On July 23, 2013, the Boston Bar Association hosted its 5th Annual Symposium on Employee Non-Compete Agreements, Trade Secrets, and Job Creation.
Speakers at the well-attended event included Senator William N. Brownsberger and Representative Lori A. Ehrlich, co-sponsors of a compromise non-compete bill that is working its way through the state legislature, along with Jennifer Lawrence, General Counsel of the Massachusetts Executive Office of Housing and Economic Development (who participated as a representative of Governor Deval Patrick’s Administration), and several private practitioners (including Russell Beck and Michael Rosen, whose non-compete blogs can be found here and here).
Brownsberger and Ehrlich described the long process that has led to their most recent (and substantially watered down) bill, discussed below, along with the myriad interests with which they have had to contend on a hot-button issue such as this. Both seemed genuinely interested in getting to a result that was equitable to both employers and employees, but expressed frustration with the amount of time and effort it has taken to get there. Ms. Lawrence indicated that the Patrick administration is strongly opposed to non-compete agreements in general, and she repeatedly referenced the impact of restrictive covenants on both single mothers who are kept out of work and high tech companies, which purportedly will not relocate to Massachusetts due to its enforcement of non-compete agreements (despite the fact that 46 other states also permit them in one form or another, and that there are several other laws on the books in Massachusetts under which companies find it exceedingly difficult to do business, including the wage and hour laws).
There are currently three bills pending in the Massachusetts legislature that could affect the enforceability of non-compete agreements in the Commonwealth: Senator Brownsberger and Representative Ehrlich’s compromise bill and two bills that would prohibit non-compete agreements altogether. Recall from these previous posts that Senator Brownsberger and Representative Ehrlich each introduced competing non-compete legislation in 2008 — Brownsberger’s would have gone the way of California and a few other states and banned all non-compete agreements, whereas Ehrlich’s would have been far less restrictive. In the spring of 2009, the legislators collaborated on a compromise bill, Massachusetts House Bill 2293, entitled “An Act Relative to Noncompetition Agreements.” House Bill 2293 aimed to codify existing common law while affording greater procedural protections to those subject to contractual restrictions on employment mobility. After several revisions, House Bill 2293 ultimately failed to pass. According to Brownsberger and Ehrlich, this failure was due, in part, to the bill being weighed down and made too complicated by new provisions that were intended to mollify critics on both sides of the issue.
The Noncompetition Agreement Duration Act. The “Noncompetition Agreement Duration Act”(on which we previously reported here, introduced by Senator Brownsberger and Representative Ehrlich,leaves intact much of the existing common law, but creates a presumption that a non-compete agreement of up to six months is reasonable, whereas a non-compete agreement that lasts longer than six months is presumed unreasonable. If a court determines that the duration of the non-compete agreement is unreasonable, the non-compete agreement will be unenforceable in its entirety, with three exceptions (in which case the court may enforce the non-compete for any duration it deems appropriate): (i) “the employee has breached his or her fiduciary duty to the employer;” (ii) “the employee has unlawfully taken, physically or electronically, property belonging to the employer”; or (iii) “the employee has, at any time, received annualized taxable compensation from the employer of $250,000 or more.” This represents a significant departure from existing Massachusetts law, which permits the court to reform an unenforceable agreement to make it enforceable. Like House Bill 2293, the Noncompete Agreement Duration Act does not impact non-disclosure agreements, non-solicitation agreements, non-competes in connection with the sale of a business (where the party to be restricted is an owner of at least a 10% interest of the business who receives significant consideration for the sale), non-competes outside of the employment context, forfeiture agreements, or existing trade secrets law. A hearing on this bill is currently scheduled for September 10, 2013 before the Joint Committee on Labor & Workforce Development. We plan to attend and will report back with any material updates.
An Act Relative to the Prohibition of Noncompete Agreements. Representative Sheila Harrington filed a competing bill to the Noncompetition Agreement Duration Act on January 18, 2013, entitled “An Act Relative to the Prohibition of Noncompete Agreements,” that would prohibit the use of non-compete agreements altogether, much like California has done. Specifically, the bill states: “Except as provided in this section, any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade, or business of any kind is deemed unlawful.” The only exceptions are for the sale of a business or the dissolution of a partnership or LLC, which have substantial limitations. Unlike Senator Brownsberger and Representative Ehrlich’s previous and current compromise bills, this bill would seemingly apply to non-solicitation agreements as well. Indeed, the bill explicitly states that it does not apply to non-disclosure agreements, but is silent about non-solicitation agreements.
The Uniform Trade Secrets Act. Finally, snuck into a bill that seeks to make Massachusetts the 49th state to adopt the Uniform Trade Secrets Act (on which we previously reported here), is a provision that would ban non-compete agreements altogether, much like the bill filed by Representative Harrington. This bill, filed by Representatives Garrett Bradley and Thomas Calter, would similarly bring Massachusetts in line with California and a small group of other states that prohibit the use of non-compete agreements. It is interesting that this provision is included in the Uniform Trade Secrets Act, which in its original form does not include such a prohibition.
Based upon Ms. Lawrence’s comments at the symposium (as well as Governor Patrick’s own statement earlier this year, on which we previously reported here), these latter two bills would be more favorable to the Patrick administration than Senator Brownsberger and Representative Ehrlich’s Noncompetition Agreement Duration Act. As the panelists at the symposium discussed, however, prohibiting non-compete agreements would not necessarily reduce the amount of litigation in Massachusetts; instead, it may just shift to disputes over misappropriation of trade secrets and breaches of non-solicitation agreements, which can be just as costly and time-consuming, if not more so. In fact, as trade secret misappropriation can be quite difficult to allege absent strong indicators of such misappropriation (e.g., proof of large transfers or deletion of data), in the absence of the protections afforded by non-compete provisions many employers may find themselves in the unenviable position of being unable to prevent irreparable harm to their business when a key employee leaves for a competitor until there is solid proof of misappropriation, at which point it may simply be too late to protect the employer’s assets.
So, as we said back in 2009, Massachusetts Is Not California; At Least Not Yet! Nothing has changed since that time, however, and it may very well be heading in that direction if compromise legislation cannot be passed. That would seem to be Governor Patrick’s preference. In any event, this healthy and productive debate continues, and we will continue to monitor it and report any material updates. If you missed our recent webinar on significant legislative updates across the country, you can watch it here.