TOUGH ENFORCEMENT OF NON-COMPETE AGREEMENTS MAY BE PUTTING A LID ON GROWTH OF LOCAL ECONOMIES

Nicholas Fortuna, July 17, 2017

Bucking the national trend, Idaho is making it easier for employers to enforce employee non-compete agreements that prevent employees from leaving to go to work for a competitor. The State passed new legislation that provides, if a court finds a key employee or a key independent contractor breaches a non-compete agreement, a rebuttable presumption of irreparable harm to the employer is imposed. The burden of overcoming that presumption shifts to the former employee to show that their employment with a competitor does not adversely affect their former employer’s legitimate business interests.

Nationwide, state lawmakers have been considering whether to make it easier or harder for companies to block workers from jumping to competitors. For the most part, states have concluded that it is better for the local economy to make it easier for employees to move from job to job.

From a business prospective, the impact of strict enforcement of non-competes falls disproportionately on start-ups and high growth companies because it makes it harder for them to recruit workers with relevant experience. Given the choice of locations, such companies will shy away from establishing or moving to jurisdictions where the ability to hire employees is limited.

California does not recognize non-competes and, in part, attributes the rise of Silicon Valley and technology businesses to this policy. Massachusetts, which recognizes non-competes, has a technology sector known as the Route 128 corridor outside Boston that never could reach the economic level of Silicon Valley, despite its strong start in the early 1980s. Economists attribute California’s freedom from the burdens of non-competes, which allows new companies to open and permits employees to move to different jobs, as an important factor in its dominance of the technology industry there.

Boise, Idaho has been looking to be a center for high growth technology companies and startups. The consensus, however, is that the enhanced enforcement of non-competes will be an impediment to developing a thriving technology sector. While older established companies favor strict enforcement because they are trying to protect their position and insulate themselves from the demands of the marketplace, new companies will stay away.

At the federal level, the White House published a report on non-compete contracts in May that concluded that they impose substantial costs on workers, consumers and the economy. The Treasury Department also issued a report criticizing excessive use of non-competes.

An economic study examined the impact of non-competes of people in the state of Michigan who registered at least two patents from 1975 to 2005. In 1985, Michigan reversed a longstanding policy of prohibiting non-compete agreements. The study found that the rate of emigration of inventors from Michigan was twice that of states which prohibited non-competes. The authors concluded that enforcement of non-competes in Michigan after 1985 resulted in a brain drain. Worse, the most talented inventors were found to be the ones most likely to flee.

While proponents of non-competes continue to argue that companies must protect their investment in training and development of employees through the use of such agreements, the evidence suggests that they harm growth, limit opportunities for entrepreneurs, and workers, causing talented people to seek more accommodating jurisdictions.