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Massachusetts Legislature Hears Testimony on Non-Compete Bill

Posted in Non-Compete Enforceability

By Kate PerrelliErik Weibust, and Ryan Malloy

On September 15, 2011, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development heard testimony on House Bill 2293. The bill, originally introduced in 2009 as House Bill 1799, and as previously blogged on here, here, and here, aims to codify Massachusetts common law pertaining to non-compete agreements and to simultaneously afford greater procedural protections to those affected by the contractual restrictions on mobility in employment. 

Changes to the Previous Draft

            The revised bill was re-filed in January 2011. Changes include the elimination of a threshold that confined the use of non-compete agreements to employees earning over $75,000 per year in favor of a requirement that courts more broadly consider the economic impact on an affected employee before deciding whether to enforce a non-compete agreement. Additionally, it permits garden leave clauses of up to 2 years if the affected employee receives adequate compensation (the 1-year limit to non-compete agreement duration otherwise remains).  

            Bill 2293 also provides for mandatory attorneys’ fees to employees. However, an employer can avoid paying fees if the court determines that it took “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable.” Finally, the new bill would permit the signing of mid-employment non-compete agreements so long as “fair and reasonable” consideration is provided to the affected employee.

            Like its predecessor, Bill 2293 does not apply retroactively, nor does it affect non-solicitation, non-disclosure, or other non-employment related non-compete agreements, such as those in the context of the sale of a business. The bill continues to reject the inevitable disclosure doctrine, and provides that non-compete agreements must be in writing and signed by both parties.

The Legislative Hearing

            Nearly 15 affected individuals, ranging from hairdressers and parents of college-age children to attorneys and legislators, testified before the Committee last Thursday. Although most testified in favor of the bill, some voiced concerns about mandatory attorneys’ fee awards and the perceived threat of an upswing in costly litigation. For instance, a representative of the Smaller Business Association of New England (SBANE) insisted that small business owners, who must now pay to comply with the Wage Act and mandatory employee healthcare legislation would suffer an added financial hardship if this bill is passed and opined that the bill would permit judges to ignore contract terms and create an atmosphere of unpredictability surrounding non-compete agreement validity.   

            Other critics expressed concern about the bill, and in particular three specific issues: 1) the unclear definition of “fair and reasonable consideration”; 2) the presumption that a 6-month non-compete agreement is sufficient to protect employer interests; and 3) the court’s ability to deny enforcement of otherwise valid contractual obligations. There was a shared belief by some that the present state of the common law provides adequate coverage and that statutory modification of the law would adversely affect local industries, particularly in the current economic climate.   

            Others praised the bill’s efforts to reform a complex and unpredictable realm of common law. The Massachusetts Employment Lawyers Association (MELA), an employee-rights organization, asserted that non-compete reform is necessary because abusive practices are pervasive and employees are being exploited under the current law. Other concerns expressed about the status quo include that unlimited non-competes create a chilling effect on hiring. Of course, the common law does not generally permit unlimited non-competes, but rather only those that are reasonably limited in time and geographic scope. Likewise, Secretary of Housing and Economic Development Greg Bialeck voiced the Patrick administration’s view that reform is necessary and that now is the time to do so.

            The drafters of the bill insist that it is not intended to alter the substance of existing common law. Instead, the point of the statute is purportedly to add consistency and procedural protections for the benefit of employers and employees alike. In the drafters’ view, it will be easy for employers to avoid the mandatory payment of legal fees, for example, if they comply with the bill’s safe harbors.

            As evidenced by the testimony of both the bill’s drafters and constituents, several important issues remain outstanding in Massachusetts, particularly in the areas of attorneys’ fees and the court’s equitable power. Compromise will be necessary on many of these points. It may be some time before the dust settles and a final draft is presented to the legislature, but efforts to create a statutory scheme to guide the use and enforcement of non-compete agreements is well underway.