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State House Testimony
 

State House Testimony

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State House Testimony regarding employee non-compete agreements.

State House Testimony regarding employee non-compete agreements.

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    State House Testimony State House Testimony Document Transcript

    • October 7, 2009
      Senator Thomas McGee, Chair Representative Cheryl Coakley-Rivera, Chair Joint Committee on Labor and Workforce Development State House Boston, MA 02133cc: Representative Hanlon Peisch; Representative Brownsberger
      Subject: State House Testimony Regarding Employee Non-Compete Agreement
      Innovation is the engine that has long fueled economic prosperity here in the Commonwealth of Massachusetts. We have a proud history of seeding and growing successful companies based on new ideas, inventions and discoveries. These breakthrough companies not only employ highly skilled workers and pay significant taxes to fund valuable programs in Massachusetts, but they also help the Commonwealth thrive in the increasingly competitive national and global economic environment.
      Yet there is a major barrier to entrepreneurialism and commerce in our state: the use of non-competition agreements. These agreements, mandated by employers, force skilled employees to sign away their rights to engage in any business of a competitive nature for a year or more when they leave their present jobs. In short, non-competition agreements treat employees as the intellectual property of their employers – which they simply are not. These agreements are an unnecessary, unfair and senseless barrier that should be removed.
      As a general partner at Spark Capital, a venture capital firm based in Boston which is currently backing Internet start-ups such as Twitter and Boxee, I see on a daily basis how the use of non-competes is stifling the genesis of new start-ups in our state and is forcing many venture capital firms to invest their money in other states that don’t enforce non-competes. We can’t let this happen. We need to stimulate the Massachusetts economy and we need our state to stay at the forefront of innovation.
      Venture capital firms invest a tremendous amount of money in cutting-edge companies. According to data from IHS Global Insight, in 2008, venture-backed companies employed more than 12 million people across the country and generated nearly $3 trillion in revenue. Massachusetts is one of the top states for venture-backed jobs, but these jobs are a mere fraction of what they could be. Moreover, the enforcement of non-competes is driving many entrepreneurs to flee to new regions or, worse, preventing them from pursuing their innovations for fear of litigious action against them.
      Non-competes unnecessarily restrict workers and prevent them from pursuing profitable opportunities, based on their talents and expertise. Many large companies in our region argue that non-competes protect their trade secrets and intellectual property. There is no question that it is important to make certain that our largest companies continue to compete and support the local economy. However, in actuality, non-competes are not necessary if non-disclosure agreements and non-solicitation agreements are in place. There is simply no proof to suggest that non-competes are effective in protecting companies.
      With non-competes in place, many entrepreneurs are handcuffed and have to wait to move forward on their ideas – ideas that could immediately be funded by venture capitalists and create jobs and get money flowing to the local economy. But if these ideas have to wait a year or more, someone else may act on a similar concept and get the financial backing first. Or, if entrepreneurs decide to not honor their non-competes, many venture capital firms will back away from a great idea, fearing their investment dollars will be squandered fighting legal battles. This had led many venture capital firms based in Massachusetts to invest their dollars outside of the state, nurturing the economies of other states that do not enforce non-competes, such as the State of California.
      Consider California: some of the best ideas are originating in Silicon Valley, and the high-tech industry in the area is thriving, despite the weak national economy. Over the last decade, dozens, if not hundreds, of start-up companies have sprouted out of Google alone. Google, like other companies in California, doesn’t ask its employees to sign non-competes. Now ask yourselves: how many start-ups have come out of our state’s largest technology companies? Massachusetts entrepreneurs and technologists have the skills and innovative ideas that rival those in Silicon Valley. Why shouldn’t our entrepreneurs have the same rights and opportunity as their counterparts in California?
      Many larger companies in Massachusetts argue that venture capital firms are only sympathetic to those startups that prey on big companies. This is not the case. The truth is, no one likes to see the best and brightest in a company leave for something else. Once venture capitalists invest in new companies, we become board members and fiduciaries. It’s tough when the best employees from our portfolio companies leave and start new ventures. But that is the risk of doing business. Companies that are so concerned about their employees leaving should reconsider how they treat their workers and do their best to maintain an environment that employees want to stay in. As active investors in Silicon Valley companies, we have seen that overall, these companies treat their employees very well since there is always the risk that these employees could leave. And because of this, there is increased competition that forces companies to innovate from within and get to market more quickly with their new ideas.
      In other industries, such as sports, it’s easier to see the deleterious effect of non-competes. In 2004, if Curt Schilling had a non-compete, he would have had to sit out the season after leaving the Arizona Diamondbacks after the 2003 season. The Red Sox couldn’t have had the best and brightest in the game at that time. The team probably would have never made the playoffs, there never would have been the Bloody Sock in Game 6 of the ALCS against the Yankees, and the Red Sox wouldn’t have won their first World Series in 86 years.
      The Red Sox needed Curt Schilling to remain competitive in 2004; they couldn’t have done it if non-competes were in place. Similarly, the Commonwealth of Massachusetts needs to remain competitive in business, both nationally and internationally, in 2009 and beyond. We need the best ideas and the greatest talent when it’s available, not a year later. Massachusetts needs to stay ahead of the curve in innovation. That’s why I respectfully ask for your support in eliminating non-compete agreements and giving our entrepreneurs, investors, talented workers – and our economy – every possible advantage.
      Thank you.
      Respectfully,
      Bijan Sabet
      General Partner
      Spark Capital
      137 Newbury Street
      Boston, MA 02116