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Stanford Study Credits Lack of Non-Competes For Silicon Valley's Success 114

Posted by timothy from the santa-clara-clause dept.
HughPickens.com writes Natalie Kitroeff writes at Bloomberg that a new study says the secret to Silicon Valley's triumph as the global capital of innovation may lie in a quirk of California's employment law that prohibits the legal enforcement of non-compete clauses. Unlike most states, California prohibits enforcement of non-compete clauses that force people who leave jobs to wait for a predetermined period before taking positions at rival companies. That puts California in the ideal position to rob other regions of their most prized inventors, "Policymakers who sanction the use of non-competes could be inadvertently creating regional disadvantage as far as retention of knowledge workers is concerned," wrote the authors of the study "Regional disadvantage? Employee non-compete agreements and brain drain" (PDF). "Regions that choose to enforce employee non-compete agreements may therefore be subjecting themselves to a domestic brain drain not unlike that described in the literature on international emigration out of less developed countries."

The study, which looked at the behavior of people who had registered at least two patents from 1975 to 2005, focused on Michigan, which in 1985 reversed its longstanding prohibition of non-compete agreements. The authors found that after Michigan changed the rules, the rate of emigration among inventors was twice as a high as it was in states where non-competes remained illegal. Even worse for Michigan, its most talented inventors were also the most likely to flee. "Firms are going to be willing to relocate someone who is really good, as opposed to someone who is average," says Lee Fleming. For the inventors, it makes sense to take a risk on a place such as California, where they have more freedom. "If the job they relocate for doesn't work out, then they can walk across the street because there are no non-competes."
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Stanford Study Credits Lack of Non-Competes For Silicon Valley's Success More

Stanford Study Credits Lack of Non-Competes For Silicon Valley's Success

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  • Steve Jobs is the Monkeywrench (Score:5, Informative)

    by Baby Duck ( 176251 ) on Wednesday March 18, 2015 @03:41PM (#49286815) Homepage
    And then there's those Steve Jobs emails that revealed major players in Silicon Valley created their own de facto non-compete policies with each other. The study is incomplete without examining intra-California career stifling.

    • Yup.
      Non compete agreements are blatantly unconstitutional, but they exist everywhere, including in California. In California, they just collude behind closed doors instead of out in the open.

      • Re:Steve Jobs is the Monkeywrench (Score:4, Interesting)

        by bouldin ( 828821 ) on Wednesday March 18, 2015 @05:58PM (#49287881)

        In my state (Georgia), non-compete contracts were specifically banned in the constitution until the Republicans snuck through a constitutional amendment with some amazingly blatant doublespeak.

        The ballot read:

        Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?

        Unfortunately, the state is full of enough weak-minded sheep that the amendment won 2:1.

        • Re: (Score:3)

          by chihowa ( 366380 )

          That's a fucked up way of amending a constitution anyway. A ballot to amend a constitution should contain the actual text that will be amended to the constitution. If the purported reasoning for the amendment (eg, to make Georgia more economically competitive) is going to be on the ballot, then different interpretations should be included from opposing groups.

          • Re: (Score:3)

            by bwcbwc ( 601780 )

            Yeah, even Florida requires the actual text of the proposed amendment to be put on the ballot.

            It's a sad reflection on society that "right to work" laws and non-compete contracts are touted as engines to grow the economy, while things like a living minimum wage are denigrated as class warfare. When your middle class is disappearing, you actually get more economic bang for the buck when the money goes to consumers rather than investors. The fact that consumers have more money to spend creates true investment

          • Yeah, the voter ID amendment in Minnesota was deliberately deceptive on the ballot. Fortunately, it failed (it would have caused a lot of problems with absentee voting, for example, and absentee voting was not mentioned on the ballot).

        • Surely such an amendment would be unconstitutional, in that the wording mislead the people...?

          • Re: (Score:2)

            by Ihlosi ( 895663 )
            Surely such an amendment would be unconstitutional, in that the wording mislead the people...?

            Which constitution explicitly bans misleading the people?

    • The study is incomplete without examining intra-California career stifling.

      Does it really matter in this case?

      Non-competes in other states are enforced by the government, and therefore are much more widespread and effective than a criminal conspiracy of some of the big players.

    • Re: (Score:3)

      by tlhIngan ( 30335 )

      And then there's those Steve Jobs emails that revealed major players in Silicon Valley created their own de facto non-compete policies with each other. The study is incomplete without examining intra-California career stifling.

      That only affected "pull" style recruitments - where a company recruits from another company.

      You as an employee were completely free to apply for a position at the other company. If you worked at Apple and wanted to go to Google, you submitted your resume to Google. If Google liked yo

      • Nope.

        * I have contacted some companies directly and I have been explicitly told my someone at that company that they can not hire me because my current company would retaliate against them.
        * I have seem copies of contracts where it explicitly stated that the two countries agreed not to hire each other's employees.

        • I have seem copies of contracts where it explicitly stated that the two countries agreed not to hire each other's employees.

          I assume you meant "companies", not "countries", but even this seems really strange to me, at least as an American - under our antitrust laws, they'd have to be insane to put something like that into writing.

          • Re: (Score:2)

            by Agripa ( 139780 )

            I assume you meant "companies", not "countries", but even this seems really strange to me, at least as an American - under our antitrust laws, they'd have to be insane to put something like that into writing.

            That sure stopped Adobe, Apple, Google, Intel, Intuit, Pixar, Lucasfilm, and eBay from discussing and agreeing to do this in a tangible medium. All they had to put up with is a civil lawsuit.

    • No compete != No poaching. No poaching matches your last statement about career stifling, no competes means that companies won't try to produce products that someone else produces. I'm not claiming they are not both issues to discuss, I'm pointing out that you can't mix the two conversations like you did and have a rational discussion.

      On one hand, the no-competes are stifle innovation and harm consumers. This is not unconstitutional as some have said, but it is a problem with anti monopoly laws. Further

  • ...it innovates better than almost any place else, and failure is (sometimes) OK.

    http://www.scientificamerican.... [scientificamerican.com]

    It has very little to do with employees not being able to go anywhere else...many of the people who work there come in from other countries where this isn't even an issue.

    • Re: (Score:2)

      by aitikin ( 909209 )
      The implication (at least that I get) is that people who are creative and inventive thinkers will immigrate to California because (at least in their eyes) if it doesn't work out, they can just quit and find another job because there's no non-compete clause. I know when I signed my contract for my current position, I was very wary of the fact that there was a non-compete clause, but then I realized what any first year law student would in looking at my job and the non-compete, it's completely unenforceable.

    • ...it innovates better than almost any place else

      Of course. But why does it innovate better? One reason is the employee churn and cross pollination of ideas. Employees don't feel locked-in, and can go where they are most productive. Companies can easily lose employees if they don't treat them like valuable assets, but they can also easily poach them from others. I live and work in Silicon Valley. There are a lot of things that California does wrong, but on this issue, they've got it right. Free and open competition is a good thing, with ideas, as w

  • Can't comment (Score:4, Funny)

    by Anonymous Coward on Wednesday March 18, 2015 @03:44PM (#49286849)

    I can't provide any substantial comments on this article for another 4 months.

  • Banning enforcement of certain aspects of a contract may be useful. But it deprives the parties of the freedom to meaningfully enter into such contracts, and I'm not at all sure, the utility ought to outweigh the liberty.

    In fact, I'm quite sure of the opposite...

    • Re:Utility vs. freedom (Score:5, Insightful)

      by AuMatar ( 183847 ) on Wednesday March 18, 2015 @03:59PM (#49286987)

      Great. Then you don't mind if I take a hit out on your life? I mean, its just a contract, the fact its to kill someone doesn't outweigh my liberty to enter into it, does it?

      Congratulations, you've just said the stupidest thing I've ever read on the internet. That includes "Where does babby come from".

      • That's a crappy analogy - a better question to ask is whether he'd be okay with a contract that required the employee to donate a kidney to the company upon leaving.

    • Re:Utility vs. freedom (Score:5, Insightful)

      by knightghost ( 861069 ) on Wednesday March 18, 2015 @04:03PM (#49287025)

      There is no freedom when the contract is de-facto mandatory for employment.

      • Re: (Score:2)

        by pspahn ( 1175617 )

        Is it?

        The last two times I was given a non-compete to sign (Colorado), I stood up and addressed the issues I saw with it.

        The first one was reviewed by a co-worker's legal buddy. There was a lot of boilerplate, but there were also certain components that were totally unenforceable and unreasonable. A couple people signed it, but the majority of us refused. What is the employer going to do, fire everyone?

        The last one was a completely reasonable non-compete. In my case, my work is fairly niche, and the numb

    • Re:Utility vs. freedom (Score:4, Interesting)

      by taustin ( 171655 ) on Wednesday March 18, 2015 @04:03PM (#49287031) Homepage Journal

      It's only freedom if both parties are equal in the negotiations. That is rarely the case in employment contracts. Since a free market is, almost inherently, impossible, it is a choice between being regulated by the more powerful of the two parties, or by an outside third party.

      Only one side of the contract would agree with you.

    • Banning enforcement of certain aspects of a contract may be useful. But it deprives the parties of the freedom to meaningfully enter into such contracts, and I'm not at all sure, the utility ought to outweigh the liberty.

      In fact, I'm quite sure of the opposite...

      It seems to me that banning non-competes increases both utility and liberty.

      For the utility it seems obvious, non-competes are a tragedy of the commons. The talent pool is a common resource for companies and they all benefit from the largest and most talented pool, ie one without non-competes. But on an individual level a company benefits from having a non-compete since employees have a more difficult time leaving, so the entire talent pool suffers.

      As for the freedom level I find the argument unconvincing.

      • Re: (Score:2)

        by bouldin ( 828821 )

        Banning enforcement of certain aspects of a contract may be useful. But it deprives the parties of the freedom to meaningfully enter into such contracts, and I'm not at all sure, the utility ought to outweigh the liberty.

        As for the freedom level I find the argument unconvincing.

        mi does not actually make arguments. In this case, Stanford academics made the argument that the utility DOES outweigh the liberty, and supplied evidence worthy of peer review.

        mi just waves his hands and spouts simpleminded diarrh

    • Re: (Score:2)

      by bouldin ( 828821 )

      You're a troll and an idiot.

      They are talking about bans on NONCOMPETE contracts. Competition is supposed to be the driving force that makes capitalism work.

      If you would take off your kindergarten thinking cap and act like a real adult, you would see that some regulation is necessary to keep everything free.

    • You are still free to sign the contract. The state just makes it so that you are free to ignore the contract you have signed. Bam. Even more freedom.

    • Re: (Score:2)

      by crioca ( 1394491 )

      Banning enforcement of certain aspects of a contract may be useful. But it deprives the parties of the freedom to meaningfully enter into such contracts

      You’re actually making the argument that the state declining to exert power over its citizens is actually a loss of freedom? That’s moronic.

    • Re: (Score:2)

      by Ihlosi ( 895663 )
      But it deprives the parties of the freedom to meaningfully enter into such contracts,

      Just word it differently. "For up to x months after the end of the employment contract, employer will pay employee x% of their last salary if they are not working in field Y".

      Basically, a "carrot" noncompete instead of a "stick" noncompete.

      But of course employers wouldn't want to pay for having their business model protected.

  • Refuse (Score:5, Informative)

    by SumDog ( 466607 ) on Wednesday March 18, 2015 @04:05PM (#49287045) Homepage Journal

    I have refused to sign any contract with a non-compete in it for IT work starting with my first IT job in 2005. I think I saw something on slashdot back then making me weary of them.

    My first company was getting everyone to sign them after sales people were leaving and taking clients, but I just refused and they never asked. With every other company, if I saw it in the contract, I'd tell them "I don't sign non-competes." They would always take it out or give me a new contract. Only one company made a big deal about it, a start up, and it wasn't even the company but their horrible lawyer. The principal investor told me to "sign the contract you want." I wasn't about to writing my own contract and they started paying me anyway...so I basically got paid without a contract. Made it easier to open source what I wrote after the company failed. :)

    TL;DR NEVER SIGN A NON-COMPETE. They are unethical.

    • Just because a company goes bankrupt doesn't mean its IP is suddenly public domain--the creditors or another company (which either is the sucessor-in-interest or purchased them) will own the copyrights, including in the software you created as a work for-hire if you were employed by them.

      If you open-sourced that software without permission, you put copyrighted work in the open source community without authorization. That means the creditors or other successor-in-interest to that failed startup can get an i

      • Nope.

        If someone does work as a contractor without a formal contract, by default the software / IP is the property of the contractor, and not the other company. He is hence perfectly within his rights to open source his software.

        The situation is different if you are an employee.

        • Nope.

          If someone does work as a contractor without a formal contract, by default the software / IP is the property of the contractor, and not the other company. He is hence perfectly within his rights to open source his software.

          The situation is different if you are an employee.

          That is the rule, hence "If you make a work *for-hire*" in my original post. There is a BIG distinction between making a work as a contractor and making one as an employee--and you don't need an employment contract to be working as an employee. Working for a company and not providing your own contract or being willing to take the time to provide one suggests employee, although there may be other facts supporting a finding that he made the work as an IC.

          • That is the rule, hence "If you make a work *for-hire*" in my original post. There is a BIG distinction between making a work as a contractor and making one as an employee--and you don't need an employment contract to be working as an employee. Working for a company and not providing your own contract or being willing to take the time to provide one suggests employee, although there may be other facts supporting a finding that he made the work as an IC.

            But the guy you were talking to wasn't work-for-hire -- did you even read his post?

            • Yes. He didn't say anything about whether he was working for hire or not, just that he had worked for different companies. That could either mean work for different companies on an IC basis or on an employee basis.

    • Re: (Score:2)

      by pspahn ( 1175617 )

      Responded above before I saw this. But this may totally be the case.

      I don't think non-competes are entirely unethical. Their premise makes sense, but the gray areas are where lawyers err on the wrong side of the morality spectrum. If an employer isn't willing to make changes to a contract to remove those nasty gray areas that make non-competes absurd, you should be grateful for not signing yourself up for disaster.

      At this point, I imagine many employers don't even realize the non-compete clauses are in th

    • You can always strike out the offending clause and initial the strikeout. The other party then has the option of accepting this, or not, as they choose. (They always make you sign first, I have noticed).

      In any case such clauses were ruled unlawful in UK courts years ago as they prevent you using your skills.

  • Well DUH (Score:1)

    by Anonymous Coward

    So you are saying that allowing people to gather knowledge and use said knowledge even if they change jobs is beneficial? No surprise there. Copyright, patents, non competes, all are almost always only good for the big corporations and have a detrimental effect on the economy as well as innovation.

    We use capitalism because its pretty much the best economic system we have. The biggest component of capitalism is to let people do what they do best. Monopolies in any way will interfere with that. Sometimes a sm

  • I think the article misses the mark when it focuses on inventors explicitly choosing districts with non-competes. That may be a factor, but I think people tend to choose the job based on the company and the offer. Things like non-competes are typically a secondary motivation.

    Far more likely the effect comes from better skill utilization. If you work at a company for 5 years and become an expert at X then you're probably an extremely valuable employee when you do X. If you change jobs you'll be most effectiv

    • I think it probably applies to any job. Myself I would never sign a non-compete unless the compensation would shortly free me from having to ever work again. My Father had signed such an agreement and I saw him suffer the consequences when he finally left that company. At the time he told me he could fight it in court that by the time the lawyers were done there wouldn't be anything left and he'd still be out the years of lost income. I didn't know then that moving to California could possibly have been a v

  • Why Boston's Route 128 lost to Silicon Valley (Score:4, Interesting)

    by twasserman ( 878174 ) on Wednesday March 18, 2015 @04:27PM (#49287225)
    Non-compete agreements may be part of it, as were the decline and fall of Digital Equipment Corporation, Wang, Data General, Prime Computer and more. With the notable exception of Akamai, there were relatively few big Internet successes among Boston area companies, and the past 15 years have continued that trend.

    But I think that Boston's terrible weather is also a big factor. Here's an analysis [mit.edu] of Boston winters that shows the grim reality of 5 or 6 months out of every 12. When sunshine, mild weather, and Silicon Valley jobs beckon on a gloomy February day, it takes a wicked love for the Hub or the Bruins to turn down a good offer. The cost of housing is much higher in the Bay Area, but the bills for heating oil and winter clothing go away, and cars last a lot longer, just to name a few things.

    Boston remains one of my favorite American cities to visit (only during baseball season, though), but I no longer [perhaps unfairly] associate it with startups. Maybe the innovative and creative ideas get frozen out.

  • There's another law, too... (Score:5, Informative)

    by Ungrounded Lightning ( 62228 ) on Wednesday March 18, 2015 @04:29PM (#49287247) Journal

    TFA says:

    ... the secret to Silicon Valley's triumph as the global capital of innovation may lie in a quirk of California's employment law that prohibits the legal enforcement of non-compete clauses.

    Yes, that's important.

    But (IMHO even more important) is another "quirk" of California's labor law, which you'll find as a page in the bundle of every employment agreement you're handed in Silicon Valley. This affects patent assignments:

    To paraphrase: If
      - you Invent something,
      - you didn't use the company's resources, and
      - building and selling it isn't in the company's current or expected business model
    It's yours.

    Any patent assignment terms to the contrary are void, overridden by the state's compelling interest. Your employer can't put your great idea on a shelf to gather dust and make it stick. You can partner with a couple of your buddies, move into a garage across the street, and start a new company to exploit the invention.

    This makes California an inventor's Mecca. Startup companies bud like yeast. Inventions go to market rather than being shelved or becoming just playing cards in a game of cross-licensing poker. Inventors get rich. This attracts more talent, so the longer it goes on the easier it is to find the "other two guys" with the complimentary talent you need to make your startup work, making things even easier, in continual positive feedback.

    Small companies get a hiring advantage over conglomerates, too, because the fewer things an employer is into, the fewer classes of invention the employer can lock up rather than exploit.

    • To paraphrase: If
      - you Invent something,
      - you didn't use the company's resources, and
      - building and selling it isn't in the company's current or expected business model
      It's yours.

      But this isn't a "quirk of California's labor law". This is true in almost all the States.

      In general, in the absence of a prior agreement to the contrary, what you wrote is true in most states. Certainly every state I've lived in, and I've lived in more than a few.

      What you left out is that if you were explicitly paid to develop your product or invention, in general it then belongs to whoever employed you to do it. It doesn't have to be in "the company's business model" if you were being directly and e

      • But this isn't a "quirk of California's labor law". This is true in almost all the States.

        Really? Are you saying that, in most other states, the state law voids your patent assignment contract with your employer?

        Remember: What I'm talking here is not "you invented it on your own time with your own tools". I'm talking "You SIGNED A CONTRACT GIVING ALL YOUR INVENTIONS TO YOUR EMPLOYER and THEN invented it on your own time with your own tools."

        I've never heard of this anywhere except CA. I'll be very inte

        • That's been true in Minnesota since 1982. I don't know where to go to find a list.

        • Really? Are you saying that, in most other states, the state law voids your patent assignment contract with your employer?

          NO. I wrote "In general, in the absence of a prior agreement to the contrary...

          Your patent assignment contract is "a prior agreement to the contrary."

          Try reading next time.

      • Sigh. I should have read your post a little more before replying.

        In general, in the absence of a prior agreement to the contrary, what you wrote is true in most states.

        But we're talking in the PRESENCE of a prior agreement to the contrary:
        - You hired on to do X, for Consolidated Widgets, a company that does X, Y, and Z and isn't interested in doing Q (any time soon).
        - When you hired on, Con Widgets had you sign a patent assignment giving ALL your inventions to them.
        - While still emp

        • Sigh. I should have read your post a little more before replying.

          And I replied to your earlier post before reading this one. So we're even. :o)

          - You hired on to do X, for Consolidated Widgets, a company that does X, Y, and Z and isn't interested in doing Q (any time soon).
          - When you hired on, Con Widgets had you sign a patent assignment giving ALL your inventions to them.
          - While still employed, you had a bright idea that's a major breakthrough for Q.
          - You develop your idea on your own time with your own resources.

          In California, YOU own the Q invention, regardless of what your contract with Con Widgets says.

          Well, that's a little different from the way you described it the first time. This much would be true in most states, except for the patent assignment agreement part. I think in most states the patent assignment would be binding. Which is why I would never sign one.

          I had not heard that you can't assign ALL your patents to the company as a requirement of employment. If so, it must be a fairly recent law, because in fact my fathe

  • Getting it Right (Score:5, Interesting)

    by Mullen ( 14656 ) on Wednesday March 18, 2015 @05:43PM (#49287767)

    This is where I think the Right Wing and Republicans get it wrong when it comes to business. They look at it as, what is best for business is what will drive business, but in the case of California, it is what is best for employees is what drives business. Who in their right mind would want to work in a state where business can keep you from leaving by creating non-compete contracts? People with talent are going to go where they think it is best for them. In the case of California, weather and not being locked into a company is what is best for them.

    On a side note, I left a company in California that was based out of New Mexico and they told me I could not work in IT for three years because of the non-compete I signed with them. I laughed at them and told them to come to California and try to enforce it. Needless to say, I kept working in California.

    • In the case of California, weather {...} is what is best for them.

      On the other hand, we have water, so much of it that half the year we have to freeze the excess :)

      Life is full of trade offs ....

    • Re: (Score:1)

      by Anonymous Coward

      MA has extremely strong non-competes and it's no red state. By contrast Texas has limited non-competes for over 120 years.

      • Shhh. You are ruining the narrative. Quickly, dump something on Fox News or Sarah Palin or you'll lose all credibility.
  • .... your former employer you are working for them. Or unless you actually misappropriate some ip from your old company, which is protected by laws that can carry criminal penalty for infringement and not just civil penalties anyways, whether you signed a non-compete or not, how would your old company even know what you were doing after you left?

    • Re: (Score:2)

      by Ihlosi ( 895663 )
      whether you signed a non-compete or not, how would your old company even know what you were doing after you left?

      You suddenly show up in a customer-facing role at another company.

      Your name pops up in patent applications filed by another company.

      Your job is high-profile enough that your name can be found on the other companys website.

      Your old employment contract also contains clauses about you having to report your employment status for the duration of the non-compete.

      There are lots of ways.

      • Re: (Score:2)

        by mark-t ( 151149 )

        Your old employment contract also contains clauses about you having to report your employment status for the duration of the non-compete.

        As far as I know, the only organization that you are obligated to make any kind of regular report of your employment status to is the revenue branch of the regional government. What would the company do if you didn't report in? Hire a private eye to track you down? How likely is it going to be even worth their time to pursue you unless you have actually misappopriated so

        • Re: (Score:2)

          by Ihlosi ( 895663 )
          What would the company do if you didn't report in?

          Sue due to your violating your contract.

          Hire a private eye to track you down?

          Not necessary if you fail to report despite agreeing to do so in the contract. This would only be necessary if the former employer suspects that your reports are not true.

          How likely is it going to be even worth their time to pursue you

          That depends on how many lawyers they have on their payroll that aren't busy doing other things.

          • Re: (Score:2)

            by mark-t ( 151149 )

            If I signed a contract stating that I was supposed to name my next child "Bob", they could try and sue me for violating that contract as well.... that doesn't mean that I'd actually end up owing them anything. A contract that requires you to do things that a company is not legally allowed to ask you to do is not enforceable. It should go without saying, even though it is usually made explicit in a non-compete contract and is true anyways even if you never sign one, is that you are not allowed to disc

  • I'll assume that "Right to Work" does not include the right to break noncompetes.

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