non-compete legislation

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The Vermont Legislature kicked off 2019 with bill H.1, seeking to ban non-competes in the Green Mountain State. The new bill has been filed by Martin LaLonde, who promulgated an identical bill last January. The 2018 bill was read and referred to the Committee on Commerce and Economic Development and never made further progress. Rep. LaLonde has a new co-sponsor in 2019, Rep. Annmarie Christensen.

The bill, as drafted, seeks to prohibit all non-compete agreements in the employment context. There are three limited exceptions allowing for parties to enter into an agreement not to compete with a business or similarly restrain a person from engaging a profession, business, or trade, where the sale of a business or dissolution of a partnership or limited liability company is involved. The bill specifically notes that it does not “prohibit an agreement that prohibits the disclosure of trade secrets . . . .”

We will continue to closely monitor proposed legislation in Vermont and across the nation and report back with any updates.

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.

We previously reported on H.B. 6658, which was introduced earlier this year in the Connecticut House of Representatives. On the last day of the legislative session, the Connecticut legislature enacted a substantially watered-down version of the bill as Public Act No. 13-309, the full text of which can be found here. In yet another twist, however, last Friday Governor Dannel P. Malloy vetoed the legislation, returning the bill to the legislature with a letter noting his concerns about a lack of clarity in the final version of the bill enacted by the legislature.

The final bill, which would have gone into effect on October 1, 2013 if signed by Governor Malloy, provides that, in certain circumstances, a “noncompete agreement” (which is not defined in the bill) entered into, renewed, or extended on or after October 1, 2013 between an employer and employee is void, unless, “before entering into the agreement, the employer provides the employee with a written copy of the agreement and a reasonable period of time, of not less than seven calendar days, to consider the merits of entering into the agreement.” Employees can waive the right provided under the bill if the waiver is reduced to a separate writing, sets forth the right being waived and is signed by the employee prior to entering into the agreement.

Because the bill represents the first time that Connecticut has enacted a non-compete statute of general applicability to all employees in the state (existing statutes apply only to security guards and broadcasters), the bill would have represented a significant development in Connecticut noncompete law if signed into law. Nevertheless, the final bill contains a significant limitation: unlike earlier drafts of the legislation, the bill only applies when:

(1) “an employer is acquired by, or merged with, another employer,” and

(2) “as a result of such merger or acquisition an employee of the employer is presented with a noncompete agreement as a condition of continued employment with the employer.”

The final version of the bill also contains three other noteworthy departures from the draft bill.

First, a prior draft of the bill would have provided employees with a statutory basis for filing suit against employers who act in violation of the law (including recovery of damages and attorney’s fees). The final bill lacks this provision.

Second, a prior draft of the bill would have required employers to provide employees with “at least 10 days, and more if reasonable, to consider the merits of entering into the agreement.” The final bill dropped the number from 10 to 7 days and omitted the vague “more if reasonable” language.

Third, a prior draft of the bill provided that the bill applies to “an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line or business after termination of employment.” In contrast, the final version of the bill refers only to “a noncompete agreement” without further definition. It is unclear whether the legislature intended the language in the final version to be shorthand for true noncompete agreements (i.e., agreements that “expressly prohibits an employee from engaging in employment or a line or business after termination of employment”) or whether they intended the term “noncompete agreement” to include other post-termination restrictive covenants, such as covenants not to solicit customers and employees.

In his letter returning the bill to the legislature, Governor Malloy observed that, in light of uncertainty in the final bill, “it would be better for both employers and employees to receive greater clarity from the General Assembly on this issue next session.” We will continue to monitor developments on legislation in Connecticut if and when comparable legislation is introduced in the legislature at the next legislative session.

*Please note that there was confusion within several media outlets and blogs, including Trading Secrets, as to whether the Governor had in fact signed this legislation. We apologize for any confusion caused by those reports.

By Jessica Mendelson and Robert Milligan

New Jersey state legislators recently proposed A3970, a bill designed to prevent New Jersey businesses from enforcing “non-compete agreements with staffers who can claim unemployment compensation.”

The bill, which is sponsored by Assembly members Joseph Egan and Peter Barnes, was recently referred to the state’s Assembly Labor Committee. If the bill passes, it would invalidate contracts or agreements “not to compete, not to disclose or not to solicit” in cases where individuals qualify for state unemployment benefits. The changes would not apply to preexisting contracts. Theoretically, the bill would eliminate obstacles for workers on unemployment to return to work, thus reducing benefit payments and, by extension, unemployment taxes on employers. However, the legislation will likely face opposition from employers who rely upon non-compete agreements to protect legitimate business interests such as trade secrets and confidential information.

Traditionally, New Jersey courts enforce restrictive covenants if they are reasonable in scope and duration.  In determining whether a non-compete covenant is reasonable, New Jersey courts use a three-prong test, where an employer must show the restriction is necessary to protect the parties’ legitimate interest, that the restriction does not cause undue hardship for the former employee, and is not against the public interest. Under existing law, impacted employees are already able to apprise New Jersey courts of their unemployment status in opposing the enforcement of non-compete agreements.

If A3970 passes, it will further limit the enforceability of non-compete agreements in New Jersey. The state currently has a 9.3 percent unemployment rate, which has led to increased proposals for legislation pertaining to jobless benefits. Given this high rate of unemployment in New Jersey, the passage of the bill will make it harder for employers to enforce non-compete agreements against former employees.

New Jersey is hardly the first state to consider such a change to its non-compete law. In fact, the Maryland state Senate considered passing a similar bill earlier this year. We will continue to keep you apprised of significant proposed changes in trade secrets and non-compete law as they emerge.