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Thursday, August 15, 2013

Noncompetes and Entrepreneurship

The WSJ had an interesting article about the effects of noncompete agreements on entrepreneurship.  The article quotes contracts prof Alan Hyde of Rutgers University School of Law who notes that while non-competes benefit employers, jurisdictions that enforce them have "slower growth, fewer start-ups, fewer patents and the loss of brains to jurisdictions that don't enforce" them.  In California, these non-competes are generally not enforceable unless they are in conjunction with the sale of a business or partnership.  Confidentiality agreements, on the other hand, are enforceable.  That's why it's puzzling that those who favor noncompetes argue that they are necessary to protect valuable trade secrets.  Since most employees have to sign confidentiality agreements anyway as part of their employment - and would likely be prevented from using company trade secrets under state law even if they didn't - it seems that noncompetes are providing a different function which is to make sure that employees, well, don't compete.  It's not surprise then that non-competes would have an adverse effect on innovation and entrepreneurship.  Most would-be entrepreneurs don't relish the thought of an expensive lawsuit with a former employer. The article states that employers are less likely to bring trade secret misappropriation claims than they are non-compete ones because they are more costly.  I think their "costliness" is why confidentiality agreements are a more desirable mechanism for protecting trade secrets than non-competes.  Many believe that one of the reasons Silicon Valley exists in California - and not Florida, for example - is because non-competes are not enforceable.  I think this is definitely one factor (other reasons include the awesome computer science and engineering departments at UC Berkeley and Stanford, immigration, proximity to the Pacific Rim, the less formal cultural environment in California generally, and a type of historical path dependence). 

 

[Nancy Kim]

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