The readers may be interested in "Regional Advantage: Culture and Competition in Silicon Valley and Route 128" by AnnaLee Saxenian, a professor at Berkeley:

http://www.amazon.com/gp/product/0674753402/ref=cm_cr_pr_pro...

The book was written in 1994, one year before the Netscape IPO, but even 13 years ago, the author concluded that Silicon Valley offered enormous advantages over Massachusetts for entrepreneurship. Two points in particular are worth noting:

1. Professor Saxenian paid particular attention to the (back then) highly successful minicomputer companies: Digital Equipment, Data General, Prime Computer, Wang. All of them were vertically integrated companies that attempted to do everything themselves -- R&D, product design, manufacturing, sales, and after-market service. The SV companies were more likely to focus on their core competencies and then network with other companies to provide the missing pieces.

2. Employment laws make a significant difference. Under California law, a non-compete contained in an employment agreement is void as a matter of public policy. In the employment content, California courts simply do not enforce them, and thus companies do not even bother to ask for a non-compete in California. Under Massachusetts law, a court of equity will consider enforcing a non-compete agreement if it is reasonable in terms of scope, duration and geography. I say "consider enforcing" because to a large extent, it depends on which judge decides the case; some judges are more sympathetic to the employer seeking to enforce such an agreement while others are more sympathetic to the employee who needs to earn a salary.

The upshot of this is that in California, labor is extremely mobile. People quit their jobs on Monday and start a new company or work for a new company on Tuesday, and there is nothing the former employer can do in terms of enforcing a non-compete clause. (I am ignoring intellectual property issues that may protect the former company.) Because the new employer know that California courts will not enforce non-compete agreements, it is willing to hire employees that would not be hired in Massachusetts, and investors are willing to fund start-ups that would not be funded in Massachusetts.

In Massachusetts, due to the legal uncertainty and the possibility that a non-compete will be enforced, lots of employees are not hired, lots of start-ups are not started, and lots of start-ups are not funded, that would be in California.

Simply put, Massachusetts could increase its competitive advantage (or more accurately, decrease its competitive advantage) by changing its law concerning non-competes.

One issue that Saxenian and Paul do not address is the quality of the business laws and its court system. Ceteris paribus, a state where business laws make sense and where the courts enforce contracts and handle business disputes quickly and fairly will have an advantage over other states.

The "gold standard" is Delaware. The Delaware Corporations code, for example, is clear, well written and is in almost cases unambiguous. The Delaware Chancery Court (a court of equity that hears all business disputes) is respect through the world for its smart judges who show no favorites, enforce reasonable agreements, and decide cases quickly. Their supreme court (Delaware is small enough so that all appeals go directly to the state supreme court) is equally well regarded. To some extent, companies outside Delaware can opt-in to the Delaware legal system by incorporating in Delaware, giving Delaware jurisdiction to corporate governance issues, for example.

Neither Massachusetts nor California can compare to Delaware. In comparing Massachusetts and California, I believe Massachusetts has the advantage. At the Superior Court level, at least in Middlesex and Suffolk counties (the only two counties with which I am familiar), the judges are very well regarded. Massachusetts has a ton of law schools who produce an excess number of lawyers who do not want to practice law. So when a judgeship opens up, a lot of very good, well educated lawyers apply, and the committee has its pick of the litter. At the appellate level, the judges are also well regarded.

A recent development in Suffolk county has been the establishment of a court -- called the Business Litigation Session ("BLS") -- whose sole mandate is to adjudicate business disputes. Like federal court, the BLS handles the entire case from the time it is filed to trial. Allan Van Gestel is the judge appointed to the BLS. He is highly experienced in business disputes and is very well respected by lawyers who litigate business disputes. So far, none of the other counties have create a BLS, even though everyone agrees the BLS has been quite successful.

In California, the court system is less well regarded. The caliber of the trial judges is very uneven. Appeals in California are often unpredictable -- California is such a large state that different appellate divisions in the state simply disagree with each other, and thus there is not the predictability there is in Massachusetts. And the California Supreme Court does not step in enough to decide the disagreements among the appellate divisions, again because California is such a large state that there are simply too many appeals to the California Supreme Court, a small fraction of which are accepted for review.

James Mitchell
jmitchell@kensingtonllc.com