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Non-Compete Agreements Protect Innovation

Posted by John Regan on May 13, 2014 10:08:00 AM

The largest business association in Massachusetts announced today that it opposes efforts to ban or limit the use of non-compete agreements because the action would threaten hundreds of small companies that depend upon the agreements to protect their intellectual property.

Non-Compete AgreementsIn a letter to members of the Legislature, Associated Industries of Massachusetts (AIM) said a survey of its 4,500 members shows that non-competes are used widely in every segment of the Massachusetts economy, including manufacturing, life sciences, medical devices, finance, retail, marketing, publishing, construction, energy, professional services, transportation, food and beverage distribution, insurance and health care.

“Our business would be compromised by allowing employees and former employees to share trade secrets that have been crucial to continuing business,” said the president of a small engineering firm.

Language eliminating non-compete contracts is found in a jobs bill filed recently by Governor Deval Patrick and in a bill recently reported out of the Legislature’s Joint Committee on Labor and Workforce Development. No date has been set for a debate on either bill.

Brad MacDougall, Vice President of Government Affairs at AIM, said  the non-compete issue is really about choice for both individuals and employers, who should be free to negotiate contracts of mutual benefit as long as the employee is a part of the process.

Employees already enjoy legal protection against overly restrictive non-compete agreements, according to MacDougall.  Case law dictates that enforcement of agreements occurs only when they:

  • are narrowly tailored to protect legitimate business interests;
  • are limited in time, geography, and scope;
  • are consonant with public policy; and
  • the harm to the employer from non-enforcement outweighs the harm to the employee.

“Non-compete agreements may not be used to curtail ordinary, fair competition or to prevent employees from using their general skills. Massachusetts has a long history of case law that strikes the right balance between employee freedom of mobility and financial incentives with employer interests in protecting intellectual property (IP), trade secrets, confidential information, and goodwill,” he said.

AIM maintains that proponents of doing away with non-competes have inappropriately characterized the issue as a battle between innovative technology startups and large, established companies trying to prevent key people from moving to smaller competitors. In fact, the AIM survey finds that most companies that depend on non-competes to protect intellectual property are small firms outside the technology sector.

“We believe that intellectual property created by us could be transferred to our competition and lessen that value of the IP, which required significant investment,” says a small publishing company.

A manufacturing company with fewer than 50 employees adds that eliminating non-competes “could put us out of business.”

AIM also takes issue with the argument by proponents that Massachusetts must eliminate non-competes to keep pace with innovation competitor California, which for years has limited use of such agreements.

But California does allow non-competes in certain business circumstances and many California-based companies use them in those circumstances. California companies use non-compete agreements in other states where they operate, including Massachusetts.

California’s restrictions have existed for years, but other states have not followed suit. Covenants not to compete are recognized and honored in 48 states.  Several of those states are in fact looking to strengthen their public policy protections for IP.  In 2010 for example, Georgia passed a law and then an amendment to its constitution to allow for broader enforcement and court discretion to uphold legal protections, moving towards the current Massachusetts legal model.

New York has a growing start-up community, yet enforces non-compete contracts; the law has not dissuaded the growth of a tech economy there.  Indeed, reports suggest that the investment market there for start-ups now surpasses Massachusetts.  Non-competes cannot be the reason. 

“Massachusetts ranks among the highest in the U.S. for patent creation and venture capital investment.  National surveys rank Massachusetts ahead, or competitive with, other states in the very metrics cited by proponents as the reason to ban non-competes,” MacDougall said.

“The commonwealth is often ranked higher than California on the Kaufman Foundation’s “economic dynamism” measure, and also holds its own in the areas of fastest growing firms and initial public offerings. Non-compete agreements protect that culture of innovation.” 

Topics: Non-Compete Agreements, Intellectual Property, Innovation

Kraft - Intellectual Capital Drives Massachusetts Economy

Posted by Christopher Geehern on May 12, 2014 10:38:00 AM

The abundance of intellectual capital in Massachusetts provides a wellspring of innovation for companies ranging from biotechnology startups to manufacturing enterprises to professional sports teams, Jonathan Kraft told the AIM Annual Meeting Friday. 

Jonathan.KraftKraft, best known as president of the New England Patriots but who also oversees business interests in manufacturing, real estate and investing, said his family has never been more optimistic about the prospects for the Massachusetts economy. The reason, he said, is that advances in communications, computing, information storage and global infrastructure have placed a premium on ideas rather than capital.

“I think these … changes together have said to people who want to innovate that anything is possible. You don’t need capital; you just need a good idea. And if you just need a good idea it goes by definition that the economies are going to develop in places that have the most intellectual capital. And Massachusetts has more intellectual capital per capita by far than any other place in the world,” said Kraft, who spoke to more than 570 business executives at the 99th AIM Annual Meeting.

Educational institutions such as Harvard and MIT, along with renowned medical centers such as Massachusetts General Hospital and Dana Farber Cancer Center make Massachusetts the worldwide epicenter of ideas that benefit businesses of all types, said Kraft, who spends 40 percent of his time on manufacturing corrugated boxes and linerboard.

It’s a business the family considered selling 15 years ago in the face of high labor and energy costs, but now happily retains because of productivity improvements made possible by smart phones and other technology.

“Even if we are not in the life sciences, our businesses benefit. When there is economic activity, there are multiplier effects and the whole economy gets lifted,” he told the audience.

“The only real difference between us and those rust-belt communities that have not come back, those areas in Pennsylvania, Ohio, Detroit - the only difference is that we have all that intellectual capital sitting at those schools and universities that that is what is driving our economy and that is a huge advantage.”

Kraft credited the administration of Governor Deval Patrick with encouraging the innovation economy by creating a $1 billion life sciences initiative and by resisting the practice of other administrations to heap burdensome regulation on business.

The Kraft Group has worked hard to integrate innovation and new ideas into all of its business. Kraft said that customers of the family’s Rand Whitney paper and packaging manufacturing business now place orders and manage their accounts wirelessly.

Technology is also playing a role with the Patriots as the owners work to ensure that fans will continue to come to Gillette Stadium to attend games. The team has installed wireless Internet at the stadium, allowing fans to watch replays of sequences, check lines at the concessions and even locate rest rooms.

Topics: AIM Annual Meeting, Innovation, Jonathan Kraft

Importance of Health Care Should Prompt Massachusetts to Lead Reform

Posted by Rick Lord on Mar 15, 2012 8:41:00 AM

The Boston Foundation’s 2012 Boston Indicators report, City of Ideas: Reinventing Boston’s Innovation Economy, released Wednesday morning, is at once exhilarating and sobering. The metropolitan area, which accounts for most of the state’s population and economy, is maintaining its position as a global leader in innovation, and this is reflected in relatively strong economic performance. But the challenges are many, including socioeconomic inequities, a persistent and growing jobs/skills mismatch, and above all health care costs.

Health care costsAIM agrees that the cost of health care represents “the biggest bubble” and the greatest threat to our economic future. (I called for holding future increases below economic growth in Tuesday’s blog.) The Boston Foundation report highlights the impact of health-care costs on public sector budgets - crowding out education, transportation and other needed investments.

But the effect of health costs on market-oriented sectors is at least equally dire. Retiree health benefit burdens are crippling “legacy” companies and institutions; costs for current employees burden every employer; and 97 percent of AIM members say that health costs are a significant deterrent to hiring, especially of lower-skilled and entry-level workers.

“City of Ideas” proposes that “the new paradigm” for innovation is local solutions for broader problems. The health cost crisis is, we believe, amenable to this approach, to a greater extent than the report explicitly proposes. While health care is clearly a national crisis, Boston and Massachusetts have a powerful incentive to seek solutions because of the extent of our exposure. Health is our largest employment sector even when limited to care delivery and research organizations, but beyond that we have a wide range of health-related manufacturing and service industries.

Change is coming, ultimately at the national level. Because the stakes are so high for us – and because our structures and circumstances are to some degree unique – we must lead the way to change. We cannot protect our interests by standing pat.  What we need in the health care cost sphere is what we achieved on access: policy innovation produced locally and “exported” nationally.

Of course the specific interests of health care providers, insurers, employers and others diverge and conflict.  That’s exactly why we can succeed. Together with a strong shared interest in reform, we have the balance of differing interests to work through the issues, and the intellectual resources to do it. And we have these in one compact area where reality trumps abstractions, and debate can bring us to agreement. In 2006, we came together with a sense of shared responsibility and found a solution to access. We must do the same for cost control.  

Topics: Health Care Costs, Issues, Innovation

Research and Development Tax Credit Important to Massachusetts

Posted by Eileen McAnneny on Sep 22, 2011 11:41:00 AM

A bipartisan group of United States Senators on Monday unveiled a proposal to strengthen and make permanent the federal research and development tax credit before it expires at the end of the year.

Research and Development Tax CreditAnalysts project that increasing the alternative simplified R&D credit from the current 14 percent to 20 percent would spur the creation of 162,000 technology based jobs in the short term and thousands of additional jobs over the long term. Associated Industries of Massachusetts supports the increase because research and technology remains a key driver of the Bay State economy.

Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Republican member Orin Hatch (R-UT) formally introduced the Greater Research Opportunities Tax Help (GROWTH) Act of 2011 at a hearing on Tuesday. Massachusetts Senator John F. Kerry and seven other senators co-sponsored the measure.

“In the1980s the U.S. offered the best research and development incentive in the world. Today, the U.S. credit lags behind incentives offered by many developed countries and that credit has lapsed 14 times,” said Eileen McAnneny, Senior Vice President of Government Affairs at AIM.

“One of the reasons that the Massachusetts economy has out-performed the rest of the nation is a prevalence of research and innovation. Strengthening the R&D credit is therefore a key issue for Massachusetts.”

A new report by Ernst & Young indicates that the R&D credit has a significant impact on private spending:

  • The existing credit is estimated to have increased annual private research spending by $10 billion in the short-term and by $22 billion in the long-term (beyond the first several years), substantially higher than the credit’s roughly $6 billion to $8 billion annual revenue cost.
  • Increasing the simplified credit from 14 percent to 20 percent is estimated to increase annual private research spending by an additional $5 billion in the short-term and an additional $11 billion in the long-term.
  • In total, the overall policy – the existing credit plus strengthening the alternative simplified credit – is estimated to increase annual private research spending by $15 billion in the short-term and $33 billion in the long-term.

Tax-News.com reports that under current law, the R&D provision may be calculated under two methods: a traditional credit and the alternative simplified credit, both of which provide US firms a tax credit for incremental qualifying research expenses, such as labor and equipment costs. The GROWTH bill would simplify and update the research credit by significantly raising the value of the alternative simplified credit from 14 percent to 20 percent of average qualifying research expenses, and by allowing the traditional credit to expire at the end of 2011.

The R&D tax credit was originally enacted in 1981 and has provided an important incentive for private sector investment in innovative research by companies of all sizes and in a variety of industries. But many foreign competitors have instituted more generous R&D incentives in recent years, leaving the United States ranked 24th in research incentives among industrialized countries.

The temporary nature of U.S. R&D incentives is a strain on U.S. companies, causing uncertainty that negatively influences future company R&D budgets. Providing the certainty of a permanent credit, especially in a tax reform environment, is critical to maintaining U.S. leadership in global advanced research and ensuring that U.S. companies will continue to do their R&D here in the U.S.

AIM is supporting passage of the R&D credit renewal as part of a national coalition that also includes many AIM-member companies, including Abbott Laboratories, Intel, Procter & Gamble, Microsoft, EMC, GlaxoSmithKine, Pfizer and Raytheon.

Please email Eileen McAnneny, emcanneny@aimnet.org,  if you would like to receive updates about this issue.

RD.Credit

Topics: Associated Industries of Massachusetts, Taxes, Innovation

Is Your Company's Immune System Killing Innovation?

Posted by Gary MacDonald on Aug 13, 2010 9:45:00 AM

The innovative ideas that represent your company’s future often appear in a raw and flawed state. They are murky and a bit vague, imperfect in some way.  They’re also fragile and easy targets for an organization’s “immune system.” 

InnovationThe same organizational antibodies that suppress potentially harmful actions can also dispose of valuable innovations before they have a chance to mature.  What distinguishes successful, world-class companies such as Intel, Google and EMC from “also-rans” is a culture capable of separating marginal ideas that need to be eliminated from true innovations to be nurtured. 

Can you think of 10 ways to kill an idea?  How about 20?

When I facilitate AIM’s Fostering Innovation seminars, it’s not unusual for a team to generate – in less than ten minutes - as many as 50 ways to kill an idea.  They’re often relayed from long-ago but not-forgotten personal experience.  It’s easy.  Anyone can do it.  And it’s habit.  When you add non-verbal communications such as tone and body language, to the actual words being said, anyone possesses a potent enough arsenal to do the job quite handily. 

Early suppression of innovations can compound into a cultural reality, requiring innovators to make a heroic effort to push an idea through all the active and passive barriers.  How many people possess that assertiveness and stamina?

This does NOT mean an organization should implement every proposed initiative.  In fact, a high percentage ultimately won’t make sense.  But the critical point is that they are allowed to mature.  Instead of “Yes, but…,” think and say “Yes, and…”  Instead of “It costs too much” think and say “How can we show a stronger ROI on this?”  And look interested and enthused throughout.  Create forums, ground rules and a culture that supports, develops and selects the next generation of initiatives in your business.

Innovation and risk tolerance are cornerstones of long run viability and effectiveness.  Oddly enough, it is often commercially successful companies that are most vulnerable to the suppression of these qualities. 

First of all they’re busy meeting all those urgent customer demands.  The longer run nature of innovation seldom has the same urgency and can easily be crowded out. Secondly, success and stability can lead to a certain organizational complacency.  As the author Jim Collins puts it so succinctly “Good is the enemy of great.”  Entrepreneurial thinkers within the organization tend to quit and leave or quit and stay.  And your organization is the weaker for it.

Keep an entrepreneurial flair alive and well in your organization by creating avenues and time for the advancement and vetting of ideas.  Recognize and stop the comfortable and easy habit of killing them off prematurely.  Don’t allow for contributions to the process, insist upon them.  Then, with a balance of patience and persistence, you’ll see those raw ideas develop into the gems that strengthen your business.

I welcome your comments below.

Topics: Associated Industries of Massachusetts, AIM, Management, Innovation

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