Non-competition agreements should be banned.

Industry representatives claim that non-competition agreements are necessary for companies to protect their intellectual property, more specifically to protect their “trade secrets.”  In this post I shall argue that

1. A Non-competition (N-C) agreement is the wrong tool for protecting confidential intellectual property (IP).  Detailed non-disclosure (N-D) agreements are the right tools.

2. The primary effect of N-C agreements is to suppress competition in the labor market, with deleterious consequences for the society at large, for the Commonwealth, and for the individual.

3. N-C agreements are unethical.

1. A Non-competition agreement is the wrong tool for protecting confidential IP.  Detailed N-D agreements are the right tools.

The basic argument in favor of N-C clauses is that they enable companies to protect their confidential intellectual property.  In fact, N-C clauses are blunt instruments that do not achieve their intended purpose while causing harm to a large class of people.  By far the most common duration for an N-C clause is one year.  Now it may be that that there are trade secrets whose commercial value substantially decays over the course of one year, but surely this is an unusual circumstance even in the fastest developing technology areas.  Indeed, non-disclosure clauses generally have no time limit, because everyone recognizes that there is proprietary information whose value may last for years or even decades.  No one argues that N-C agreements should therefore be extended over many years, let alone decades.  Therefore, it makes no sense to claim that an N-C clause protects confidential information — it only delays the potential release of that information for one year.  There is a mismatch between the time value of confidential information and the duration of N-C restrictions, a mismatch that strongly suggests that one really has little to do with the other.  Moreover, many employees do not have access to confidential information of significant commercial value.  How can it make sense for such people to be subject to an N-C clause, which arguably is an extraordinary intrusion by a former employer into the life of an employee?  In this case there is no connection between confidential IP and the N-C clause at all.

If an employer truly has confidential information of significant commercial value that must be protected, surely it would be worthwhile for that employer to draw up a description of exactly what that information consists of, and to protect it with an employment agreement that makes reference to the document with the information that is to be protected.  When an employee leaves his job, he can be presented with this document and reminded of his obligations.  Because the document would be specific in its reach, breach of trade secrets and the like would be easily detectable in a discovery procedure.  Needless to say, this is not standard practice in the industry.  Instead, employee agreements commonly make use of highly vague and imprecise language, so that the departing employee really has no idea what exactly it is that the former employer regards as secret.  One presumes that vague language of this sort is deployed precisely so as to frighten an employee into staying put, or if he does leave his job, into changing fields.  Banning vague agreements of this sort and replacing them with detailed N-D agreements would have the advantage of making the detection of trade secret misappropriation a much more tractable problem for the Courts, thereby eliminating the need for N-C clauses, while also freeing employees to work for other companies knowing exactly what technical details must remain secret.

Sometimes one hears the argument from “inevitable disclosure” — that an employee will inevitably “leak” secrets as soon as he begins work at a new company and the N-C restriction prevents this from happening.  This also makes no sense.  Suppose the former employee has taken a year off, and then begins work with a competitor.  It may be true that his recollection of those secrets may not be as sharp as it was a year ago, but surely it is still there, and by the standard argument, inevitable disclosure will begin as soon as he begins working — just one year later.  The argument can only make sense in the unusual circumstance of a trade secret whose time value is less than one year.  Should N-C agreements be imposed on a large class of people to deal with a circumstance that is rare?

2. The primary effect of N-C agreements is to suppress competition in the labor market, with deleterious consequences for society at large, for the Commonwealth, and for the individual.

Why, then, do employers insist on N-C agreements, if they are such ineffective tools for protecting secrets?  I would submit that the real reason for the popularity of the N-C clause is that it suppresses the free market for labor.  It keeps labor costs low, it prevents costly turnover in the ranks, and it generally leads to a quiescent employee population.  Consider for a moment the predicament of an employee with a one year N-C.  If a competitor offers him a more lucrative position or a promotion or better working conditions or just a better run company, he must always decline the offer for fear of a lawsuit.  His only recourse is to leave his job, and sit on the sidelines for a year, while his skills decay and he receives no income (or perhaps in a compromise bill perhaps half of his standard salary), at the end of which time he has no guarantee of a job — and even if he does find a job, the real risk of a future lawsuit over trade secret misappropriation based on a highly vague N-D agreement.  Clearly, very few people (whether they earn $50k or $100k or even $150k) per year will be willing to take such a risk.  So these employees stay where they are or they leave their field.  I will not review the standard arguments from Economics 101 why this is not a good arrangement for society.  Clearly it is not.  I will only offer the speculation that the huge decline in recent decades of American graduate students in technical specialties is, in part, a consequence of the suppression of compensation and job mobility by means of draconian employment agreements.

3. N-C agreements are unethical.

Even if N-C agreements were an appropriate way to protect IP (they’re not), and even if N-C agreements didn’t damage our economy (they do), it would still be wrong to impose them on the citizens of our Commonwealth.   A common argument of industry representatives goes something like this: “The employee signed the N-C agreement; he didn’t have to sign the agreement; he is free to sign whatever agreement he prefers.”   However, in an environment where virtually all high tech employers insist on N-C clauses, it is a rare circumstance for someone to be offered a job without one.   If you want to continue your career in your field and if you want to work for a high tech company, you will be forced into an agreement of this sort.  One of the fundamental values of our society is the belief in opportunity, in the opportunity to find a better, more fulfilling, higher paying job if only we educate ourselves and we work hard.  N-C agreements violate these values by preventing people from pursuing their best interests, however they define them.  Former employers should not have the ability to interfere in our future endeavors.  They should not have veto power over who we can work for.  It is the duty of government to embody the fundamental principles of our Country and our Commonwealth with laws that reflect these tenets.  Non-competition clauses should be banned.

Published by LarryGillick

I spent 24 years in the speech recognition business, serving as VP of Research at Dragon Systems, Voice Signal Technologies, and Nuance Communications. I received a BA from Swarthmore College, an MA from Columbia University, and a PhD in applied mathematics from MIT.

One reply on “Non-competition agreements should be banned.”

  1. Larry,

    Thanks for speaking out! You make fair points. As you say, there is often a mismatch between the limits imposed on an employee and the interests that the agreements are intended to protect. Also, in some parts of the marketplace, the agreements really do seem to be a leash designed to hold down labor costs.

    The intention of the legislation we have framed is to limit the use of non-compete agreements to cases in which they protect legitimate interests and also to make them more narrowly drawn to reduce the kinds of mismatch that you identify. We expect that many non-compete agreements in the market today would stand under the legislation, but some would not. The legislation would help address some of the concerns that you address quite specifically — for example, it repudiates the doctrine of inevitable disclosure and prohibits their use unless very specific interests are protected.

    We look forward to more feedback and encourage feedback that recognizes the progress the legislation actually makes and considers how it can be improved.


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