Another scientist took an “unpaid sabbatical” at a university; yet another worked in the industry secretly, hoping to avoid notice by his former employer; another, with years of experience, was forced out of the industry after being fired over a disagreement with the company founder. Many felt that noncompete enforcement was particularly unfair because their employers had only mentioned the agreements after they had accepted the job and begun work. Others, such as Jerry, felt it was unfair because it restricted the use of knowledge they had acquired before taking the job. Fair or not, noncompete agreements are taking an economic toll. For example, to avoid legal problems, one scientist took a job that did not use her specialized skills. “I intentionally looked for general-purpose programming, and I took a substantial pay cut to go there.”
But what about employers? It's true that trade secrets can really affect a company. Firms would be reluctant to pour millions of dollars into developing software if a rival could freely access the program code. Software code is typically protected as a trade secret and this protection is important for motivating firms to invest. State trade-secret laws provide civil remedies for the misuse of trade secrets and the federal Economic Espionage Act provides for criminal prosecution. In recent years, federal prosecutors have gone after a spate of Chinese competitors to U.S. firms, accusing them of stealing trade secrets.
In short, noncompete agreements limit the job opportunities of highly skilled workers. When their choices are so limited, employees have less incentive to develop new skills and new knowledge. Statistical analysis supports this: Comparing states that allow firms to enforce noncompete agreements to those that do not, Mark Garmaise of UCLA found that managers earn less and they receive incentive compensation less often in states with noncompete enforcement, all else equal. Other researchers have found a similar effect in states that provide employers stronger controls via trade-secret law.
So it's important both to protect trade secrets from misuse and to preserve employee mobility. Historically, the law has sought to balance these two interests. However, when employers control not only true trade secrets but also general employee knowledge and skills, the net effect is it reduces investment and innovation. Garmaise found that states that allow employers to enforce noncompete agreements actually invest less per employee. And economists Sampsa Samila and Olav Sorenson found that in these states, venture capital investments generate fewer patents, fewer new firms, and less job growth.
Not only do employees have less incentive to innovate in these states, but it's no surprise that employers have a harder time hiring talent, especially start-up firms. Bart Riley is a veteran tech entrepreneur. He recently joined a California clean-tech startup and sought to set up an office in Massachusetts, initially with about 10 engineers. But Massachusetts is one state where noncompete agreements are regularly enforced, and Riley quickly found that most of the people he wanted to hire were blocked by agreements with their former employers. Worse, evidence shows that states that enforce noncompete agreements experience something of a “brain drain.” Matt Marx, along with co-authors Lee Fleming and Jasjit Singh, found that inventors tend to migrate to states that do not allow employers to enforce noncompete agreements.