Innovation is Collaborative: What about Noncompetes?

In a recent podcast, Neal Seth and I discussed protection of ideas, focusing particularly on the problem where someone has a business plan, a concept, a script, or really just an idea for doing something. They want to pursue it somehow, but they’re worried that sharing it with anybody will open them up to all sorts of problems.

What’s the solution? There’s always the most traditional and perhaps the most primitive solution: Lock up the idea. Meaning: Do everything you can to make sure that anything that anyone does for you as a developer, contractor, employee, business partner, vendor or whatever is owned by you or your new company.

And that can certainly involve “work for hire” and similar agreements, but it also involves noncompete agreements. Or in other words, “I own everything, but just to be clear, in case you think that I don’t own everything, don’t even think of going to one of my competitors or opening up your own shop across the street.”

How sweet.

Actually, putting aside the quaintness (and crassness?) of that approach, its bigger problem is a dependence on contracts rather than trust. No, that’s not quite right – contracts are fine, but they miss the point. Reliance on contracts ignores key realities of how innovation happens.

And in certain rather important technology locales in the United States (READ: California), it also ignores the law. In California, for example, courts have routinely refused to enforce noncompetition agreements.

To the first point: Innovation is collaborative. Look no further than the invention of the telephone, which as everyone knows was invented by Alexander Graham Bell. Or … was it? Well, Bell did file the first successful (and successfully defended) patent for the telephone. But as Malcolm Gladwell wrote several years ago in The New Yorker,

[Elisha] Gray was working on the telephone at the same time that Bell was. In fact, the two filed notice with the Patent Office in Washington, DC, on the same day – February 14, 1876. Bell went on to make telephones with the company that later became AT&T. Gray went on to make telephones in partnership with Western Union and Thomas Edison, and – until Gray’s team was forced to settle a lawsuit with Bell’s company – the general consensus was that Gray and Edison’s telephone was better than Bell’s telephone.

Gladwell’s story about Bell and Gray and the telephone is an anecdote to paint the scene for an “invention session” organized by Nathan Myhrvold, formerly research director at Microsoft. Myhrvold’s idea was the innovation could by organized and “fabricated” (in a not-quite fair characterization) through modeling on the lesson of the telephone invention controversy: Namely, innovation could be – is – collaborative.

Which brings us to present-day California: What really happens if a noncompete is unenforceable? This week’s Washington Post published a fascinating story on Silicon Valley’s “culture of cooperation”. (“In a cutthroat world, some Web giants thrive by cooperating”, Washington Post, Saturday February 19, 2011.)

Emblematic of the view is that of Google’s soon-to-be former CEO Eric Schmidt, quoted by the Post from a Google blog post saying “How do you be big without being evil? We don’t trap end users. So if you don’t like Google, if for whatever reason we do a bad job for you, we make it easy for you to move to our competitor.”

The Post goes on to profile some of the more obvious West Coast tech giants, including (in addition to Google) Microsoft, Twitter, Facebook and Apple. Apple is presented as the counter example to the culture of cooperation, of course, with CEO Steve Jobs recently quoted saying “Open systems don’t always win.”

And yet, that one quote is really the extent of the Post story’s Apple bashing, with an insightful discussion of what works for different companies and cultures.

The California story – and the history behind the story – began to accelerate in the 1990s when California courts refused to enforce noncompetition agreements, which particularly affected the dot-com companies of Silicon Valley seeking to lock up talent and ideas. Talent mixed and mingled, traveling wide and far, as did ideas and, ultimately, innovation. The Post cautions that Google’s self-promoted reputation for open-system may be significant and influential, but it is also limited to services whose viral promotion drives traffic for Google’s core search advertising business. And Google search does not participate in the same open-system practice.

On the other hand, Gladwell’s and Myhrvold’s point about the nature of technical innovation seems to buttress policy support for the courts’ disdain for noncompetes. The gray area involves what constitutes “general knowledge, skills, techniques and learning”, which this more expansive view of innovation suggests should never be bottled up. It is not always easy to distinguish general knowledge from company-specific ideas, facts and techniques.

Noncompetes (where enforceable) are often used to get around this problem by simply saying, “You can’t work for our competitors. Period.” Which left Hewlett-Packard having to challenge former CEO Mark Hurd’s move to Oracle based on claimed breaches of confidentiality commitments, rather than noncompete. Hard to do.

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