VOX: Non-compete Enforcement Hobbles Tech Ecosystems

Silicon Valley has soared on the strength of tech innovation while the “Massachusetts miracle” fizzled, Vox writes, in a piece that analyses how non-compete agreements in employment contracts have affected tech startup ecosystems.

What a Non-compete Does

A non-compete is a clause in an employment contract that stops a worker from joining a rival, or starting a competing business, for a set time after they leave. Employers say these clauses protect their investment in training and keep trade secrets from walking out the door.

The trouble, for a tech region, is that people walking out the door is how new companies get started. Engineers leave to found startups or join small teams with a better idea, and they take their skills and contacts with them. When the law lets an employer block that move, fewer people make it.

California vs. Route 128

California has gone further than other states to nullify such clauses. They’re not just void in the sunshine state; employers can be held liable for refusing to hire someone for not agreeing to sign one. The unfettered job-hopping freedom that results has helped to support companies like Intel, Tesla and YouTube.

In contrast, Boston-area ventures Digital Equipment Corporation and Wang Laboratories, behemoths in their day, are gone. (You might want to keep the volume down when you hit the Wang Labs link.)

Both companies were giants of the minicomputer era along Route 128, the highway ring around Boston that was once mentioned in the same breath as Silicon Valley. Wang filed for bankruptcy in August 1992, and Digital Equipment was acquired by Compaq in 1998. Non-competes weren’t the only reason either one struggled, but the argument Vox describes is that a region where talent can’t move freely is slower to replace the companies it loses.

However, the Bay area’s edge may get blunted.

“Most states have laws like Massachusetts, and recently policymakers from Massachusetts to Hawaii have been considering reforms to noncompete agreements,” Vox says.

That might give Boston, as well as other areas boasting institutional strength in academia and venture capital, a chance to catch up.

What Changed After 2016

The reforms Vox mentioned did arrive in several places. Massachusetts passed its own Noncompetition Agreement Act, which took effect in October 2018. It didn’t ban non-competes, but it put limits on them: a restricted period generally can’t run longer than 12 months, and the agreement has to be backed by a “garden leave” clause paying at least 50% of the worker’s highest base salary, or other consideration both sides agree to.

Minnesota went further. In 2023, it adopted a law that makes covenants not to compete in employment agreements void and unenforceable, with exceptions for things like the sale of a business. That put Minnesota alongside California in banning them outright for most workers.

There was also an attempt at a national ban. In April 2024, the Federal Trade Commission voted 3 to 2 to ban nearly all non-competes. The FTC estimated that about 30 million people, or one in five American workers, were bound by them, and said the change could raise wages by nearly $300 billion a year. The U.S. Chamber of Commerce said straight away it would sue.

The ban never took effect. In August 2024, before its September 4 start date, Judge Ada Brown of the U.S. District Court for the Northern District of Texas threw the rule out, writing that “the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.” So for now, non-competes remain a state-by-state question, which is exactly the patchwork Vox was describing in 2016.

What It Means for Founders

For startup founders, non-competes cut both ways. If you’re hiring, a candidate’s old contract can delay or block a great hire, so it’s worth asking about any restrictions early. If you’re leaving a job to start something, read your own agreement before you go, and check how your state treats it, since the same clause can be void in one state and enforceable in the next.

For regions trying to build a tech scene, the 2016 argument still holds. Universities and investors matter, but so does letting people move between companies. The places that make it easy for an engineer to leave and start something new tend to get more new companies.