Leaky Covenants-Not-to-Compete as the Legal Infrastructure for Innovation
54 Pages Posted: 5 Jun 2015 Last revised: 5 Nov 2015
Date Written: May 29, 2015
The flow of information that naturally occurs when employees change firms plays a vital role in spurring innovation. Numerous law review articles have explored how covenants-not-to-compete (“non-competes”) can impede this important information flow. In 1999 Professor Ronald Gilson published an influential article concluding that California’s ban on non-competes led to the rise of California’s Silicon Valley and the comparative decline of Massachusetts’ high technology corridor known as Route 128. Despite the scholarly praise for California’s approach, most states enforce non-competes that are reasonable. That may change, however, because many states are re-evaluating their non-compete laws to avoid Gilson’s cautionary tale about the fate of Route 128. But do states really need to ban non-competes in order to provide an inviting platform for innovation? This Article provides an answer to that important and intriguing question by examining, for the first time, whether technology firms actually enforce non-competes.
Evidence from Washington State indicates that technology firms rarely enforce non-competes. In other words, non-competes are very leaky - knowledge workers move freely from one technology business to another in Washington just as they do in California. The Washington case study has crucial implications for all states. It suggests that states do not need to ban non-competes in order to foster innovation as many scholars contend. It also shows that leaky non-competes provide better protection for trade secrets than a complete ban does. States can offer a fertile legal infrastructure for innovation without banning non-competes by taking steps to assure that non-compete enforcement is leaky, including measures to address the potential chilling effect of non-competes. California, for its part, should embrace the so-called “trade secret exception” to its ban on non-competes to improve California’s legal infrastructure for start-ups and established firms that rely on robust trade secret protection.
Keywords: covenants not to compete, agreements, contracts, non-compete, non-competition, non-disclosure , enforcement, employment, knowledge workers, technology, tech sector, trade secrets, business climate, innovation, empirical legal studies, confidential information, knowledge or information spillovers
JEL Classification: K12, J41
Suggested Citation: Suggested Citation