Taking the Long View on Competition and the Mobile Employee: Lessons from the United States History of Efforts to Regulate Employee Innovation and the Mobility of Workplace Knowledge
University of California, Irvine School of Law
May 1, 2013
Business Innovation and the Law: Perspectives from Intellectual Property, Labour, Competition and Corporate Law, p. 214, Marilyn Pittard, ed., Edward Elgar, 2013
UC Irvine School of Law Research Paper No. 2013-105
An early twenty-first century effort by a national organization of lawyers and scholars in the United States to revise the law of employment provoked bitter disagreement over the proper contours of the law governing employee use of knowledge in competition with current or former employers. The controversy replicates a centuries-old debate over legal restrictions on employee mobility. Since the American colonies first began to recruit skilled British artisans to emigrate in violation of British law, Anglo-American courts and lawyers have disputed whether restrictions on employee mobility help or hinder economic development and free intellectual inquiry. While some uses of confidential workplace knowledge in post-employment competition may be wrongful, many recognize that information flows associated with employee mobility foster innovation. Moreover, as knowledge is inevitably both an attribute of employees and an asset of companies, strong moral as well as practical considerations limit the extent to which companies can and should invoke law to prevent competition from former employees.
Businesses are even less likely than lawyers to reach a consensus about the desirable level of protection against competition from former employees. In cases pitting an enterprising employee against his or her former employer, it is always in the company’s interest to restrict employee mobility. In the aggregate, however, companies benefit from employee mobility at least as much as they are harmed by it, for departing employees usually go to work for other companies that recruit employees to gain the benefit of their knowledge. Although some companies may believe they will be net consumers of technology developed by others and thus may want relatively lax restrictions on employee mobility, others may believe they are and will remain industry leaders or technology pioneers and may want stronger protections.
This chapter responds to an invitation to offer lessons from the past to inform debates about the proper scope of legal regulation of postemployment competition. I offer two. The first is that the relationship between law, the rate and direction of innovation, and the welfare of a region or an economy as a whole is difficult to assess objectively and the optimal legal rules are likely to be a matter of substantial controversy. From the persistence of controversy flows the inescapable fact that clarity and precision in the law are unlikely to be obtained. The lack of legal clarity stymies efforts to identify which legal rules are correlated with which patterns of economic development, simply because it will be hard to know what companies and employees actually regarded the law as being and what legal rules actually were enforced.
A second lesson of the past is that the norms of the workplace and the industry have always been as important as the law in determining the transmission of knowledge from employee mobility. In some eras, industries, and companies, employees controlled quite a bit of the intellectual property they produced. In others they did not. Even companies with restrictive policies toward IP ownership and postemployment competition negotiated individual arrangements granting some employees substantial control over their ideas. Moreover, scholarly and trade press literature documenting the twentieth century history of large companies’ knowledge management policies suggests that companies with internal labor markets struggled to develop suggestion systems and other policies to motivate their employees to innovate. Thus, companies recognized the importance of norms even as they confronted limits on their power to create or change them.
The conclusion that follows from these two lessons is that robust economic development can occur in legal regimes that treat employee knowledge as mobile and in those that treat it as the property of the employer and restrict knowledge mobility. Relatively little is known about the optimal level of restrictions on knowledge transmission associated with employee mobility. In the US, until the late nineteenth century, companies had few legal rights to restrict competition or use of knowledge by former employees, yet the nineteenth century witnessed rapid economic growth and technological development.1 Moreover, as scholars who have studied the growth of computer technology in the middle and late part of the twentieth century have shown, Silicon Valley grew notwithstanding, and may even have prospered precisely because, California does not enforce non-compete agreements against employees and Silicon Valley employers seldom resorted to trade secret litigation before the 1990s.2 In the early- and mid-twentieth century, however, some innovative companies did restrict transmission of employee knowledge. Both knowledge-protective legal regimes and lax legal regimes have existed in places and periods of economic growth.
Number of Pages in PDF File: 23
Date posted: May 3, 2013