The Massachusetts legislature is back at it again. Under new leadership, the Joint Committee on Labor & Workforce Development recently scheduled a hearing for October 31, 2017 on the non-compete reform bills proposed in January of this year. While we know little about the hearing, the bills to be discussed are presumably Senate Bill S.988 and companion House Bill H.2366. These identical bills were filed in January 2017 by the same legislators who began this process back in 2009, Senator William Brownsberger and Representative Lori Ehrlich.

As we previously reported, the proposed law brings many past proposals to the table with some new additions as well. We also reported in July and November of 2016 that the House and the Senate were unable to bridge their differences and agree on a compromise bill that year. For a detailed overview of the bills likely to be discussed in the upcoming hearing, please see our prior report.

We will continue to monitor these developments and report back with any updates. Perhaps 2017 is finally the year for non-compete and trade secret reform in Massachusetts after all. Readers of this blog know all too well, however, that this may just be another of the many attempts that the Massachusetts Legislature is unable to see through to its fruition.

shutterstock_66377878Last Friday, on January 20, 2017, the Massachusetts Legislature began its annual tradition of attempting to promulgate non-compete and trade secret reform in the Commonwealth. A new bill has been filed by the same legislators who began this process back in 2009, Senator William Brownsberger and Representative Lori Ehrlich, which brings many of the past proposals to the table with some new additions as well. As we reported in July and November, the House and the Senate were unable to bridge their differences and agree on a compromise bill in 2016.

The bill seeks to adopt much of the Uniform Trade Secrets Act. In addition, it would formally recognize the inevitable disclosure doctrine, providing that “threatened misappropriation may be enjoined upon principles of equity, including, but not limited to, consideration of party conduct before or after commencement of litigation and circumstances of potential use, upon a showing that information qualifying as a trade secret has been, or inevitably will be, misappropriated.”

On the non-compete side, the bill notably limits non-competes (with some exceptions) to a duration of one year from the date of termination, requires that the employee receive the non-compete prior to a formal offer of employment or two weeks prior the commencement of the his or her employment, and requires consideration beyond continued employment for post-hire non-competes. The bill also requires courts to apply the bright-line “red pencil” approach if the non-compete agreement fails to satisfy any of bill’s requirements, but grants courts the discretion to reform or otherwise revise an agreement to comply with certain safe harbors set forth in the bill.

Other provisions of the proposed legislation may cause some consternation for businesses or, at the very least, may require those businesses to change their practices. For example:

  • An agreement must expressly state that the employee has the right to consult with counsel prior to signing;
  • Employers must review all non-competes with their employees at least once every three years for them to remain valid and enforceable;
  • For post-hire non-competes, notice must be given at least ten days before the agreement becomes effective;
  • If the employee has breached his or her fiduciary duties, or taken property of the employer, the duration of the non-compete may be extended to two years;
  • A geographic reach of any non-compete is that is limited to “areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable”;
  • A restriction that “protects legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable”;
  • Employers have ten days after the termination of employment to “notify the employee in writing by certified mail of the employer’s intent to enforce the noncompetition agreement.” If the employer fails to do so, the non-compete is deemed waived by the employer. That being said, this requirement does not apply if the employee has unlawfully taken the employer’s property or already breached the non-compete, a non-solicit, an anti-piracy/no-raid covenant, a confidentiality agreement, or a fiduciary duty;
  • Non-compete agreements would not be enforceable against (1) employees who are not exempt under the Fair Labor Standards Act, 29 U.S.C. §§ 201-209, (2) undergraduate or graduate students engaged in short-term employment, (3) employees terminated without cause or laid off, (4) employees who are 18 or under, and (5) non-employees who perform services for less than one year; and
  • If the employee is a resident of, or has been working in, Massachusetts for at least thirty days immediately prior to the termination, Massachusetts law will apply, rending any out-of-state choice of law provision unenforceable.

Notably absent from the bill is the inclusion of a provision requiring “garden leave,” forcing employers to pay former employees bound by non-compete agreements fifty percent of their highest annualized salary over the last two years of employment for the restricted period. Such a provision has appeared in many of the proposed bills in the past few years.

We will continue to monitor these developments and report back with any updates. Perhaps 2017 is the finally year for non-compete and trade secret reform in Massachusetts after all. Readers of this blog know all too well, however, that this may just be another New Year’s resolution that the Massachusetts Legislature is not able to keep.

A special thanks to our friend Russell Beck for his thoughtful analysis of, and input into, the latest proposed legislation.

There are signs that the debate over whether to ban non-competes may end in a compromise, a result many, including this blog, have predicted.

As we reported in Friday’s post, the Joint Committee on Economic Development and Emerging Technologies held a public hearing yesterday at the Statehouse on HB4802, which would adopt the Uniform Trade Secrets Act (“UTSA”), repeal the current statutes regarding theft of trade secrets (Sections 42 and 42A of Chapter 93), and ban employee non-compete agreements.  The three hour hearing was packed with legislators, lawyers, and business people on both sides of the non-compete debate. Also, in attendance and presenting testimony were individuals negatively impacted by non-competes, many of whom were wearing “Create Jobs in Massachusetts/Ban Non-Competes” stickers.

The Committee’s Chair, House representative, John Wagner noted at the commencement of the hearing that unless convinced otherwise he was somewhere along the spectrum between leaving the law as it is on non-competes, and banning them outright. The hearing testimony was kicked off by Governor Patrick’s economic development chief, Gregory Bialecki, who presented the Patrick administration’s position that non-competes stifle innovation and job growth and should be banned, but he told the committee that the administration would be open to a compromise.

Another House Representative, Lori Ehrlich,  who has been involved in the non-compete debate since 2009 (please see our link to previous blog entries on the topic), and worked previously with then House Representative William Brownsberger, on a compromise bill, offered proposed changes to the HB4802. She explained that the changes are designed to address the unpredictability of the current common law, and incent employers to use narrowly  tailored non-compete restrictions.  Ehrlich’s proposal would establish presumed reasonable terms for the duration, geographic scope, and activity restrictions of non-competes, such as a six month non-compete restriction, and limiting the employee only from taking a position with similar duties to previous position and within same geographic region he/she was in previously. Under current Massachusetts common law, while courts can reform overbroad agreements to be more limited, it is difficult at best for employers and employees to predict what will be deemed reasonable or not. Erhlich’s proposal sets a “reasonableness” guidepost. Moreover, in a departure from current law, the proposal includes a “red pencil” provision for any non-compete restriction not presumed reasonable under the proposed legislative scheme. For example, if the enforcing company cannot demonstrate a legitimate business reason for exceeding a 6 month non-compete restriction, Ehrlich’s proposal requires a court to “red pencil” and strike the non-compete, rather than merely reduce it to a 6 month presumed reasonable time frame. The intent behind this part of the proposal is to incent employers to implement very tailored and narrow non-compete restrictions. 

While it seems there is much less debate over the trade secrets provisions in HB4802, Erhlich also proposed some revisions relating to the UTSA, including expanding protections to licensees of trade secrets rather than just the owners; eliminating the need for owners of trade secrets that have been misappropriated to continue security protections while they pursue enforcement; and limiting the premature and breadth of disclosure of the trade secrets at issue in litigation to enforce UTSA protections.

As we had previously reported (link to previous blog), also still in play on non-compete and trade secret protection in Massachusetts are the House and Senate’s pending economic development bills. The House economic development bill is notably silent on the issue of non-competes and adoption of the UTSA. The Senate economic bill, was also silent on the issue of non-competes, but would adopt the UTSA. Yesterday, while the Joint Committee hearing was underway, the Senate voted 32-7 in favor of a compromise approach offered by Senator William Brownsberger, an early proponent of banning non-competes. Here is a link to earlier blog entries on the bills. This compromise like Ehrlich’s would limit the duration of non-compete restrictions to six months and prohibit their use with hourly employees. It is unclear what the House will do on the non-compete issue given the pending bill’s silence on the issue. These differences will no doubt be addressed and perhaps settled later in the month when the Senate and House try to reconcile their economic development bills before the end of the legislative session on July 31.

In sum, it seems more likely now that Massachusetts will enact some form of legislation governing the use of non-competes and adopt some form of the Uniform Trade Secrets Act. The final form of such legislation remains to be seen, as well as whether it can be accomplished before the end of July. As we reported previously, there will be no more formal sessions of this legislature after July 31st.  While informal sessions will still occur, typically those only address “non-controversial” legislation, such as the changing of a street name.  Moreover, it is the last year of the two year legislative session, so unless the legislature acts on HB4802 or another standalone bill before the end of July, the legislation would have to be reintroduced into a new congress in January — with a new governor.

We will continue to monitor all the pending bills, as well as any others that may be filed, and report back.

We attended a hearing today before the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development regarding the pending non-compete legislation on which we have previously posted

Among others who testified about the issue was Governor Deval Patrick’s Secretary of Housing and Economic Development, Gregory Bialecki. 

Mr. Bialecki finally acknowledged publicly what the Patrick Administration has been dancing around for some time now (see our recent post on the issue here), and which we believed was inevitable:  that it supports the “outright elimination of enforceability” of all non-compete agreements in Massachusetts, regardless of their duration or geographic scope.  Mr. Bialecki also said that the Patrick Administration wants to see Massachusetts adopt the Uniform Trade Secrets Act, which it believes provides sufficient protection to companies (see our previous post on this issue). 

If the legislature were to adopt the Patrick Administration’s suggestions, Massachusetts may be the next California as it relates to non-compete and trade secret law.

Below is Secretary Bialecki’s full testimony (with our emphasis added to the most notable points).  We will provide a more detailed report on the legislative hearing in the coming days. 

Dear Chairman Conroy and Senator Wolf,

Thank you for the opportunity to appear before you today. I am here to express the strong support of the Patrick Administration for substantial reform of the current rules on the enforceability of non-competition agreements in Massachusetts.

I gave very similar testimony to this committee almost two years ago. Now, as then, there are bills in the Legislature that call for changes to our current rules regarding the enforceability of non-competes and bills that call for the end to such enforceability.

I suggested two years ago that it seemed increasingly unlikely that we could achieve any meaningful consensus among the stakeholders on changes to our current system that left non- competes in place. I think that this has turned out to be the case, as the debates and disagreements that you will hear today are almost exactly the same as those that you heard two years ago.

I also suggested two years ago that if we could not achieve any meaningful consensus among the stakeholders on changes to our current system, then the best course for Massachusetts would be the outright elimination of enforceability of non-competition agreements. I am here today to affirm that the Patrick Administration now supports such outright elimination, combined with adoption of the Uniform Trade Secrets Act, which has been demonstrated in other states to protect the loss or disclosure of proprietary information by departing employees.

A key element of the Patrick Administration’s economic development strategy has been to build on the strength of our world-class innovation economy. A key measure of success for our economic development and job creation policies and programs considers whether our policies and programs effectively support the innovation and entrepreneurship that has given us our critical competitive advantage for so many years. If our policies and programs do not provide this support then we should simply re-consider them. Our policy on non-compete agreements needs reform because Massachusetts should do everything it can to (1) retain talented entrepreneurs; (2) support individual career growth and flexibility; and (3) encourage new innovative businesses that are the engines of economic growth. Massachusetts employers currently have tools to protect the stability of their businesses.

Retention is Key: We do an excellent job of educating talented people here in the Commonwealth. However, if they work here and sign a non-compete agreement, we are essentially asking those same talented people to leave and to become entrepreneurs elsewhere. If Massachusetts is not able to create an environment that gives entrepreneurial talent a chance to thrive, then the most effective job creating companies may be pushed to grow to scale in states like California. In fact, we have heard examples of entrepreneurs at MIT who were advised to start their businesses outside of Massachusetts as a result of non-compete agreements laws. Non-competes stifle movement and inhibit competition and we do not want that. The evidence is clear—we are not seeing the kind of spin-offs and starts up at the same rate that previously made Massachusetts an enviable model.

Individual career growth is good for the Commonwealth: We encourage our talent to be creative, to be innovative, and to network with other talented people. Furthermore, we encourage employers to recruit talented people. However, we send a mixed message: providing the talent needed to support the kind of explosive growth we want in the innovation economy is considerably more difficult if employees are legally unable to move between jobs in the innovation economy. The current law makes it considerably harder for employees to leave their current employers, whether due to the actual enforcement of a non-competition agreement, or more frequently, just due to the threat of enforcement. The individual has no effective recourse. The only thing to do is to suspend relevant work until the term of the non-compete agreement expires. Most individuals are not in a financial position to afford not working for the term of the non-compete. Being out of the market for the term is a major liability to the individual’s career and future development. An individual who has 10 or 20 or 30 years of experience and expertise is forced to avoid using their expertise during the term of their non-compete agreement. We do not want this mixed message to continue.

We want innovative businesses. A priority of this Administration has been to support and enhance the innovation economy. Massachusetts has long had a vibrant and leading edge in research and the innovative community. Many of the fundamental technological advances like the Internet economy and digital media had beginnings in Massachusetts in the past couple of decades. However, we could do more. We need more start-ups, especially in the technology and bio-tech sectors. Start-ups are good; they create jobs, push innovation to new heights, and retain talent. Many of our current employers, larger and small, report they are unable to attract lateral or advanced talent due to our current laws limiting the mobility of our workforce.

Current employers should not feel threatened: Senators Brownsberger, Vice-Chairman Ehrlich, and Leader Bradley have championed the efforts in the legislature to reform the current system. While, we understand employers concerns that protecting their proprietary information is critical, non-compete agreements are neither the best option nor the only available vehicle to protect companies. By adopting the Uniform Trade Secrets Protection Act, and limiting or abolishing non-compete agreements, we will have an opportunity to both grow our economy and protect a company’s proprietary information.

The Uniform Trade Secret Act (UTSA) has been adopted in 47 other states and the District of Columbia. The UTSA and other tools protect an employer’s trade secrets and proprietary information, which is fundamentally important. Patents, confidentiality agreements, and trade secrets are more than sufficient to protect legitimate company interests against former employees. Even without non-compete agreements, companies still have a disproportionate ability to litigate against the individual.

You will certainly hear today from businesses and business groups who would prefer to keep the current legal arrangements regarding non-competes intact. While holding onto their current employees may be convenient for employers, it is not at all clear that it is necessary to their business success. Our businesses could recruit the very talent they need without a non-compete agreement impeding the opportunity.

For these reasons, we support outright elimination of enforceability of non-completive agreements in Massachusetts combined with adoption of the Uniform Trade Secrets Act.

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.

By Erik Weibust and Ryan Malloy

Massachusetts has entered a new chapter in a long-standing effort to enact comprehensive non-compete reform in the Commonwealth. Recall from these previous posts that Senator Will Brownsberger and Representative Lori 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.

This session, however, Representatives Brownsberger and Ehrlich have taken a simplified approach with the introduction of a new bill that focuses exclusively on the duration of non-compete agreements in the employer-employee context. The proposed bill, entitled the “Noncompete Agreement Duration Act,” is based on the following findings:

  • “[T]he Commonwealth of Massachusetts has a significant interest in its economic competitiveness and the protection of its employers, and a strong public policy favoring the mobility of its workforce” and
  • “[T]he Commonwealth of Massachusetts has determined that an employee noncompetition agreement restricting an employee’s mobility for longer than six months is a restraint on trade and harms the economy.”

The proposed bill 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 unreasonable, with three exceptions: (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.” If a court determines that the duration of the non-compete agreement is unreasonable and one of the exceptions does not apply, however, the non-compete agreement will be unenforceable in its entirety. This represents a big 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, non-competes outside of the employment context, forfeiture agreements, or existing trade secrets law.

We will continue to monitor the progress of this legislation and will provide updates when appropriate.

On January 20, 2011, Massachusetts State Representatives Lori Ehrlich, William Brownsberger, and Alice Hanlong Peisch re-filed the Massachusetts non-compete bill, aptly entitled “An Act Relative to Noncompetition Agreements.”  The bill was originally submitted in late 2009 as House No. 1799, and since that time has undergone significant review, comment, and revision.  While much of the bill remains the same, its sponsors made changes to address several concerns the business community had expressed about particular provisions.  There is no current timeline for a vote on the bill, but we do expect there to be ample opportunity to provide additional input.

What Remains the Same As the Prior Bill?

The bill applies to non-compete agreements in the context of employment, including forfeiture for competition agreements (agreements that impose adverse financial consequences if an employee engages in competitive activities).  However, the bill specifically excludes non-solicitation agreements (both of customers and employees); non-compete agreements outside the employment context, such as those that are executed in the sale of a business; forfeiture agreements (agreements that impose adverse financial consequences as a result of termination regardless of whether the employee engages in competitive activities); and agreements not to reapply for employment.  The bill does not apply to non-disclosure or confidentiality agreements. 
In essence, the bill codifies the existing common law rules, which provide that non-compete agreements are enforceable only if they are reasonable in duration, geographic reach, and scope of proscribed activities necessary to protect the employer’s trade secrets, confidential information, or goodwill, and are consonant with public policy.  In addition, the bill does not change current Massachusetts law permitting courts to reform or modify unreasonable non-compete agreement provisions.

The bill requires non-competes to be in writing, signed by both parties, and “to the extent reasonably feasible,” they must be provided to the employee at least seven business days in advance of employment.  If the agreement is executed after the commencement of the employment relationship, the employee must be provided with notice and “fair and reasonable” consideration (beyond continued employment).

The bill restricts non-compete agreements to one year, except for “garden leave” clauses (agreements by which the employer agrees to pay the employee during the restricted period), which may last up to two years. 

The bill mandates the payment of attorneys’ fees to employees if a court refuses to enforce “a material restriction or reforms a restriction in a substantial respect,” or if it finds that the employer acted in bad faith.  Attorneys’ fees are not mandated, however, if a particular provision is “presumptively reasonable,” as defined by the statute, or if the employer made “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable,” even if a court refuses to enforce or reforms the provision.  An employer may be entitled to its legal fees if it prevails only if they are otherwise permitted by statute or contract, the agreement is presumptively reasonable, the non-compete was enforced, and the employee acted in bad faith.

What Has Changed From the Prior Bill?

Perhaps the most significant change in the current version of the bill is that it no longer restricts the use of non-compete agreements to employees making more than $75,000 per year.  Instead, the bill calls for courts to consider the economic circumstances of, and economic impact on, the employee.  This is important because there are many companies doing business in the Commonwealth, oftentimes start-ups, that employ individuals who are paid less than $75,000 per year, but who are otherwise provided with potentially lucrative equity interests, stock options, or the like.  The departure of these employees to a competitor can cripple a start-up company and can even cause hardship to well-established companies that may utilize these other types of non-monetary compensation and pay key employees less than $75,000.  This salary benchmark was also a concern for companies that employ part-time or seasonal employees, and staffing agencies, to name a few, which may not meet the $75,000 salary benchmark in a calendar year.    

Another change in the bill relates to the award of mandatory attorneys’ fees to employees.  While this provision remains in the bill, as discussed above, an employer can avoid paying fees if the court determines that it undertook “objectively reasonable efforts to draft the rejected or reformed restriction so that it would be presumptively reasonable,” even if unsuccessful.  This provision, however, does not provide clear guidance to employers as to the parameters of such “objectively reasonable efforts,” and remains a significant departure from existing law that litigants pay their own attorneys’ fees, win or lose.

Like some other states, including California, the bill, in its prior and current versions, explicitly rejects the inevitable disclosure doctrine (which holds that even in the absence of an enforceable non-compete agreement, a former employee may be prevented from working for a competitor based on the expectation that the employment would inevitably lead to the disclosure of trade secrets or confidential information of the former employer).  The newest version of the bill, however, recognizes that employers may nevertheless protect themselves using other laws and agreements, including applicable trade secrets laws and non-disclosure agreements.   

Other changes from the last version of the bill include: (a) non-competes executed after the commencement of employment no longer must be accompanied by a 10% increase in salary to be presumptively reasonable; now, they must simply be supported by “fair and reasonable consideration”; (b) non-compete agreements no longer need to be separate documents; (c) garden leave clauses are permitted; and (d) the scope of restrictions placed on forfeiture agreements has been limited.

Finally, it is important to note that the bill is not retroactive, and will not apply to agreements entered into before January 1, 2012.

Seyfarth Shaw plans to monitor and participate in the legislative process and will report on the status and evolution of this bill on our blog, Trading Secrets, at www.tradesecretslaw.com.  If you have any questions or would like to provide input on the bill, please contact the Seyfarth Shaw attorney with whom you work or any Trade Secrets, Computer Fraud & Non-Compete attorney on our website (www.seyfarth.com/tradesecrets). Click here for Seyfarth Shaw’s Management Alert on the bill.

By Kate Perrelli and Erik Weibust

On October 7, 2009, the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development held a hearing on a non-compete bill, House No. 1799, sponsored by Representatives Will Brownsberger and Lori Ehrlich. Representatives Brownsberger and Ehrlich had each previously sponsored their own independent bills – Brownsberger’s based on California’s statute that bans non-compete agreements altogether, and Ehrlich’s based on Oregon’s statute that permits non-compete agreements with certain restrictions. The two Representatives have spent a considerable amount of time and energy over the past few months crafting a compromise bill, relying on input from proponents and opponents of non-compete agreements, including industry leaders, employees, trade associations, and attorneys. Several of these people testified before the committee about the need for predictability in the area of restrictive covenants — for both employers and employees — and the need to balance the interest of employer’s in protecting their confidential information, trade secrets, and goodwill, with those of employees in being able to switch jobs freely. Although this compromise bill in some respects codifies Massachusetts common law, there are four provisions in particular that warrant further review and refinement:

  • The bill prohibits enforcement of non-compete agreements against employees who make less than $75,000 per year. One concern with this provision is that start-up companies often pay their employees lower salaries until they are able to obtain greater financing, yet provide them with as much, if not more, confidential information and trade secrets than higher paid employees at other companies. The bill ignores this scenario. In addition, there is no method in the bill for determining whether companies that pay hourly wages to their employees, such as staffing agencies, are subject to the law, as it is difficult to determine whether an employee will make more than $75,000 in a given year when they begin their employment, which is when they would be required to execute a non-compete agreement. The bill makes no exception or accommodation for these types of companies or others that would be adversely impacted by the $75,000 minimum.
     
  • The bill limits non-compete agreements to one year, with the exception of a garden leave clause provision, pursuant to which the employer would pay the employee to sit on the sidelines for the term of the restriction. Courts in the Commonwealth often enforce as reasonable two-year non-compete agreements, and in some limited instances, for longer. A one year limitation may be insufficient in many situations. 
     
  • Attorneys’ fees are mandatory for successful defendant-employees, yet they are merely permissive for successful plaintiff-employers, and are to be awarded only in the latter situation if the employer can show that the employee acted with bad faith, a very subjective standard. Moreover, an employee also receives attorneys’ fees if he or she files a declaratory judgment action challenging his or her non-compete agreement, provided that two days before doing so, the employee provides the former employer with specific measures that the employee would take to protect the employer’s confidential business interests, which measures are substantially adopted by a court as part of a hearing on preliminary injunctive relief. Again, this provision may place undue pressure on a start-up to accept an employee’s proposal to avoid incurring legal fees.   
     
  • The bill rejects the inevitable disclosure doctrine, under which it is presumed that an employee who had access to a significant amount of confidential information and trade secrets will disclose that information, even if unintentionally, to his or her new employer. This doctrine plays the important role of acting as a backstop to non-compete agreements, or as the only protection where no non-compete agreement is executed, and is necessary to further protect employers against disclosure by such employees. Complete obliteration of this doctrine will affect certain industries more dramatically than others.

Kudos to the legislators, and the group that they enlisted to fashion this compromise bill.  Massachusetts has stepped back, at least for the time being, from the precipice of following California’s legislature’s path in banning non-competes altogether, and instead, has taken a big step forward to provide more clarity to a very complex, fact-specific area of Massachusetts law. There are steps left to be taken, but the current debate is healthy and productive.

The Massachusetts House of Representatives has before it two competing bills relating to non-competition clauses to consider this Spring.  Representative Lori Erlich has sponsored House Bill No. 1799, which sets forth the standards by which a non-compete provision could be measured for enforceability.  The proposed statute includes (i) a ban on non-competes all together for any employee earning less than $100,000 in compensation, (ii) a mandate that any non-competition agreement entered into after employment must be based on consideration other than continued employment (presumably cash, although it is unclear), and (iii) the requirement that the employer must give the employee at least two weeks’ notice of the agreement before it can become effective. 

In addition, and this is perhaps the most rigorous demand — a non-compete agreement may be enforceable only if the the employer pays to the employee "for the full restricted period and without offset for any income the employee may receive from other noncompetitive activities, a minimum of the greater of:  (1) compensation equal to fifty percent of the employee’s annual gross base salary and commissions at the time of the employee’s termination or (2) $100,000." The proposed statute does not affect employee or customer non-solicitation agreements and expressly excludes the rights of companies to act to protect trade secrets and confidential information from misappropriation by way of an injunction. 

The other statute, House Bill No. 1794 submitted by Representative Will Brownsberger, proposes to ban non-compete and non-solicitation agreements in their entirety.  This bill reportedly is gaining support by those who believe that Massachusetts high-tech corridor has not been competitive with California’s Silicon Valley because Massachusetts allows non-compete provisions and California does not.  

Although both statutes apply only prospectively by their terms, if either is passed, they clearly would affect all future contracts with employees governed by Massachusetts’ law.