Non-Compete Agreements: Bad for Business?

Mike Masnick offers an excellent article on, which points out that the goal of Non-Compete Agreements and those of Digital Rights Management (DRM) are essentially the same: to restrict the free flow of information. Masnick accurately note that non-competes are the “DRM of human capital.”

A new study now shows that the degree of mobility for employees who move from one company to another may have a direct bearing on the economic health and diversity of a state.

Building on earlier reports, Harvard Business School produced a study comparing the economies of Silicon Valley, Boston, and the State of Michigan. It concluded that the fact that non-competes are not enforced in California has led to that state’s explosive growth, especially in Silicon Valley. Quoting from a report by the National Bureau of Economic Research (Job Hopping in Silicon Valley: Some Evidence Concerning the Micro-Foundations of a High Technology Cluster):

Using new data on labor mobility we find higher rates of job-hopping for college-educated men in Silicon Valley’s computer industry than in computer clusters located out of the state. Mobility rates in other California computer clusters are similar to Silicon Valley’s, suggesting some role for state laws restricting non-compete agreements.

On one hand, a company reasonably wishes to protect itself against possible leakage of protected information or trade secrets to a competitor. On the other hand, citizens of the United States cannot have their rights to seek employment violated by anyone. This is especially important these days, since corporate loyalty towards employees went out with the leisure suit.

Frankly, I believe that both sides of the non-compete argument are understandable and reasonable–just inequitable. Businesses should consider the practice of compensating for employee exclusivity. If a company wants to monopolize the employment status of a former employee for an additional 12-24 months beyond the severance of the relationship, then they should pay for it. They could set up an individualized non-compete fund for applicable employees/positions. It’s only fair.

The Harvard Business School study believes ten other states are “significantly more lenient” with the enforcement of non-competes: Nevada, Arkansas, Washington, Montana, North Dakota, Minnesota, Wisconsin, Connecticut, West Virginia, and Oklahoma.

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