Imagine this. You have an idea that might be with tens of millions of dollars to your company. You devise a simple, low-fidelity test that you execute yourself. The test indicates you may be on to something.
So you write up a pitch and present it to your management. They agree it's a great idea. But they don't want to move on it. "We have other priorities." Your idea, which passed at least one viability test, is dead. Forever.
And there's nothing you can do about it.
Who's Idea Is It?
In a normal world, you would be free to develop this idea yourself. But not in most states or most companies. But in the bizarro world of 21st century America, businesses increasingly use onerous non-compete contracts that claim perpetual ownership of an employee's ideas for the life of the employee--and beyond. While these clauses may not stand up to judicial scrutiny, employers bet that most former employees lack the financial resources for a protracted court battle over intellectual property.
In most cases, if your management decides not to pursue a great idea, the idea dies. At least, it dies until a competitor or start-up hatches the same idea.
What makes innovation-killing contracts worse is the incentives they create. Businesses hate the unknown. I've said that most business executives would rather know for certain their company is dying than take a chance on making billions. That's an exaggeration, of course, but only slightly.
A new idea always presents risk and chance. To bear fruit, ideas require time, money, and patience. Great, transformative ideas can upset a company's culture. The future under a brilliant new idea might be brighter, but it's also less certain. And today's senior executive hates uncertainty more than he hates total failure.
If the employee with the idea were free to leave and develop the idea on his own, the employer would have an incentive to develop the idea itself. But when the company owns every employee's every thought, it's actually less risky to simply kill all the ideas.
The problem is, of course, one company can't kill the ideas of other companies or entrepreneurs. The idea-killing contract works only in the short run.
Studies Show Non-Competes Kill Innovation
A literature review of studies on non-compete contracts shows nearly universal agreement that states with strong non-compete laws drive innovators out, eventually destroying their states' economies.
MIT researchers Matt Marx, Jasjit Singh, and Lee Fleming concluded:
Non-compete enforcement drives away inventors with greater human and social capital, while retaining those who are less productive and less connected (2010).
In my state of Missouri, the brain-drain, followed by a job drain, is obvious. Over the past 30 years, St. Louis lost half its Fortune 500 headquarters. Moreover, Missouri and St. Louis have dramatically in almost every major economic measure. Out of the 50 states, Missouri ranks:
- 44th in private-sector job growth
- 47th in GDP growth
- 46th in personal income growth
Missouri's legislature and courts strongly enforce innovation-killing non-compete contracts. One legislator told me, "if you don't like it, you should move to California," a state that prohibits non-compete contracts and refuses to enforce contracts of other states.
Missourians can blame non-competes for part of its economic decline. Alex Tabborock writes:
Non competes benefit firms but harm industries by reducing innovation . . . Firms who come to Silicon Valley know that they cannot use NCA to protect their innovations but they come anyway because the opportunity to learn from other people exceeds the costs of other people learning from you. Thus, worker mobility and the inability to protect IP by restricting mobility is bad for an individual firm but good for the industry as a whole, good for innovation, good for workers and good for consumers.
Missouri needs to attract innovators who create businesses. Its established firms need smart workers who bring forward great new ideas for growth. Telling innovators to move to California will only accelerate our state's rapid economic decline.
To protect ideas, employees under onerous contracts keep their best ideas to themselves.
"I will not say a word to anyone about my best ideas, and I work only on my own personal computer," said one innovator who's seen his ideas killed by management.
"I won't work here forever, and I want the freedom to breathe life into my ideas once I've moved on."
Asked if he would present his ideas to management if he were not under the non-compete, he said, "in a heartbeat. I don't care so much about the money or even the credit. I just don't want to see someone else implement this before we do."
States Should Protect Businesses From Themselves
Business executives will almost always trade long-term viability for short-term gains. So long as the firm is the only party damaged by myopic management, so be it. But onerous non-competes hurt people and regions, not just short-sighted companies.
If states like Missouri want to get off their economic backs, legislatures need to pare back non-compete laws that encourage domestic companies to thwart innovation.
In addition to California and Michigan, Massachusetts, Rhode Island, and Washington state are considering banning non-compete employment contracts. According to Forbes, the motivation behind banning non-competes is two-fold: 1) to encourage innovation and invention, and 2) to increase competition for talent.
Missouri and other states that have traditionally supported onerous non-compete contracts, will find themselves falling further and faster unless they make talent more mobile.