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Control or Innovate

July 13, 2011

“It’s clear that inventors are leaving states that enforce non-competes for states that don’t.”

That is the conclusion of research just published in Harvard Business School ‘Working Knowledge’. And of course it matters, since invention lies at the heart of innovation and growth.

For anyone unfamiliar with a ‘non-compete’ clause, it is a provision within an employment contract that bars the employee from leaving the organization and working in a competitive role for a specified period of time – typically 2 years. Such provisions are unenforceable in some jurisdictions (such as California).

A key question for anyone in the world of contracting is whether similar consequences flow from restrictive or onerous terms in other forms of contract. For example, what is the result of a clause that demands IP rights, or imposes liquidated damages? How does a supplier act when there are unlimited liabilities or a right of termination for convenience? Even ‘compulsory’ innovation clauses can be damaging, esecially if the supplier cannot be confident about how their ideas will be handled.

Much of the evidence in this area is anecdotal, and of course business-to-business relationships are not the same as those in business-to-employee. However, it seems to me that similar principles are likely to apply – relationships that impose ‘unfair’ levels of control are likely to prove counter-productive when it comes to things like loyalty, innovation or flexibility.

Of course this does not always matter. We don’t need or expect innovation, loyalty or flexibility from every relationship. But just as non-compete provisions are now undergoing re-examination in some US states, smart businesses also audit their standard contract terms and strategies to be sure that their focus on control is not ultimately damaging their ability to compete.

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