Massachusetts Non-Compete Public Hearing

[On Sept 12, 2022 I’m salvaging this old post that I published on my old blog in 2009]

A quick update on the Public Hearings at the Joint Committee on Labor and Workforce Development held in Boston on October 7th, 2009.

Today I went to State House in Boston and testified before the Joint Committee on Labor and Workforce Development on the subject on Non-Competes in the state. The hearings today were dominated by bills that had to do with “paid sick days”. Here is the days agenda

If you were a mother and wanted to make the case for paid sick days to care for your child, what would be better than to bring your child with you when you are about to testify to the Committee on Labor and Workforce Development on a bill about paid sick days? To be fair, the child sat quietly and ate a peanut butter and jelly sandwich and at one point tried to help read out her mother’s prepared testimony.

After hearing the testimony from several people and seeing how many children there were in the room just drove home the point that many people made. When their children were sick, they had to take them along to work because they could not risk losing their jobs. That’s just wrong; I had assumed that most people had paid sick leave. Unfortunately, I learned today that this is not the case.

Earlier this year, I posted several articles on the subject of non-competes. In reverse chronological order, these articles are:

• A conversation with Rep. Brownsberger
• Some other perspectives on the non-compete discussion
• Boston Bar Association: Symposium on Non-Competes
• In Summary: The Marx paper, mobility, other papers by Fallick et al., the proposed draft bill
• Preliminary comments on proposed draft of compromise non-compete bill
• Noncompetes and Inventor Mobility: Specialists, Stars, and the Michigan Experiment; the Matt Marx paper
• The Real Reasons for Retaining Non-Competes in Massachusetts
• In defence of employee non-compete agreements

As I said on July 9th 2009, there was a time when I absolutely hated non-competes with a passion. I thought they were intrusive and unfair to employees. I’ve done a lot of reading and thinking and come to the conclusion that I was wrong. I believe that non-competes have a good reason for existence and I support them. I also feel that the current state of non-competes in Massachusetts is broken and needs fixing.

HR-01794 and HR-01799 were both on the docket, but the compromise is the one that almost everyone focused on.  The first bill is the original one from Rep. Will Brownsberger, which would prohibit restrictive employment covenants. The latter bill is a bill sponsored by Rep. Lori Ehrlich.

I prepared testimony for both bills, and a written submission. For those of you who may have missed the bills, their text is available below.

hr-01794 The original bill by Rep. Brownsberger. (from the mass.gov web page here)
hr-01799 The amended bill with Rep. Ehrlich. (from the mass.gov web page here)
compromise-bill The latest draft of the compromise bill.

The various points of view

At one end of the spectrum, the committee heard from those who made the argument that the original Brownsberger-Jehlen Bill No. 1794 was “the only ethical thing to do.” The committee also heard testimony from those who felt that the “200 years of jurisprudence” was perfectly adequate and did not need any change.

Up until now, the discussion of these changes has been largely in the blogosphere, and the participants represented members of the high technology sectors of the industry. At the hearing however, members of the non-high technology sectors and small businesses presented strong argument against the proposed changes.

“Talented individuals are leaving the state in large numbers because they see noncompetes as unfair,” said one concerned individual who supported the proposed changes. “I am willing and able to work but no one will hire me because of the noncompete that I have with my previous employer. Therefore, I am collecting unemployment. Noncompetes are not fair,” and “Full pay and health insurance coverage should be guaranteed during the period of the noncompete,” said others. “After 10 years of consulting in Massachusetts, I now prefer to work out‐of‐state for one simple reason: The terms of a typical non‐compete agreement are not profitable,” said another individual who favored reforming the non-compete law.

One opponent of the reforms, who highlighted the fact that forty-nine states honor some form of noncompete agreements, said, “California is the only state that has outlawed noncompetes entirely; I do not want Massachusetts to be the only other state.” A small business owner against the changes said, “A single bill cannot cover all industries and people. In my business, individuals making much less than that threshold ($75,000 per year) have access to critical information and should be covered by a noncompete clause.” Another small business owner said, “Small companies employ more people in the state and the proposed changes will be devastating. These companies form the backbone of our economy.”

Dr. Matt Marx, Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at MIT’s Sloan School of Management presented compelling numbers based on his research on this issue of noncompetes that showed a significant number of employees were asked to sign noncompete agreements that lasted over three two years! Almost one-third of employees do not receive their noncompete agreements till their first day at work, and are pressured to sign them.

I also guest posted a column on the hearing at Xconomy.

The California Syndrome

At the hearing we took the expected, boring detour through winding testimony comparing Massachusetts to California, highlighting how companies in California are thriving just fine without non-competes. There were some “numbers” presented highlighting the market capitalization of California companies with those in Massachusetts and the number of companies in the NASDAQ. Conspicuous by its absence was any mention of the other area in which California led the Bay State, VC funded flameouts. Also absent was the fact that unemployment in California was a almost 36% higher than Massachusetts (California’s unemployment rate was 12.1% in August 2009 and Massachusetts was 8.9%. But, “almost 36% higher” seems more impressive. Just like our tax rate just went up 25% recently) based on data obtained from the Bureau of Labor Statistics. Let us put that in perspective, California has 2.24 million people who are unemployed, Massachusetts has 309 thousand.

One striking comment was a comparison between Massachusetts and California (again) that claimed that the only substantive difference between the two states was the non-compete law, suggesting maybe that 100% of the difference between the venture capital investment in California and Massachusetts was a result of this one issue.

There are a variety of other factors that set the two states apart; civilian labor workforce (18.5m vs. 3.5m in August 2009), and size of the state (163,696 sq. mi, vs. 10,555 sq. mi) are the first two that come to mind. With an economy with six times as many people, is it not reasonable to assume that they may in fact get more investment? And data has been provided before that shows that there is no long term trend showing a flight of venture capital funding from the state and the region.

To make the claim that the only substantive thing that differentiates Massachusetts from California is the non-compete law  however, caused my eyebrows to go up just a notch.

Don’t get me wrong, California has had great success, and these are successes that we should all be proud of, especially those in California. But, attributing all of this to a single subject of interest is, to say the very least, questionable.

In my opinion, the folks who want to outlaw non-competes in the state can do better than this incessant,  and utterly meaningless comparison to California.

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My point of view

As presented in my written and submitted testimony, I believe that the non-compete system is currently broken and in need of fixing. I believe that the bill does not go far enough to ensure full pay and health insurance for all those who are subjected to a non-compete agreement. I think the bill HR. 1794 is a step in the right direction and the compromise bill is too. But, I would like to see them go further.

Based on what I heard at the hearing today, I think the proposed bills need some thought on the thresholds (currently $75,000). Credible arguments were made in opposition of this threshold such as the case of the hourly employee making $63 per hour who works 1100 hours in the year (27.5 weeks, numbers based on one of the people who testified at the hearing). That puts the person just under $75,000 and therefore exempt from the provisions of this bill.

A much more significant issue impacting employee mobility (and I hope Dr. Marx will study this) is the effect of health care coverage, or lack thereof. Healthcare is required in Massachusetts thanks to the healthcare law. Some people who testified on the “paid sick leave” bills talked about mandatory health insurance as being their lifeline. But, insurance is not cheap. That’s why I think the companies must pick up the tab for healthcare during the period of the non-compete. There are many who would not be able to afford the mortgage, the bills, the kids activities, and paying for their own healthcare and therefore the current proposals to pay 50% of salary are grossly inadequate. Without employee sponsored health insurance, many individuals would be bankrupt because of their medical bills and in my own experience, a great engineer who I worked with who was over 65 years old continued to work only because he received excellent healthcare through our employer and he needed it to care for his ailing wife. The seven months that he was out of work after a layoff must have been a nightmare.

I favor non-competes; they provide employers with a protection on intellectual property during a long gestation period without other IP protection such as patents. At lunch I heard from some that one could file provisional patents and then subsequently increase the scope of the claims, or file additional patents. Incessant patenting as a means of IP protection have been cited as a natural consequence of eliminating non-competes.

Samuel Shafner makes a reference to this behaviour when he writes that

An organization that must live in constant fear of its employees pirating its core technologies, will naturally evolve coping mechanisms. Compulsive patenting of everything imaginable has been one such coping mechanism, but patent law is evolving in a direction that is beginning to limit this approach.

So, to those who don’t want to invest in litigation, I ask this; do you want to fund incessant patenting? With limitations imposed by patent law, how will industry cope?

This is a complex system and non-competes are one parameter. Outlawing them, or limiting them in any way, will cause industry to react in some other way to protect its interests.

It is clear that a significant number of skilled employees in the state are suffering under the current law, and the state has to use every available means to retain talent and help grow the economy. This is a challenging issue and the committee got to hear a broad spectrum of views. With the public hearings now completed, the bill will be taken up by the committee, and hopefully brought to the floor during the current session.

One thing that almost every person who testified commented about was the fairness and openness that has been seen throughout this process. Rep. Lori Ehrlich, Rep. William Brownsberger, and their staff, Attorney Russell Beck, Attorney Robert Mantell, Caroline Huang and everyone else who participate in this process deserve a round of applause.

Thank you all for allowing all of us to participate in this process.