As we reported last week, Massachusetts Governor Deval Patrick has proposed sweeping legislation that would eliminate employee non-compete agreements in Massachusetts. Now that we have had an opportunity to review the Governor’s bill, entitled “An Act to Promote Growth and Opportunity” (HB4045), we wanted to report back on its content and the implications should it pass. While the bill includes a number of proposed changes and additions to existing laws on a variety of subjects, two main provisions are of particular interest here.
Outright Elimination of Employee Non-Compete Agreements
First, as expected, the bill includes a provision that would invalidate all employee non-compete agreements in the Commonwealth.
In our last post on the topic, we wondered whether the proposed legislation would apply solely to non-competes in the technology and life sciences industries, as this Boston Globe headline suggested, or if it would apply to a broader category of industries. We can now report that the bill, as currently drafted, would invalidate all non-compete agreements in Massachusetts, with a few very limited exceptions, regardless of industry.
This would bring Massachusetts in line with only California and North Dakota, the only other states that completely prohibit employee non-compete agreements.
The limited exceptions to the proposed Massachusetts statute include non-competes entered into in connection with the sale of a business (or the sale of substantially all of the assets of a business), where the restricted party owns at least 10% of the business and received significant consideration for the sale, and non-compete agreements arising outside of an employment relationship.
Additionally, the bill would not affect non-solicitation agreements (both those prohibiting solicitation of an employer’s customers and those prohibiting solicitation of employees), non-disclosure agreements, forfeiture agreements, or agreements not to reapply for employment to the same employer. While the bill does not explicitly reference “garden leave” or “bench” provisions (where the employee is compensated not to compete during the restricted period), it would seem to bar such provisions, as they would presumably be deemed to prohibit or restrict an employee’s ability to seek or accept other employment. This is something the legislature should clarify and/or the courts may ultimately need to consider in interpreting the bill, should it pass.
One of the most notable provisions of the bill, however, provides that the prohibition on non-compete agreements applies to agreements executed before the bill’s effective date. This retroactive application is certain to impact negatively businesses in Massachusetts that currently use non-compete agreements to protect their legitimate business interests (e.g., protection of good will, trade secrets, and confidential information), and plan to do so until they are invalidated by statute. Companies whose only protection of confidential and proprietary information or customer relationships consisted of non-compete agreements (which has never been advisable) will have to ensure that they have appropriate protections in place moving forward.
Adoption of the Uniform Trade Secrets Act
Second, the bill includes a provision adopting the Uniform Trade Secrets Act (“UTSA”)—making Massachusetts the 49th state to have adopted some version of the UTSA—and another provision that would repeal the current statutory provisions related to liability for trade secret misappropriation and injunctive relief (Sections 42 and 42A of Chapter 93 of the Massachusetts General Laws).
Unlike the current statutory scheme in Massachusetts, the UTSA explicitly permits injunctive relief for actual or threatened trade secret misappropriation (whereas under the current scheme, actual misappropriation must be established). The UTSA also specifies that damages can include not only the actual loss caused by the misappropriation, but also unjust enrichment damages.
Like the current statutory scheme, courts can award multiple damages for trade secret misappropriation: The UTSA would allow awards of exemplary damages of up to twice the amount of actual loss or unjust enrichment, where the misappropriation is willful and malicious.
Another significant change that adoption of the UTSA would bring about is an attorneys’ fees provision, where the court would be permitted to award fees to the prevailing party if: (i) a claim of misappropriation is made or defended in bad faith, (ii) a motion to enter or terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists. We have addressed the implications of a nearly identical provision in the Texas Uniform Trade Secrets Act here. Notably, unlike the section of the bill eliminating non-competes, the section relating to the UTSA would not apply retroactively.
While the UTSA may be welcomed by businesses operating in Massachusetts, we anticipate mixed responses to the proposed elimination of all non-competes (and its proposed retroactive application), with passionate arguments on both sides of the issue.
Of course, the mere introduction of the bill does not ensure its passage and, as we have previously reported, other legislation regarding the enforceability of non-compete agreements in Massachusetts has been pending in one form or another in the state legislature since 2009.
Faced with incredibly disparate opinions in the business community, and the fact that Governor Patrick’s administration is in its final months, it may be that the bill in its current form will wither on the vine. Instead, previous bill sponsors may continue their hard work to find a compromise between outright elimination of non-competes and a codification of the common law, which has evolved in the Commonwealth, to enforce those non-competes that are narrowly tailored and address the employer’s legitimate business needs to protect its good will, confidential information, and trade secrets. While some studies have suggested a connection between enforcement of non-competes and limited regional growth (for example, comparing the boom of Silicon Valley, where non-competes are unenforceable, to the more tempered success of the Route 128 area in Massachusetts), other studies have noted that a variety of factors distinguish these regions, such as cultural and structural differences between the East and West Coasts. Accordingly, we anticipate that critics of this bill will point out that the Patrick administration’s claim that non-competes “are a barrier to innovation in Massachusetts” may not be quite that cut and dry.
The bill was filed in the Massachusetts House of Representatives and has since been referred to the Joint Committee on Economic Development and Emerging Technologies. We will keep you updated on this sweeping bill’s progress.