How Companies Kill Their Employees' Job Searches

http://www.theatlantic.com/business/archive/2014/10/how-companies-kill-their-employees-job-searches/381437/?single_page=true

James Bessen Oct 17 2014

The days of working for only one company for a whole career are over. As a worker moves from one job to the next, their value to their next employer stems, at least in part, from the skills and knowledge he or she gained at work. It may seem like an odd idea, but who owns the skills and knowledge a worker gains on the job? Apparently, the companies you work for do. Even Jimmy John's has a noncompete agreement for sandwich-making.

Take Jerry Smith for example (not his real name, because he fears it would affect his future job prospects): He's an expert on speech recognition, but he can't use his deep knowledge of this technology at work anymore because he had signed a noncompete agreement with his former employer, promising not to work in the industry for two years after leaving the firm.

“I’ve been in this industry for 20 years and have a Ph.D. I walked in the door [of my former employer] with all this experience, and while I was there for 18 months they added, what, 2 percent to that?" he says. "Now they don’t want me to work in speech at all?”

He's not alone. Employers are increasingly taking legal action to prevent former employees from taking their knowledge and skills to new jobs, using trade-secret laws and contracts that cover post-employment activity. The number of lawsuits over noncompete agreements and trade secrets has nearly tripled since 2000. Now Congress is about to go further, giving employers new powers to sue employees under federal law. But many economists and legal scholars are against it, armed with ample evidence showing that such a law would reduce innovation and an employee's incentive to learn.

Currently, laws vary significantly from state to state: Some states allow the enforcement of agreements that former employees will not work for a rival company for a period of time, while other states view such agreements as illegal. But even in those states in the latter case, judges have used trade-secret laws to limit what economists call employee mobility—the ability of workers to move from one job to the next.

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If you think that such a broad legal interpretation might create obstacles for many employees seeking to change jobs—you’d be right.

Some states have significantly broadened the range of employee knowledge that employers can seek to protect under trade-secret law. In the past, trade secret law mainly protected only concrete knowledge: the formula for Coca-Cola, or the code of a software program. Now, in many states, the law also extends to cover less well-defined knowledge, such as employee know-how, customer relations, and knowledge that is not used commercially. It gives firms control over employee knowledge that goes far beyond true trade secrets, reaching into basic knowledge that employees need to do their jobs. While most employers don’t push the limits of these powers, an increasing number have done so.

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Another scientist took an “unpaid sabbatical” at a university; yet another worked in the industry secretly, hoping to avoid notice by his former employer; another, with years of experience, was forced out of the industry after being fired over a disagreement with the company founder. Many felt that noncompete enforcement was particularly unfair because their employers had only mentioned the agreements after they had accepted the job and begun work. Others, such as Jerry, felt it was unfair because it restricted the use of knowledge they had acquired before taking the job. Fair or not, noncompete agreements are taking an economic toll. For example, to avoid legal problems, one scientist took a job that did not use her specialized skills. “I intentionally looked for general-purpose programming, and I took a substantial pay cut to go there.”

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But what about employers? It's true that trade secrets can really affect a company. Firms would be reluctant to pour millions of dollars into developing software if a rival could freely access the program code.

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In short, noncompete agreements limit the job opportunities of highly skilled workers. When their choices are so limited, employees have less incentive to develop new skills and new knowledge. Statistical analysis supports this: Comparing states that allow firms to enforce noncompete agreements to those that do not, Mark Garmaise of UCLA found that managers earn less and they receive incentive compensation less often in states with noncompete enforcement, all else equal. Other researchers have found a similar effect in states that provide employers stronger controls via trade-secret law.

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when employers control not only true trade secrets but also general employee knowledge and skills, the net effect is it reduces investment and innovation. Garmaise found that states that allow employers to enforce noncompete agreements actually invest less per employee. And economists Sampsa Samila and Olav Sorenson found that in these states, venture capital investments generate fewer patents, fewer new firms, and less job growth.

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evidence shows that states that enforce noncompete agreements experience something of a “brain drain.” Matt Marx, along with co-authors Lee Fleming and Jasjit Singh, found that inventors tend to migrate to states that do not allow employers to enforce noncompete agreements.

The importance of employee mobility for innovation is illustrated by the phenomenal success of Silicon Valley. California prevents firms from enforcing noncompete agreements and researchers found that this explains the high level of job-hopping in Silicon Valley’s computer industry. Legal scholars Ron Gilson and Alan Hyde connect Silicon Valley’s greater employee mobility with its innovative successes relative to tech clusters in other states, such as the Route 128 cluster in Massachusetts.

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