Non-Competes As the DRM of Human Capital

An anonymous reader writes "Techdirt has an interesting look at how non-compete agreements are like DRM for people, doing just as much damage to innovation as DRM has done to the entertainment industry. It includes links to a lot of research to back up the premise, including some studies showing that Silicon Valley's success as compared to Boston's can be traced in part to the fact that California does not enforce non-compete agreements."

Comments

Don't feed the competiton

[cthulu_mt]

My contract prohibits me from engaging in the same business as my current employer for up to 5 years after termination. It makes perfect sense though; why fill my head with Trade secrets and methods just to have me open up shop across the street.
Hell, that's how my boss got started. His employer didn't have a non-compete clause and he proceeded to run them out of business.
Competition is the core of good Capitalism but nothing says you have to help your enemies.

Re:Don't feed the competiton

[snaildarter]

You're right; non-competes reduce competition. You're wrong about "nothing says you have to help your enemies," as we have numerous laws that say exactly that, like the CLEC system with telephone companies.

The issue of trade secrets is a separate one from the issue of non-competes. Trade secret laws could still be enforced without the need for non-competes. Again, like the article says, look at the Silicon Valley vs. Boston thing.

Re:Don't feed the competiton

[4iedBandit]

My contract prohibits me from engaging in the same business as my current employer for up to 5 years after termination.

So you can't use your expertise to make a living for 5 years? Or does you contract have your employer paying you severance for 5 years? I'm betting it doesn't. I'm also betting that your employer is happy with the knowledge that he doesn't have to pay you market, or give you decent benefits because if you leave you can't compete with him for 5 years. It's just another form of indentured servitude and you're a willing participant.

Competition is the core of good Capitalism and you agreed not to. Oh yes that's great for your employer, no doubt about that.

Re:Don't feed the competiton

[UnknowingFool]

It makes perfect sense though; why fill my head with Trade secrets and methods just to have me open up shop across the street.
Hell, that's how my boss got started. His employer didn't have a non-compete clause and he proceeded to run them out of business. Competition is the core of good Capitalism but nothing says you have to help your enemies.

Whether you have a non-compete agreement with an employer or not does not address the issue of trade secrets. Unless your former employer gives explicit permission to share trade secrets, you can never share them with any other employer. Period. The same thing applies to source code. Now do people break that rule when they go to another company? Yes, it happens but they open themselves up to litigation. The question is whether non-competes harm innovation by placing an restriction on who can employed.

Re:Don't feed the competiton

[Rob the Bold]

My contract prohibits me from engaging in the same business as my current employer for up to 5 years after termination. It makes perfect sense though; why fill my head with Trade secrets and methods just to have me open up shop across the street.

That's their motivation for the non-compete: it's better for them. By the same token, not having a non-compete would be better for you, since you could easily turn around that argument saying "why should I fill their pockets with money just to have them lay me off in bad times". If it's OK for an employer to look after their own interests, then certainly it is OK for an employee, too.

TFA, on the other hand, suggests that the practice of non-competes reduces overall innovation. So what's good for an individual employer is not necessarily best for society at large. So society might have an interest here in looking out for its own, also.

nothing says you have to help your enemies.

BTW, if you view your employees all as potential enemies, you might not be getting their best efforts.

Re:Don't feed the competiton

[4iedBandit]

It prevents me from working on a project for years and learning about The Next Best Thing and then running to the competition.

I don't normally pay attention to anonymous cowards, but in this case it deserves a response.

What this contract really prevents is your employer keeping you happy and on the job. Does your contract guarantee your benefit plan? Your retirement plan? Cost of living minimum yearly raises? Severance should you be released?

A fair contract is one that benefits both parties. A non-compete only benefits the employee if they get something in return for the duration of the non-compete. If the contract only protects the companies interests then your interests are being thrown out the door. Don't accept their word that they will "do the right thing." If it's not in writing they don't have to and most likely won't.

Dawn of understanding

[WoodstockJeff]

Non-compete has existed for decades, long before DRM. It would make a lot more sense to reverse the comparison, but some people have no concept of what came before their own awakening to the ways of the world...

Don't sign them!

[FredDC]

DRM ? Don't buy it!
Non-compete? Don't sign it!

It's that simple... If a company wants you to sign such an agreement, it says alot about the corporate culture of that company. It means management thinks it completely owns the people who work for them.

It could also mean some people have already left the company to work for competitors and they're trying to protect themselves from this happening again. That tells me it's probably not a nice place to work at, if people leave to go and do the exact same job somewhere else!

There is a mechanism for this to work

[Anonymous Coward]

In his book, 'The Innovator's Dilemma' http://www.businessweek.com/chapter/christensen.htm , Clayton Christensen points out that disruptive technologies often/usually are invented by large entrenched companies. They can't take advantage of the technology because their business practices prevent it. It makes sense that an employee, familiar with the work, would start a company that could take advantage of the new technology.

Viewed in this light, the old entrenched companies are the dog in the manger. They can't take advantage of the technology they invented, because they can't make enough money on it to cover their overhead, but they sure don't want anyone else to develop it. Non-compete contracts are one way to make sure that doesn't happen.

drm, retarded patents, noncompetes...

[circletimessquare]

it's all an example of the corporatization of our creativity and our culture

it's sort of the opposite of communism, where it was believed that by expelling selfishness as a motiviation in life, all will be enriched. when in reality, communism just makes all of society as poor as its poorest member, as selfishness is a motivation to succeed and do better, and this enriches society in indirect ways

meanwhile, business law thinkers know that innovation is the wellspring of all of their profits. so the idea is to lock in the wellspring of creativity at earlier stages, so as to ride the wave to greater and greater financial success later

but actually, locking the wellspring of innovation at earlier and earlier stages has the perverse effect of killing the wellspring of innovation

so much like the paradoxical dichotomy that ruins communism (that selfish behavior leads to rich societies), there is a paradoxical dichotomy at work when it comes to business, the law, open culture, and creativity: if you let innovation proceed freely, it will enrich your business more in indirect ways than if you try to cage it

itr's counterintuitive, and it goes against the human desire to control things, even that which they cannot control, and if they just stopped trying to control it, they would actually be richer, figuratively and literally

Re:Why not..

[Svartalf]

And I'm in the process of trying to negotiate that BS line away in an employment
agreement I got presented.

There is no way I will sign an agreement of that nature without serious modifications.
I've walked away from contract gigs in recent times where the client's HR outsource
insisted that I couldn't start work without signing the document and that there would
be no modifications to the document (Effectively dismissing me before I even started-
the hiring manager went into a panic and went charging around to get permission to
get me to submit an amendment to the agreement that protected their interests, but
by that point in time, I'd already got another comparable contract and was off the
hook from the other. Don't play games with me. You wouldn't tolerate this stuff
out of me, I won't tolerate it out of you as an employer.

In the end, it's standard boilerplate and it's from businesses or their lawyers
thinking they're "clever" and trying to avoid losing anything that might be theirs.
The problem is, for me, it IS indentured servitude- and they're in no way even remotely
paying me enough to lay claim to everything I might come up with, nor could they.
The HR people all invariably say "that's not what we're intending"- BULLSHIT. If you
intended otherwise, you would have put it in the agreement- what is on the paper is
what you intended. If it's not, you need to fire your damn Counsel and find one that
will do what you actually intend.

Correlation != Causality

[cybermage]

I don't know that you can link the difference between Boston and Silicon Valley to enforcement of non-compete agreements. Here's some other equally likely candidates:

San Jose has better weather than Boston. Maybe people with a choice of where to work choose a nice place to do it.

San Jose pays programmers slightly better than boston. Maybe people like to be paid more.

Why are people always so eager to boil complex situations down to a variance in a single variable in an attempt to prove a point?

Re:Correlation != Causality

[Anonymous Coward]

Yeah, because those stupid statisticians at Stanford etc. don't consider other variables when they do their statistical analysis

For example - from the article.
Gilson looks at a few of the other possible explanations for the difference and shows how they're all lacking, leaving the difference in noncompetes as being the key difference between the two regions in terms of the flow of information and ideas leading to new innovations.

You can even follow through and read the sources linked from the original article
eg.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=124508

Why are people on the internet always so eager to think that highly qualified economists at world class Universities will have failed to consider the one blindingly obvious thing to consider about a situation, simply based on reading a one line summary of the relevant paper, in order to prove some clearly stupid point?

Re:Correlation != Causality

[pclminion]

Why are people on the internet always so eager to think that highly qualified economists at world class Universities will have failed to consider the one blindingly obvious thing to consider about a situation, simply based on reading a one line summary of the relevant paper, in order to prove some clearly stupid point?

I call it the "101 phenomenon." It goes something like: "Any moron learned in physics 101 that that's not possible..." Or "This is statistics 101 stuff, what a bunch of idiots..."

People take course XXX 101 and think they are now experts. When in fact, the true experts took not only 101, but 201, 301, 401, and probably all the way to "40001." And then they TAUGHT each of those classes. And then they wrote a book on it. They know all the little places where XXX 101 actually made simplifications or glossed over complex topics, or made statements that were NOT strictly true but did so for the sake of teachability. In other words, they know so much more than you do that they already thought of your petty objection within the first microsecond and addressed it not much more than a millisecond later. They counter your objections in their sleep, with no conscious effort -- literally.

Usually the hard science is left out of the reporting. That doesn't mean it isn't there. But everybody loves to be an expert just because some journalist worded something badly or took it out of context. If your exposure to a topic is only "101 level," you really have no clue at all and certainly no basis to make a meaningful criticism.

Human nature

[Ghubi]

People don't like to compete. People like to win. People are forced to compete in order to win. Competition brings out the best in people. Given a choice between competition and a guaranteed win, people will almost always go for the guaranteed win.

Patents, non compete agreements, and organized crime are all designed to provide an automatic win without the need for competition.

Re:Why not..

[Bert64]

That is indeed unfair, but it will be quite happily accepted by people that:
a, never intend to produce anything, just coast along doing their 9-5
b, don't read what they sign

I have refused to sign several such contracts, some companies will be flexible about it but some won't... At the very least, you can get the clause narrowed in scope so that it:
a, only includes inventions which relate to the company business or the business your employed for
b, only count things done on company time (ie things your boss told you to look into, not stuff you came up with on your own)

Re:Non-compete

[apt142]

That's going a bit far. If you quit, why should they pay you severance? The wages during the non-compete period I could see, but what's to prevent an employee from quitting specifically to exploit this? Hot dog! My employer had me sign a four-year non-compete agreement, time for me to go get a master's degree!

I don't see a problem with people exploiting this. After they've done it enough times, it'll become obvious that they are a scammer and then will become either non-employable or unfit to work with trade secrets. With this heavy of a penalty on companies who insist on non-competes then they'll really put the investment up front to look into things like this. They'll also not throw them around so frivolously.

If you have a non-compete clause on you, you obviously are (or damn well should be) doing something that's important to the company's intellectual property. If so, the company should treat you well and respect you for being in such a position.

Also, if a company wants to prevent me from using my IT knowledge for 5 years, they had better damn well pay me. Five years in computing is a long, long time. If after those 5 years I want to return to the field, I'm going to need education, certifications, etc. to make up for the lost field experience and to get me up to date.

Not going too far, already in use

[Per Abrahamsen]

> That's going a bit far. If you quit, why should they pay you severance?

Because the value of you *not* working for the competition is more worth to the company than the money in question naturally. It system is actually in use for the upper levels of management, where the people are too smart to sign a non compete agreement with no compensation. It is a significant part of what's behind Golden handshakes.

The problem is that most engineers are lousy businessmen, and thus willing to sign away something value for free (if the non-compete agreement wasn't valuable to the company, it wouldn't be there).

Re:Hear! Hear!

[Alsee]

The strongest arguments against DRM are not economic, but moral, and concerns the loss of consumer rights.

Trying to define the "strongest" arguments is itself an additional layer of value judgment, but setting aside that, one should not underestimate the various economic arguments against DRM.

Just to cite one example, the recording industry slit their own throats when they got the Audio Home Recording Act to legislatively mandate DRM be included in all new audio recording devices. It strangled the audio hardware industry, which in turn strangled music sales. The Audio Home Recording Act's imposed DRM in Digital Audio Tape and in the Minidisc and in all technology for an entire decade. It effectively exterminated all new devices and strangled hardware sales and strangled music sales for an entire decade. People sat around holding onto their CD collection and NOT buying (or re-buying) music on DAT formate and Minidisc formate or anything else, because no one owned or wanted a DAT player and no one owned or wanted a Minidisc player or anything else. The DRM-extermination of all hardware and formats since the CD is one of the major contributing factors in declining Recording Industry sales numbers.

The hardware industry was economically devastated and by direct follow-on the content industry economically harmed by DRM for an entire decade. It was only with the introduction of the MP3 player that ANY economic and technological advance has been possible in the audio hardware industry (and the far far too lagged sale of MP3 content), and the sole reason it was possible for the MP3 player to break that DRM-imposed economic wasteland is that the MP3 player slipped through a loophole in the Audio Home Recording Act's DRM mandate. The sole reason that we are seeing economic and technological stimulus in the hardware industry... and the all too delayed stimulus in music industry innovation and sale of old and new content in MP3 format... is exactly because of the escape from the negative economic effects of DRM.

I certainly agree with the "moral" consumer arguments against DRM, but don't let the situation sound like some wishy-washy "moral" anti-DRM battle against pro-DRM economics.

DRM is anti-consumer.
DRM is anti-technology.
DRM is anti-economic.

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Re:Why not..

[vinn01]

I'll fix that for ya:

It will be quite ------ accepted by people that:

a. have been unemployed for an extended period of time after a previous layoff
b. have a family to support

Ethical high ground comes at a great cost when there are responsibilities involved.

If you have responsibilities, do they share your ethical high ground (even if they are below the age of consent)?

Re:"human capital"?

[Alsee]

'Human capital' obviously does not fit in within the previous literal definition of capital, but phrase 'human capital' absolutely does have real and useful meaning above and beyond mere 'labor'.

Capital is a store of value that is used to acquire the means of production (plant and machinery), raw materials and labor that is then used in production of something to be sold on the market.

Human capital actually fits that definition quite well.

Human capital is exactly the recognition that labor is *not* a trivially interchangeable commodity, that there can in fact be a store of value in specific individuals, and that store of value has the literal or metaphorical same properties and effect as conventional capital.

If the job is digging ditches, there is essentially no human capital involved. Labor is labor and is trivially interchangeable. It doesn't matter who you have and it doesn't matter who you lose, you just hire the next generic labor unit to replace it.

If the job involves a unique and in-depth understanding to operate maintain or improve something that is extremely complex... for example some complex software or a large and extremely intricate manufacturing plant and manufacturing process... then your long time employees who do have that unique knowledge and unique understanding represent human capital. If one of those employees dies or leaves, that human capital leaves with him. You can hire new labor to replace that individual, but that new labor will be entirely incapable of preforming that job. You may need to dedicate that new labor for several months doing nothing other than becoming familiar with the complex whatever-it-is before he can productively do that job. You need to expend that labor for several months, investing in recreating that unique knowledge and unique understanding, to establish that human capital in that new person.

Human capital is a store of value within an individual person.

Sometimes you recreate, replace, or reacquire specific human capital merely by expending labor or money or other resources, as in the example above. However some of the most valuable human capital can be quite difficult and extremely expensive and sometimes impossible to replace. For example say an individual works at a company, and that individual in his off time has become exceptionally productive prominent and influential in open source, perhaps that individual is a lead individual or even the head maintainer for some world-prominent open source project for software that is critical to your business. The company can invest in that human capital. The company can "spend" some of that individual's official "company time labor" to invest in that unique human capital working on that project. That can be valuable and irreplaceable human capital. That human capital can be used to harness an entire community of open source programmers to write software that that company needs. That human capital can directly or indirectly influence that company-critical open source project to meet the needs of the company. That human capital may be able to directly or indirectly influence other global open source projects to meet the needs of the company. That human capital may be able to directly or indirectly influence national and international standards, to directly or indirectly influence national laws or international treaties, to meet the needs of the company.

That particular individual is far more than labor. That individual can represent an enormous and irreplaceable store of value, a vast investment of human capital. Human capital may not only be "used to acquire the means of production, raw materials and labor that is then used in production of something to be sold on the market" in both literal and figurative senses, it can be used for all that and far more. In grand cases human capital may influence the very existence of market for your product.

Yes the phrase 'human capital' can sometimes be abused or used is a fluffy meaningless way, but it is hardly meaningless or nonexistent. It is a somewhat abstract but very real and useful concept.

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