A recent article in the Harvard Business School Working Knowledge blog made the case that forcing employees to sign non-compete agreements may hurt more than help. State law varies widely in the ability to enforce non-competes. California is among several states where non-compete agreements are substantially restricted by law, along with Alaska, Connecticut, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Washington, and West Virginia. So, even if someone signs a non-compete agreement in Massachusetts, for instance, a judge in California is not obligated to enforce the contract because it conflicts with California state law.
New research by Lee Fleming, Matt Marx, and Jasjit Singh investigates whether there is a “brain drain” of talented engineers and scientists who leave states that allow non-competes and move to states that don’t.
“There’s a saying out in California: You never stop hiring someone,” says Matt Marx , an entrepreneurship professor at MIT’s Sloan School of Management who wrote his dissertation on non-competes while in the doctoral program at HBS. “There’s an open labor market,” he continues. “People can leave when they want. They’re not trapped at companies the way they are in Massachusetts. And that’s what changed the way I worked as a manager. I realized that I couldn’t treat employees like resources. I had to work to keep them excited to stay around.”
The authors have written a yet-to-be-published paper that investigates whether states that allow non-compete agreements are driving high-tech talent away—creating a so-called brain drain of smart inventors. In “Regional Disadvantage? Non-Compete Agreements and Brain Drain,” the researchers show that non-competes indeed factor into an inventor’s decision to emigrate, within the United States, to states that disallow non-competes. The results are most pronounced among those inventors with the most patent citations—that is, those who are most productive, collaborative, and valuable to their firms.
“It’s clear that inventors are leaving states that enforce non-competes for states that don’t,” says Lee Fleming, an HBS professor who coauthored the paper.
The researchers hope that their study will induce state legislators to consider regional rules regarding non-compete agreements.