Massachusetts Noncompete Law : Massachusetts Noncompete Lawyer & Attorney : Foley Hoag Law Firm : Non-competition Agreements, Labor & Employment

Scott Kirsner, business writer for the Boston Globe, has been perhaps the most active follower of the Massachusetts noncompete debate during the past couple of years.  Last week, he posted on his blog, Innovation Economy , about a recent chat with Gov. Deval Patrick on the issue, including the pending legislation to prohibit or scale back noncompetes.  The bottom line, it seems, is that Gov. Patrick continues to hedge his bets.  Kirsner quotes him as saying, "If there's a consensus in the industry [as to whether they're a good or bad thing], I'm happy to support that."  Well, at the moment there is far from a consensus on the issue.  While some in the emerging-company world are increasingly vocal about their desire to outlaw noncompetes in Massachusetts, many others continue to support them.  Kirsner describes Paul Sagan of Akamai Technologies -- obviously an influential voice in the technology space -- to be in the pro-noncompete camp.  

In a column in yesterday's Globe, Kirsner describes at length his view that non-competition agreements stifle innovation, particularly because they discourage talented workers with new ideas from forming or joining start-ups out of fear of being embroiled in costly and distracting litigation.  He points to the statutory exceptions that already exist for certain occupations -- doctors, social workers and broadcasters -- and questions why, if a TV anchor can move from one station to another, an engineer at a tech company can't.  One answer to that question is that the movement of a TV anchor to a competitor does not threaten any legitimate business interest of his former employer.  There is no confidential information at stake.  The anchor succeeds or fails based mainly on his or her skill at conveying news to an audience.  An engineer joining a competitor, on the other hand, arguably comes with not only her general skills and experience (which she can take with her), but also with detailed knowledge of the former employer's confidential information, and she can't simply forget that information while developing a product for a competitor.  Thus, in moving to the competitor, the engineer places at risk the very confidential information that the former employer spent much time, money and other resources developing and protecting. That, at least, is the principal argument in favor of enforcing noncompetes in certain instances.  

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The Rappaport Institute for Greater Boston at Harvard's Kennedy School next week is holding what promises to be an interesting event on the continuing debate about noncompete agreements and economic development in Massachusetts. The event, part of an ongoing lecture series, is entitled “Using Non-Compete Laws to Spur Economic Development in Massachusetts.” The panelists include Prof. Lee Fleming and Matt Marx, academics who have focused on attempting to quantify the effect of noncompetes on business innovation; State Representative William Brownsberger, who has sponsored legislation which would prohibits noncompetes in Massachusetts in most instances; Bijan Sabet, a venture capitalist at Spark Capital who has spearheaded recent efforts to limit non-competition covenants; and my partner, Robert Fisher, who has a great deal of experience litigating these issues on all sides. (Unfortunately, yours truly will be out of town for this event.) The event will be at the Kennedy School Campus on April 21 at 5:30. More information can be found here.

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Multiple media outlets (see here  and here, for example) have been covering an alarming report jointly issued recently by the Ponemon Institute, an Arizona-based research group, and Symantec Corp., that data theft is common among departing employees. As reported in the Washington Post, the most significant finding of a joint survey of employees who left a job in 2008 was that almost 60% of ex-employees admitted to taking company data of one sort or another. The most commonly identified kinds of records taken were “email lists,” personnel records, customer information (including contact lists), and “non-financial business information” (which presumably can encompass technical information, strategic information etc.). 

Approximately two-thirds of those who admitted taking company information said they did so in order assist with a new job. The report indicates that employees are stealing data in multiple ways. Most common (61%) is old-fashioned theft of paper documents or hard files, followed by downloading information onto a disc (53%), onto a USB memory stick (42%), and sending documents as attachments to personal emails (38%). Interestingly, comparatively few employees ]were taking information by stealing BlackBerrys and laptops. Another quite alarming finding is that approximately 25% of the employees indicated that they were able to access data on a company’s network even after they had departed.

If these findings are an accurate gauge of employees across a range of industries, they have far-reaching implications. I will put aside the obvious privacy and identify theft issues raised by such security lapses. (See this new blog for a comprehensive discussion of information security issues.) Companies are losing important, competitive information to employees who are taking such information because it may be valuable to a competitor. Yet, it is precisely in order to protect against such unfair competition that states have developed laws prohibiting theft of trade secrets and confidential information. For the same reason, most states permit enforcement of contractual covenants restricting certain post-employment conduct by departed employees.

So, what’s going on? As is surmised in the Washington Post article -- and I can confirm seeing this repeatedly in my own practice -- employees increasingly have a sense of personal “ownership” in the information they work with while employed. Many feel entitled to keep that information -- particularly if it involves their own work product -- after they leave. Coupled with the rapid evolution of technology in the workplace and employee mobility, the taking of valuable information as employees depart has become increasingly prevalent. 

The response from employers worried about these trends should be better planning and increased vigilance. Many companies have a haphazard approach to protecting their IP, particularly as employees depart. They may do a good job of requiring new hires to sign standard agreements, but then fail to remind employees of their obligations as they leave or even to recover company data and equipment. And many companies fail to take even rudimentary steps to protect against theft of information by departing (and often disgruntled employees).  An employer that wishes to protect against the phenomena described in the Ponemon report would do well to develop an approach to protecting information and an exit process that lays the groundwork for the possibility of later enforcement of existing agreements and policies. If the company has suspicions about the outgoing employee’s conduct or intentions, immediate consideration should be given to investigating the employee’s computer-related activities prior to his or her departure.  The fact is that most of the conduct described in the Ponemon report would have been detected by an employer that actually was looking for it.

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For those who have been following this blog’s discussion of the ongoing debate about noncompetes in Massachusetts and recently introduced legislation seeking to prohibit such restrictions, this site is a useful resource on the subject.  Thanks to Caroline Huang for bringing it to my attention.  It contains the text of proposed legislation and background information on noncompetition agreements in Massachusetts.  The site was created by Ms. Huang in consultation with Rep. Will Brownsberger, who is sponsoring one of the bills.  The name of the site, “Prohibit RestrictiveEmploymentCovenants.net,” certainly conveys the authors' views on the subject. 

Interestingly, the contrary viewpoint favoring the status quo -- i.e. that noncompetition agreements truly are necessary to protect the legitimate interests of Massachusetts businesses -- has not generated similar buzz.  Perhaps that will change if the proposed legislation has legs.

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It is possible -- at least theoretically -- to have a purely oral noncompete agreement.  A covenant not to compete is, most fundamentally, a contract, and a valid and legally enforceable contract can be formed through purely verbal communications (with some exceptions not relevant here). Nevertheless, given the heightened scrutiny that noncompetes are subjected to under Massachusetts law, any employer wishing to be able to enforce a non-competition restriction in court would want the agreement to be in writing.

This point is driven home by a decision recently issued by Judge Richard T. Tucker of the Massachusetts Superior Court.  At least from a reading of the decision, one is forced to wonder why the case was brought at all.  The plaintiff, Steelcraft, sought a preliminary injunction to stop its former employee, Hensel, from competing through his new company, Mobi Medical. It did so despite the facts that Hensel did not sign a written covenant not to compete and that there was a dispute regarding the existence of an oral noncompete. Judge Tucker observed that even if Steelcraft could show that there was in fact an oral noncompete, that the noncompete protected a legitimate business interest, and that it was supported by consideration (such as Hensel’s hiring), Steelcraft still could not show that the noncompete was enforceable, because it did not allege that the covenant contained any time limit or was limited to a reasonable geographic area. The court next disposed of Steelcraft’s claim that Hensel had used trade secrets and confidential information to advance his own business, by finding that Steelcraft had not shown that the information was in fact confidential. Judge Tucker noted that if trade secrets and confidential business information were truly at stake, Steelcraft would have taken measures to safeguard it, such as by requiring Hensel to execute a written confidentiality or noncompete agreement. The court disposed of Steelcraft’s claim that it would be irreparably harmed absent an injunction by contrasting Steelcraft’s fear of losing business -- which could be compensated by money damages at the end of the case -- with the fact that Hensel had taken out a loan to start up his new business and without the income of his continued work, would face a sever hardship in repaying the loan. Finally, although the court did not focus on this issue, Steelcraft’s cause could not have been aided by the fact that it brought the case more than a year after Hensel left and started competing.

The lesson is a basic one: noncompetition agreements are difficult to enforce. Any business wishing to be able to restrain an employee from engaging in competitive activity after the employment relationship ends should do so through a written document that is drafted with careful consideration of the limitations imposed by applicable law.

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As expected (and first discussed here), Massachusetts Rep. Will Brownsberger has introduced a bill that would abolish the use of noncompete agreements in Massachusetts, at least in the employment and independent contractor contexts.  Here is the text of the proposed law:

"AN ACT TO PROHIBIT RESTRICTIVE EMPLOYMENT COVENANTS

Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear."

As drafted, the bill would prohibit all noncompetes generated in the employment context after its effective date, presumably leaving enforceable those agreements previously executed.  It also appears to be intended to leave unchanged the common law principles applicable to noncompetes in the sale of business context.  

The sentence stating that the law would not "render void or unenforceable the remainder of the contract or agreement"  may be intended to allow for continued enforcement of non-disclosure and non-solicitation covenants, but if that is the intent it is not entirely clear.  Many of the vocal opponents of noncompetes have indicated they would favor continued enforcement of employee and customer non-solicitation restrictions.  However, the legislation, as drafted, could be read to encompass at least customer non-solicitation clauses, as it might be argued that such clauses impair the employment relationship.  In any event, some clarification might be necessary on this point.

Any employer that violates the new law -- presumably by either requiring an employee to sign a prohibited noncompete or attempting to enforce such an agreement -- would be liable for the employee's attorneys' fees incurred in litigating the issue.  And the law specifically opens the door to other actions -- such as unfair business claims under Chapter 93A -- that could provide for multiple damages based on an employer's violation.

As reported in Xconomy, Senator Patricia Jehlen will sponsor a Senate version of the bill.  The House version is expected to be referred to the House Committee on Labor and Workforce Development, which likely will hold a hearing on the subject this spring.   It will be interesting to see how the Massachusetts business community reacts to this proposal.

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Thanks to Wade Roush for bringing to my attention his article posted yesterday in Xconomy, a very informative web publication focused on the tech sectors in Boston and on the west coast.  As with this blog, Xconomy has been closely following what I have described as the Massachusetts noncompete "debate" over the past year or so.  (Scroll down to see earlier posts on this subject.) Wade reports that a Massachusetts legislator, Rep. Will Brownsberger of the 24the Middlesex district, is about to introduce a bill that would abolish or significantly curtail the use of noncompete agreements in Massachusetts.   The article reports that noncompetes would be outlawed in new employment contracts entered into in Massachusetts, except in the sale of business context.  As described, it would be similar to current California law.   

I have not yet seen the bill, which apparently is still in the drafting stage.  This blog will provide further updates as more information becomes available.

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I recently authored an article on planning reductions-in-force, a topic unfortunately on the minds of many businesses in these difficult economic times. (The article is available here.)The last of my “tips” urges companies to remind employees affected by layoffs of the continued applicability of nondisclosure obligations and other restrictive covenants. This raises a question: will a noncompete or other restrictive covenant be enforceable against employees who are let go as part of a layoff? As is often the case in this area, the short answer is: maybe. 

As drafted, noncompetition and nonsolicitation restrictions typically will apply for a specified duration following a termination for any reason, including an involuntary termination such as a layoff. Generally, under Massachusetts law, the fact that an employee was terminated in a layoff (as opposed to leaving voluntarily or being terminated for cause) is not by itself a basis for refusing to enforce a noncompete. (Note that some other states’ laws are different. For example, in New York, while the issue is not entirely settled, most courts will not enforce an otherwise valid noncompete if the employee has been involuntarily terminated without cause.)

Nevertheless, a Massachusetts judge is less likely to enforce a noncompete where the employee was laid off. In considering requests for temporary restraining orders and preliminary injunctions to enforce noncompetes, judges are required to engage in a balancing of the equities, which involves consideration of basic fairness: would it be fair to enjoin the individual from competing with a former employer under the particular circumstances of the case? In a difficult economic environment, with companies laying off workers and unemployment rising, many Massachusetts judges will not want to enforce a noncompete against a laid off worker and will look for ways to avoid or scale back enforcement.  

So, an employer seeking to enforce a noncompete following a lay off needs to stack the deck as much as possible with factors that would favor enforcement. As a starting point, noncompetes should be clear, understandable to employees, and narrowly drafted to protect the company’s legitimate interests in confidential information and/or good will. If the relevant document is vague or overbroad, employers should consider correcting those defects as part of the employee’s departure (for example, in a separation agreement). Relatedly, laid off employees should be reminded of continuing post-termination obligations and should be provided copies of the relevant agreements. Perhaps most importantly, employers should consider paying the laid off employee for some or all of the noncompete period. All other things being equal, Massachusetts judges will be more willing to enforce a noncompete against an individual who has been provided a generous severance package than against an employee who desperately is trying to provide for his or her family. 

Finally, employers that wish to be able to enforce a noncompete following a layoff should gather and preserve any evidence of “bad acts” by the former employee. An injunction will be more likely where the employer isn't merely worried about future harm but can point to evidence of, for example, inappropriate transmission, downloading or retention of confidential information; solicitation of customers or employees; or refusal to return company property. Companies that are consistently vigilant about discovering misuse of their information will improve their chances of stopping inappropriate competition.

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Many litigators of non-competition agreement cases in Massachusetts would reflexively answer “state court” to the above question. That is, given the choice (if jurisdictional principles permit) of bringing an action to enforce a non-compete or non-solicitation provision in state or federal court in Massachusetts, the conventional wisdom would be to avoid what has been perceived as the more exacting scrutiny of the judges in the U.S. District Court in Boston.

But some recent trends might suggest otherwise. Many state court non-compete cases are now heard in the Business Litigation Session (BLS) of Suffolk Superior Court, which although located in Boston, is authorized to hear cases brought in other counties. That court has developed a body of non-compete jurisprudence that includes a healthy degree of skepticism about enforcement of traditional non-competes (as opposed to customer non-solicitation agreement, which are more easily enforced). At the same time, the federal court in Boston periodically will issue a preliminary injunction decision that would suggest a greater willingness to enforce restrictive covenants than has been expressed in the BLS. One example is the recent decision by U.S. District Judge Nathaniel M. Gorton in Bio-Imaging Technologies, Inc. v. Marchant and M2S, Inc., in which Judge Gorton preliminarily enjoined an individual, Marchant, from assuming a position as director of business development with M2S, a competitor of Marchant’s former employer, Bio-Imaging. The decision is notable in that Judge Gorton somewhat summarily dismissed a number of potentially viable defenses to enforcement of the non-compete and non-solicitation clauses at issue.  

For example, the court gave short shrift to the defendants’ argument that enforcement of the restrictive covenants at issue (one-year non-compete and non-solicitation provisions) was not necessary to protect Bio-Imaging’s confidential information. Judge Gorton found that Marchant had access to and knowledge of pricing, sales strategies and customer relationships, presentations and proposals, and found that the fact that some such information was available from public sources did not undermine enforceability of the restrictive covenants. 

Perhaps most notably, the court rejected a “change of circumstances” defense. Marchant had argued that the restrictive covenants, signed at hire, were no longer enforceable because both Marchant’s position at Bio-Imaging, as well as the company’s business in the medical imaging industry itself, had changed dramatically since he was hired. The “changed circumstances” defense has received a fair amount of attention in recent years as a result of several Massachusetts Superior Court decisions in which judges found their way out of enforcement of restrictive covenants based on the concept that material changes in an employee’s job following the execution of the non-compete might undermine the legal “consideration” that is necessary to enforce a restrictive covenant. (See this article for a description of those cases.)  Judge Gorton spent no time on the legal backdrop to this argument and rejected the defense on the facts, finding that Marchant’s role at Bio-Imaging had not undergone any “dramatic” change despite the change in his title from Manager of Clinical Trial Services to Director of Business Development. But he also suggested that a more dramatic change might not have mattered, because the restrictive covenants were not limited to a specific job title but rather applied during and after the employee’s “period of employment with the company” in any capacity. It is unclear whether Judge Gorton had in front of him the recent Massachusetts cases, but his decision suggests that he would give them little weight.

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I would not be the first to observe that the Massachusetts legislature sometimes acts in strange and mysterious ways. It has been known to surprise even those of us who think we are paying attention to such things with unexpected employment-related legislation. The very significant amendment in 2004 to the Massachusetts Independent Contractor Law (.pdf) is a good example of this phenomenon: although it has wide-ranging application and has vexed employment lawyers and the business community since its passage, it was attached to a bill focused on the construction industry and was largely unknown to the outside world for weeks after its enactment, until the Attorney General’s office issued an advisory interpreting it.

A recent -- but fortunately less momentous -- example concerns non-competition agreements. Six weeks ago, on August 23, Governor Patrick signed a new law prohibiting non-competition agreements for social workers in Massachusetts. The text of the law is available here (.pdf). It states that any contract with a social worker licensed under Chapter 112 of Massachusetts General Laws that includes a “restriction of the right of the social worker to practice in any geographic area for any period of time after termination” is void and unenforceable with respect to that restriction. The law does not invalidate or render unenforceable the remainder of a contract or agreement containing such a restriction.

This law adds to a very short list of professions as to which there is a statutory prohibition on post-employment non-competition agreements: physicians, nurses, broadcasters, and now social workers. In addition, non-competes are invalid as to lawyers pursuant to the Rules of Professional Responsibility adopted by the Massachusetts Supreme Judicial Court.

I have been digging -- to no avail -- for some information that might shed light on the source or necessity of this new law. Certainly there has been nothing like the very public debate in the tech and VC community (detailed in this blog) over the past year about the effect of non-competes on the Massachusetts economy. And an Internet search on the subject of Massachusetts-based social workers and non-competes turns up nothing. As far as I know, mine is the very first voice in the electronic universe to mention this new law! (Thanks to my partner, Rob Fisher, for bringing this law to my attention.)

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he blogosphere once again is abuzz with continued discussion of whether the enforceability of noncompete clauses in Massachusetts places the state at a competitive disadvantage with California generally and Silicon Valley in particular. The latest causes: a court decision from California and an academic paper from Canada.

A decision earlier this month from California’s highest court makes clear, after some years of simmering debate, that noncompetition agreements are invalid under California law and that even a narrowly drafted prohibition will not be upheld except in a sale of business context. My colleague Sheila O’Leary’s summary of the decision can be found here. The decision places in stark contrast the laws of Massachusetts and California. Just days after it was issued came a new academic study (.pdf), by researchers at the University of Toronto’s Rothman School of Management, which argues that noncompetes may be useful in driving growth in the early stages of a tech industry but that once an industry has matured, noncompetes can hamper further growth by impeding the mobility of the talented employees who otherwise would be inclined to innovate by starting their own companies. The study, authored by April Franko and Matthew Mitchell and entitled “Covenants Not to Compete, Labor Mobility and Industry Dynamics,” focused on a comparison of tech industry growth in the Northeast – and in particular the Route 128 region of Massachusetts -- versus the Bay Area of California during the 1970s and 80s. The study did not focus on more recent events in Silicon Valley and Massachusetts’ Route 128 region. Interestingly, the study begins with the statement that “conventional wisdom among legal scholars is that contractual restrictions on employee mobility . . . led to the overtaking of Massachusetts’ Route 128 by Silicon Valley.” To this writer’s knowledge, while such wisdom may be “conventional,” there is little or no hard objective evidence supporting the proposition that noncompetes have been the cause of Silicon’s “victory” over Route 128.

In any event, the combination of the two events once again has many in the tech community talking about ridding Massachusetts of noncompetes, either by legislation or via something like a “groundswell” movement. See here and here for examples of recent discussion on the topic. The same discussion apparently is happening in Washington state, where noncompetes similarly are enforceable and the subject of debate about their effect on economic growth.

One topic somewhat lost in the din about noncompetes is a sibling in the family of restrictive covenants: the non-solicitation agreement. The Massachusetts opponents of noncompetes are quick to emphasize that they would continue to utilize and would support the enforcement of these clauses barring ex-employees’ efforts to take away customers and former co-workers. Bijan Sabet, who has been leading the charge, is quoted at Xconomy.com saying that he is in “complete support of non-solicitation agreements which are different than non compete agreements . . . [and] should be maintained …as they are in CA.” Yet, the enforceability of a non-solicitation agreement in California is far from clear. Some have suggested that the recent California Supreme Court decision places in doubt earlier decisions on the subject. What’s more, other California appellate courts have held that employee no-hire agreements are unenforceable and that customer and employee non-solicitation agreements can be enforced only if the employer can show that its trade secrets are being utilized by the soliciting employee. This is a far more stringent standard than typically applied in Massachusetts and elsewhere, where courts recognize that companies have a “good will” interest in the relationships their employees develop with customers that alone will justify enforcement of a non-solicitation covenant.

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This blog previously described a proposal being advanced by some in the Massachusetts venture capital community to abolish noncompetition agreements in Massachusetts. (See links to previous posts: December 7, 2007, February 11, 2008, February 27, 2008) The two most visible proponents of that proposal, Bijan Sabet of Spark Capital and Paul Maeder of Highland Capital Partners, participated in a panel discussion on noncompetes and innovation at Harvard’s Berkman Center for Internet & Society on June 19, 2008. The substance of the discussion is pretty well summarized here.  All of the panelists - Sabet and Maeder as well as Lee Fleming, a Harvard Business professor, Rich Miner, a Google executive based in Massachusetts, and John Palfrey, Executive Director of the Berkman Center - espoused a similar negative view of noncompetes. (Palfrey noted that they sought but were unable to obtain an opposing viewpoint on the panel.)

The basic argument is now familiar: the Massachusetts technology economy fairs poorly in direct competition with California (particularly Silicon Valley) at least in part because of the two states’ differing laws on noncompetes, with Massachusetts being an “enforcing” state and California prohibiting noncompetes except in very limited circumstances. The academics on the panel acknowledged that the subject has not yet been studied thoroughly and that there is little quantitative evidence to support the argument for a causal link between enforcement of noncompetes and economic disadvantage.

Maeder, of Highland Capital, is most blunt on the subject. His view is that every successful technology company naturally acts as “breeder” of multiple new start-ups, with a multiplier effect across successive “generations” of technology companies. He believes that a legal environment in which noncompetes are enforced acts as a “silent killer” of this multiplier effect, resulting in fewer start-ups and less innovation. Using the Massachusetts internet success-story Akamai Technologies as an example, Maeder stated summarily that “the next Akamai will be in California,” because those employees who leave Akamai and wish to form new companies will be forced by the legal framework in Massachusetts to move to California, beyond the reach of Massachusetts noncompete law.

In response to a question I posed about the current status of political efforts to change Massachusetts law, both Maeder and Sabet thought it unlikely that any change will occur. Their proposal has been politely received by the Patrick administration, which apparently is considering it, but there is no hurry to introduce legislation altering the current common law framework. Maeder said that the political approach is “not going anywhere.” Instead, Maeder and Sabet are hoping for a “grassroots” effort within the venture capital and technology communities to turn away from blanket use of noncompete provisions in employment agreements. Stay tuned for further developments.

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Whether a successor in a corporate transaction may enforce a noncompete between the predecessor entity and its employees remains one of the more undeveloped and uncertain areas of noncompete law in Massachusetts. A few years ago, in Securitas Security Services USA, Inc. v. Jenkins, now-retired Judge Allan van Gestel of the Suffolk County Business Litigation Session issued a significant decision in this area - albeit at the trial court level - holding that a noncompete agreement is not assignable to a successor entity absent an express agreement permitting assignment, either in the terms of the original noncompete agreement or in a subsequent agreement between the company and the employee. Securitas remains one of the very few decisions in this area. Because no definitive decision exists at the appellate level, there are some who continue to believe that under certain circumstances a noncompete can be assigned absent a specific provision permitting such assignment.

This issue arose very recently in another Massachusetts trial court decision involving an added twist: whether the law of New York or Massachusetts should apply to the question of assignability. In Next Generation Vending v. Bruno, the plaintiff, Next Generation Vending, had acquired a Massachusetts-based company, All Seasons, Inc. All Seasons had a noncompete agreement with one of its employees, Brian Bruno. After Next Generation acquired All Seasons, Bruno formed his own company based in New York, resigned from Next Generation and started competing. Next Generation brought an action in Superior Court in Massachusetts claiming, among other things, breach of the noncompete agreement. Bruno moved to dismiss the claim, arguing that the noncompete could not be assigned to Next Generation and therefore could not be enforced, because it lacked an “assignability” clause. Interestingly, Next Generation countered by asserting that the noncompete was governed by New York law, and that under New York law noncompetes are assignable absent contractual provisions stating otherwise.

Superior Court Judge Regina Quinlan found a divergence in the laws of New York and Massachusetts on this issue, observing that under New York law a noncompete need not be expressly assignable in order to be assigned in a corporate transaction. In contrast, citing only the van Gestel decision in Securitas, Judge Quinlan stated that under Massachusetts law a noncompete cannot be enforced in the absence of express consent by the employee. The case hinged, therefore, on whether Judge Quinlan would apply New York or Massachusetts law to the dispute. New Generation Vending argued that the contractual choice of law should be ignored because New York had a greater interest in enforcing Bruno’s noncompete than Massachusetts. Applying traditional conflict of laws analysis, Judge Quinlan rejected that argument, finding that there was no overriding reason why New York’s public policy should trump the parties’ agreement that Massachusetts law would apply. She therefore dismissed the plaintiff’s claim that Bruno breached his contract by competing.

What to make of this? Although there remains a possibility that Securitas some day will be rejected by a Massachusetts appellate court, in the meantime it appears that other trial court judges are going to continue to follow it. This means that companies in Massachusetts (and companies outside of Massachusetts that choose Massachusetts law for their agreements) should be careful to include a specific “assignability” provision in their non-competition and non-solicitation agreements. Where no such provision exists, care must be taken either to obtain consent to assignment at the time a company undergoes a sale or other change of control, or following such sale the successor should obtain new noncompetes with its employees.

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It is not uncommon for employment agreements, particularly those involving senior employees, to contain provisions requiring that the employee give notice of his or her intention to leave. These “mandatory notice” provisions can have a duration of as little as two weeks and as much as six months. Employers explain them as being intended to minimize the disruption to operations (and customers) caused by the abrupt departure of a valued employee. One potential benefit of such provisions -- if enforceable -- is that they can operate as a kind of short-term non-compete, in that they force employees to sit on the beach (or in the “garden,” to borrow the British usage) while being paid by the employer, rather than immediately joining a competitor. One school of thought is that such provisions are merely aspirational, rather than strictly enforceable, because the general American rule is that individuals cannot be compelled to remain employed at any particular employer. Two recent decisions in Massachusetts, one from the state court and the other from the federal court in Boston, and both involving the brokerage firm Bear Stearns, support that view. [As it happens, Foley Hoag represented the successful defendants in both cases.]

The first decision, Bear Stearns & Company, Inc. v. McCarron, involved Bear Stearns’ attempt to enforce a 90-day mandatory notice provision against three brokers who departed for another brokerage firm. Bear Stearns sought an injunction in the Suffolk Superior Court’s Business Litigation Session to enforce that provision against brokers who had resigned and immediately started at their new firm. Judge Ralph Gants, who regularly hears restrictive covenant cases involving the financial services industry, refused to grant the requested injunction. He had two problems with the restrictive covenants at issue. First, in this case, the defendants had never signed a document that described itself as an employment agreement, or a non-competition or non-solicitation agreement. Instead, the provisions Bear Stearns sought to enforce were “buried” in deferred compensation plan documents. Judge Gants regarded these provisions as “stealth” restrictive covenants and stated that the Bear Stearns should have obtained signed employment agreements in which the employees were “fairly told of the restrictions and knowingly” accepted them. Second, Judge Gants refused to enforce the 90-day notice provision “because it would be fundamentally unfair to the defendants’ private clients at Bear Stearns, who would be left with uncertainty as to whom would actually be servicing their needs.” He noted that if a client wished to remain with Bear Stearns, the client would be in a kind of limbo, as Bear Stearns likely would not have permitted the brokers who had provided notice of resignation to service those clients. He stated that the court would not enforce a contract provision “that may deny clients a choice of financial advisors for up to 90 days.”

Notwithstanding this decision from a Massachusetts state court judge, Bear Stearns tried to enforce a similar provision only a few weeks later, this time bringing its case in federal court in Boston, before Judge Nathaniel Gorton. In Bear, Stearns & Co., Inc. v. Sharon, Bear Stearns sought to enforce what it described as a “garden leave” provision against a senior broker who resigned in the wake of the recent well-publicized turmoil at Bear Stearns. The provision at issue required the individual to provide 90 days’ notice of termination, during which time Bear Stearns reserved the right to decide what duties, if any, the employee would perform and would pay his base salary. The provision specifically stated that it was enforceable by a temporary restraining order in court.

Although Bear Stearns initially obtained a temporary restraining order which lasted several days, Judge Gorton ultimately refused to grant a preliminary injunction enforcing the provision. He found that the 90-notice provision could not be enforced at “equity” -- i.e. via an injunction, because the effect of an injunction would be to require the defendant to continue an employment relationship against his will, a concept at odds with longstanding American jurisprudence. The court noted that the “garden leave” provision was not a simple restrictive covenant in that it barred the individual from working at any employer during the so-called notice period, rather than limiting him from working for specific competitors.

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Today I attended the Mass Technology Leadership Council’s 2008 Annual Meeting, at which several speakers, including Governor Deval Patrick, spoke about economic development strategies, the state of the technology industry in Massachusetts, and the like. I attended the meeting in part to see whether the recent noncompete debate (described here and here) would receive any attention. I was quite interested to find that it did. Following his speech, the Governor took questions from the audience, including an inquiry about the Patrick administration’s “position” on noncompetes. The governor responded that he is “hearing” from some quarters that noncompetes may be “a little too stringent.” He said that he is willing to look at the issue. At the same time, he said, his administration is not driving this issue; rather some in the tech community are focused on the issue and are asking the administration to focus on it as well. Essentially he indicated that he is noncommittal and is open to arguments pro and con on the issue.

Stay tuned for further developments on this issue

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While some in the business community continue to focus on whether the ability to enforce noncompetes in Massachusetts places the state at a competitive disadvantage vis-à-vis Silicon Valley, a recent decision from the Massachusetts Superior Court’s Business Litigation Session -- Network Systems Architects Corp. v. Dimitruk -- highlights the difficulties departing employees and their future employers can face even in the absence of a contract restricting post-employment activities.  These “no-noncompete” scenarios represent a significant litigation growth area.  (An article on this subject, co-authored by this writer and Sheila O’Leary, can be found here.) 

Absent a restrictive covenant, departing employees and their new employers still can be subjected to litigation involving claims of misappropriation of trade secrets, breach of fiduciary duty, violation of federal and state computer fraud statutes, tortious interference, and violation of  state unfair business practices laws.  The Network Systems Architects case involved the departure of a director of sales from the plaintiff to a competing venture, Accunet Solutions.  The employee apparently was not subject to a noncompetition or nonsolicitation restriction; hence, under Massachusetts law, he generally was permitted to leave for a competitor and, once there, compete for the customers he previously had serviced.  However, Mr. Dimitruk and his new employer, Accunet, found themselves defending claims that Dimitruk had misappropriated his former employer’s trade secrets and used them to solicit his former customers on behalf of Accunet.  In addition, Network Systems Architects alleged that Dimitruk had, before he resigned, solicited business from his customers on behalf of his future employer.  That allegation formed the basis of plaintiff’s claim that Dimitruk breached his fiduciary duty of loyalty.  Under Massachusetts law, an employee is free to make plans for subsequent employment, including with a competitor.  “What the employee may not do during his employment,” the court stated, “is undermine his employer’s business, such as by diverting his employer’s customers or employees to a competitor, or its resources to uses that serve interests inconsistent with those of his employer.” 

The Network Systems Architects decision addressed the parties’ competing motions for summary judgment.  The court denied both parties’ motions, finding that there was sufficient evidence for the claims to proceed to trial.  Thus, the plaintiff in this “no-noncompete” situation can continue to litigate claims of theft of trade secrets and breach of fiduciary duty against the former employee, and claims of intentional interference and unfair business practices against his new employer. 
A lesson to take from a case like this one is that hiring employers need to take a careful, strategic approach to hiring employees from competitors even in the absence of restrictive covenants.

Stay tuned for further developments on this topic

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Several weeks back this blog discussed a proposal being advanced by some Massachusetts venture capitalists to abolish noncompetition agreements in Massachusetts.  (See Proposal to Eradicate Noncompetes in Massachusetts Creates Stir).  We noted that a Boston Globe article was reporting that supporters of this proposal had written to Governor Patrick urging legislative action to make noncompetes invalid in Massachusetts.  The letter to Governor Patrick, as well as the Governor’s somewhat perfunctory response, can be found here, at the website for an organization calling itself “Alliance for Open Competition,” which describes itself as comprised of “entrepreneurs, venture capitalists and business leaders for innovation.”  The site contains an interesting ongoing discussion about whether noncompetes are good or bad for business in Massachusetts. 

Stay tuned for further developments on this topic

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The blogosphere has been abuzz during the past week with a discussion sparked by a Boston-based venture capitalist who thinks noncompetes are bad for business in Massachusetts, and now the Boston Globe has picked up on the buzz.  Bijan Sabet, of Spark Capital, argued on his personal blog last Saturday that Massachusetts should follow the California model and eradicate noncompetition agreements.  Sabet said that his firm would do away with noncompetes at its portfolio companies.  Stated succinctly, his argument is that a “non-compete clause is a significant barrier to startups and innovation,” and he contrasts the Massachusetts economy with Silicon Valley, where it is easier for tech talent to move between companies and, therefore, for companies to innovate.  Many other posts have echoed Mr. Sabet’s view.  (See posts here and here.)  The Globe reports that Sabet and his partners are urging Governor Patrick to push for legislative action to make noncompetes invalid in the Commonwealth.

It will be interesting to see how this plays out.  Not everyone in the VC and technology communities in Massachusetts is antagonistic to noncompetes.  For example, the Boston Globe quotes EMC’s General Counsel, Paul Dacier, who believes that noncompetes with key employees are essential to protecting the company’s intellectual property. 

Restrictive covenants are the proverbial double-edged sword -- employers often are frustrated about them when they are trying to recruit talent, but sometimes feel differently about them when that talent is walking out the door.  Under current Massachusetts law, noncompetes are enforceable if they are necessary to protect a company’s confidential information or good will and reasonable in temporal and geographic scope.  One oft-stated criticism of this legal standard -- which is dependent on a single judge’s consideration and balancing of numerous factors and interests -- is that it creates uncertainty about whether a particular clause will be enforced in a particular situation.  It is said that this uncertainty in itself places an inappropriate drag on labor mobility and legitimate competition.  

Another state grappling with these issues recently adopted a statutory middle-ground.  The Oregon legislature has enacted (and its governor in August signed) a law that significantly restricts the instances in which noncompetes can be enforced but makes it easier for employers to enforce nonsolicitation agreements restricting employees from diverting customers and employees to a competitor when they leave.  A summary of the Oregon law is available here.  It remains to be seen whether Oregon’s approach will, as hoped, encourage economic growth in that state.

Stay tuned for further developments on this topic.

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A newly-decided case by Judge Fabricant of the Business Litigation Section of Suffolk Superior Court highlights some interesting trends with regard to the enforcement of non-compete agreements (Lunt v. Campbell, et al.). The case involves three hairdressers who left the Lunt salon in Beverly Farms, Massachusetts to start a new shop in Peabody, Massachusetts. The hairdressers had signed non-compete agreements midway through their employment with Lunt prohibiting them from competing in Essex County for a period of two years. Lunt sought an injunction when the hairdressers left to start Gichelle's Hair Studio.

The court's decision denying injunctive relief for Lunt illustrates important principals -- namely, what constitutes protectable "good will" and "confidential information." As to the former, the court found that "hairdressers are not fungible" and that the choice of hairdressers is a matter of personal taste. To the court, this meant that the good will likely belonged to the hairdresser, not to the shop -- a finding buttressed by the fact that clients followed the hairdressers to a new shop 10 miles away.

As to confidential information, the court found that there is no evidence that records were stolen, but that at any rate "names and telephone numbers of customers" likely do not constitute confidential information.

While not dispositive, the court also made an observation that could be used in future cases. Though it has been established in Massachusetts that continued employment constitutes sufficient consideration for enforcing a non-compete agreement, Judge Fabricant found that the fact that each employee was called upon to sign the non-compete contact during her employment "weigh[ed] in the Court's evaluation of the equitable factors in deciding whether to enforce by means of a grant of an injunction." In other words, if an employer wants the court to take the non-compete more seriously, it should attempt to have the agreement signed at the outset of employment, or if done mid-employment, tie some concrete new benefit to the non-compete.

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A recent decision illustrates the risks for defendants in non-compete cases who go on the offensive by asserting counterclaims against former employers. In a 2006 opinion, the Massachusetts Business Litigation Session awarded a defendant in a non-compete case significant damages after the defendant proved that the plaintiff had filed the lawsuit for improper competitive purposes. Yet, in a recent decision, the same court dismissed a defendant’s counterclaim, ruling that the counterclaim was based solely on the plaintiff’s filing of the lawsuit and that the plaintiff’s claims were reasonably based in the facts and the law.

In Brooks Automation v. Blueshift Technologies, Inc., Justice Ralph Gants of the Massachusetts Business Litigation Session refused to enforce the plaintiff company’s non-competition agreement with a former employee, but awarded the defendant six-figure damages on its counterclaim.

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