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.