname of the group “Traitorous eight” shows how a lot of people viewed them back then. In any other states, they would have been forced to move to different geographical area, maybe even to another state, to start their company. In California they were able to open their new facility basically next door to their former employer.

Many important events in the annals of Silicon Valley could not have happened in any other states, other than California. Such as when Fairchild hired almost the entire core of Motorolla engineering/development department. The founders and employees of Fairchild leaving to for spin-off companies such as Intel, AMD, Intersil, NSD, HP, and Kleiner Perkins Caufield & Byers. The last is a venture company which has been involved in the creation and/or funding of numerous important companies such as Amazon, Compaq, Genentech, Intuit, Lotus, Macromedia, Netscape, Sun Microsystems, Symantec and others.

A start up making millions is not just another notch in the belt for Silicon Valley. It is an incubator for future innovators and entrepreneurs. PayPal Mafia is a perfect example of that.

So why do the vast majority of states (and countries) still permit post-employment non-competition agreements?

The 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.

[Utinil]

Let's look at two fictional scenarios:

Situation 1) Bob is an engineer at a tech company. He works for the company for 3 years. During that time he comes up with a few small ideas that help the company, but doesn't actually make the company more than they invested in him (his salary, benefits, etc). He does work on a side project (on company time) that could make the company millions. Bob quits the company and keeps or destroys all information on the side project. He then starts his own company utilizing that idea. This idea propels his new company to great heights directly cutting into the profits of the original company. The company can not prove he was working on this as it was a side project and not fully documented. So in the end a company ends up paying someone to develop an idea which only results in lost revenue for them.

Situation 2) Suzie works for Burger King in marketing. She helps develop the marketing strategy for the next year. She then quits and goes to work for Wendy's. She provides all the information to them. In response Wendy's arranges their promotions to directly counter BK's. Wendy's promotes and gives out digipet toys one month before BK was set to heavily promote and give out electropets, etc. Burger King ends up paying someone to basically spy on them.

Non-Compete Agreements are the only way to stop these scenarios. Yes these are worst case scenarios, but that doesn't mean they aren't valid concerns. This does unfairly keep someone who develops something at home on his own time from starting a company. Unfortunately there is no room for middle ground.

[PC2]

There's definitely pros and cons to both approaches. Non-compete makes it easier to invest in people when you know they cant willy nilly defect to nearby competitors. On the other hand, if your business model is based on ideas that are easily copied and stolen, then it probably isn't strong in the first place.

[Ornerybear]

Let's look at two fictional scenarios:

Situation 1) Bob is an engineer at a tech company. He works for the company for 3 years. During that time he comes up with a few small ideas that help the company, but doesn't actually make the company more than they invested in him (his salary, benefits, etc). He does work on a side project (on company time) that could make the company millions. Bob quits the company and keeps or destroys all information on the side project. He then starts his own company utilizing that idea. This idea propels his new company to great heights directly cutting into the profits of the original company. The company can not prove he was working on this as it was a side project and not fully documented. So in the end a company ends up paying someone to develop an idea which only results in lost revenue for them.

Situation 2) Suzie works for Burger King in marketing. She helps develop the marketing strategy for the next year. She then quits and goes to work for Wendy's. She provides all the information to them. In response Wendy's arranges their promotions to directly counter BK's. Wendy's promotes and gives out digipet toys one month before BK was set to heavily promote and give out electropets, etc. Burger King ends up paying someone to basically spy on them.

Non-Compete Agreements are the only way to stop these scenarios. Yes these are worst case scenarios, but that doesn't mean they aren't valid concerns. This does unfairly keep someone who develops something at home on his own time from starting a company. Unfortunately there is no room for middle ground.

this is basically the reason.

I currently have a non compete with my employer. it sucks but I agreed it was acceptable when i started, mine runs out after a year, it's an easy one to get around.

[belfpala]

Non-competition law is very controversial regardless of the state.

I'm guessing the OP is writing an academic paper on the topic?

[satimy]

Ironic that California in this instance California is super free market and capitalist.

[caervek]

Most states don't in general, it's just some states in the USA that do IIRC.

[Attackrabbit]

Many important events in the anal of Silicon Valley

Please tell me more of these important anal events

[Blamblam41]

Let's look at two fictional scenarios:

Situation 1) Bob is an engineer at a tech company. He works for the company for 3 years. During that time he comes up with a few small ideas that help the company, but doesn't actually make the company more than they invested in him (his salary, benefits, etc). He does work on a side project (on company time) that could make the company millions. Bob quits the company and keeps or destroys all information on the side project. He then starts his own company utilizing that idea. This idea propels his new company to great heights directly cutting into the profits of the original company. The company can not prove he was working on this as it was a side project and not fully documented. So in the end a company ends up paying someone to develop an idea which only results in lost revenue for them.

Situation 2) Suzie works for Burger King in marketing. She helps develop the marketing strategy for the next year. She then quits and goes to work for Wendy's. She provides all the information to them. In response Wendy's arranges their promotions to directly counter BK's. Wendy's promotes and gives out digipet toys one month before BK was set to heavily promote and give out electropets, etc. Burger King ends up paying someone to basically spy on them.

Non-Compete Agreements are the only way to stop these scenarios. Yes these are worst case scenarios, but that doesn't mean they aren't valid concerns. This does unfairly keep someone who develops something at home on his own time from starting a company. Unfortunately there is no room for middle ground.

So in both situations you have two bullshit business models built off ideas and ad marketing rather than products or customer satisfaction.

Good to know that non-competition agreements are fucking bullshit even in the best case scenarios. Though inb4 someone starts patenting marketing strategies.

Bets on Disney already having done so.

[bowchikabow]

Non-compete is controversial at all levels too. Even in mid-level field work.

I used to work for Cox Communications. I was a level II infrastructure engineer. I had to sign a non-compete clause preventing me from working for any Coaxial AND Fiber based telecommunications. I don't have an effect on marketing, I was not involved with customers, I didn't have anything that would be of market value to another company outside of my expertise in these systems.

When I spoke to the legal team about this, as a general inquiry, it was explicitly told to me that it was my expertise, and knowledge gained while employed there that was being protected.



It is not always about Intellectual Property, or marketing, or customer poaching. It can be something as simple as the knowledge imparted to you by that company (which is, to an extent, an investment by the company in you as the employee).

I was unhappy with it at the time, but now I at least understand why they did it. I can also understand why a company would want to protect what either is, or perceived to be, proprietary tech/systems/methods etc.

[bowchikabow]

If they could make a legal claim that their technology, systems or methods deserves to be proprietary, they should and then they should protect that. This is the critical thing; they know they'd never get anyone to acknowledge that claim so it is easy to keep it secret by gagging employees, regardless of the fact that this essentially means that employee cannot advance his career outside that company without leaving the state.

Right.. and that is where the waters are muddy. I won't claim to know for certain what or how they consider things related to experience as proprietary.. I just know that it was the reason given to me... And to an extent, it does make sense, even if it does seem stupid.

[Stormdash]

Some basic information on the legal boundaries of non compete agreements. They aren't widely available for any and all, the safeguards are pretty strong and public policy tends to favor finding them unenforceable unless it's a pretty compelling reason. Think CA outright banning them is a bit reactionary, really.

[Risale]

I live in The Netherlands and also had a non-compete but when I wanted to change jobs I had to wait 2 years before I could join another company in the same field, however since nobody here can force you to be unemployed for 2 years (court decided that years ago) my non-compete just meant it a tree died for nothing.
Also if your field of work is small enough you might be able to get around your non-compete for the same reasons.

[unbound]

Let's look at two fictional scenarios:

Situation 1) Bob is an engineer at a tech company. He works for the company for 3 years. During that time he comes up with a few small ideas that help the company, but doesn't actually make the company more than they invested in him (his salary, benefits, etc). He does work on a side project (on company time) that could make the company millions. Bob quits the company and keeps or destroys all information on the side project. He then starts his own company utilizing that idea. This idea propels his new company to great heights directly cutting into the profits of the original company. The company can not prove he was working on this as it was a side project and not fully documented. So in the end a company ends up paying someone to develop an idea which only results in lost revenue for them.

Situation 2) Suzie works for Burger King in marketing. She helps develop the marketing strategy for the next year. She then quits and goes to work for Wendy's. She provides all the information to them. In response Wendy's arranges their promotions to directly counter BK's. Wendy's promotes and gives out digipet toys one month before BK was set to heavily promote and give out electropets, etc. Burger King ends up paying someone to basically spy on them.

Non-Compete Agreements are the only way to stop these scenarios. Yes these are worst case scenarios, but that doesn't mean they aren't valid concerns. This does unfairly keep someone who develops something at home on his own time from starting a company. Unfortunately there is no room for middle ground.

rofl at Situation 1. Of course the company made more off of the person than they invested in him. The company literally couldn't exist otherwise (although I know a number of companies like to put out PR BS along those lines to defend NCA).

Situation 2 is the only realistic situation that does occur, and is one of the primary reason for NCAs. The other primary reason for NCAs is to keep salaries (aka costs) low for the company as it is extremely difficult to get a job in an area you have experience when most markets are, in reality, small...so they are all considered competitors. If you can't easily move to another company, I don't have to give you a very good raise.

Guess what has been happening for the past 4 decades to real wages?

[Risale]

Indeed, if a contract is onerous, most legal systems declare it void.

My question is, what will the non-compete offer to a company that cannot be covered by non-disclosure when it comes to safeguarding their proprietary information?

Even a non-disclosure is hard to enforce even here where I live, the company that is wronged needs to prove beyond reasonable doubt that it was the former employee that spilled the beans.
The thing is that when you work in a certain field then most of each companies practices are already known, like in my industry shipping, I know the basic rates and routes of all the competitors so it boils down to service costs (back end) and any discount you will give on existing rates, delivery times etc.
So if I move from company A to company B my new employer knows 95% of company A already and just wants me as a new member of staff.
Now I know this doesn't apply to every field ofcourse but the same principle applies in the long run.

[Risale]

Yeah I think it's mostly in fields that include engineering of any form or marketing information. Those discount rate lists you mention, I have suppliers who only send them in sealed envelopes and refuse to give me anything in electronic form for fear of it leaking. There is no real NDA ofc but there is a clear expectation that I won't share their rates with others.
And again my main point is, those contracts are mostly there to intimidate employees, not to be enforced. Just the fact that the employee is uncertain if they can challenge this term in the contract can keep them from ever thinking of going solo or jumping ship.

Which is sort of weird if you think about it as these days it is no longer the norm to work for 1 single boss your entire career, most now these days will change jobs around every 3-4 years depending on career advancement within their current employer.

[Deleted]

So why do the vast majority of states (and countries) still permit post-employment non-competition agreements?

because it favors the insiders - As a general rule these sort of laws hurts everyone a little bit, but benefits a minority a lot.
These sorts of problems are really hard to get rid of because most people don't give a shit, but the ones who benefit are disproportionally interested in maintaining the statues quo.
There is literally countless such problems in the US alone.

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I live in The Netherlands and also had a non-compete but when I wanted to change jobs I had to wait 2 years before I could join another company in the same field, however since nobody here can force you to be unemployed for 2 years (court decided that years ago) my non-compete just meant it a tree died for nothing.
Also if your field of work is small enough you might be able to get around your non-compete for the same reasons.

Here, it can be enforced, however, to do so, they are required to pay the salary of the person who is no longer allowed to compete - It's pretty rare that anyone actually enforces it.

[Deleted]

I mean can you think of a better way to stifle competition than to hire anyone who might be able to be a competition someday and have them sign a non-compete?

getting a dejure monopoly instead of just defacto?

[Deleted]

I am not sure that's actually better. A de jure monopoly is more likely to be challenged politically which means the costs to maintain it through lobbying will likely be much higher.

A reasonable point.

[Deleted]

This is actually something studied in economics btw. It's cheaper to maintain an oligopoly and violate anti-trust laws than to set up monopolies because it is an uphill battle to prove that anti-trust laws are violated and far easier to bribe someone to shut such an investigation down while monopolies are extremely costly to maintain. Indeed this is the classical argument in libertarian economics; monopolies will fall by themselves because the cost to maintain them is not sustainable.

The problem is that this is only true in the regulated environment that is an anathema to them.