In case you missed the news splash over the past 48 hours, MA Governor Patrick this week announced that he is introducing legislation to abolish employee noncompete agreements except in very limited circumstances. The proposed legislation would have Massachusetts join California as one of the very few states that generally prohibit these post-employment restrictions. The proposed law is part of a larger bill — the Growth and Opportunity Act of 2014 – focused on economic growth, particularly within the technology sector. (A description of the various features of the larger bill is here.)
Although the Internet is abuzz with expressions of shock and concern, this news should not be surprising if you have been following the ongoing debate about noncompetes in MA. (A compendium of posts about the debate can be found here.) Various proposals have bounced around the legislature since 2008, when Bijan Sabet (of Spark Capital) and others voiced concerns that the enforceability of noncompetes in MA was stifling innovation and job growth. Initial proposals would have followed the California model, which largely prohibits noncompetition agreements. When those efforts did not bear fruit, advocates turned to various reform models, pursuant to which noncompetes would still be enforceable but would be subject to a panoply of restrictions (such as durational limits, minimum compensation requirements, notice requirements, attorneys’ fees shifting, etc.). To date, those efforts also have been unsuccessful.
During this time, the Governor’s position has evolved from one of agnosticism, to mildly-stated concern, to clear antagonism toward the continuation of the current legal framework. (That framework generally permits enforcement of a noncompete when certain factual and legal requirements are met.) As described here, in more recent years, both Governor Patrick himself and representatives of his administration have become increasingly vocal in their view that noncompetes are bad for the state economy. And they have stated that Gov. Patrick would push to abolish noncompetes altogether if the business community and the legislature could not come together on a compromise reform bill. The new legislation follows through on that threat.
The legislation itself is quite straightforward. It provides for the following:
- Any noncompete arising out of an employment or contractor relationship extending beyond the term of the relationship is void and unenforceable.
- The legislation expressly states that it does not affect covenants not to solicit or hire employees or independent contractors of the employer as well as covenants not to solicit or transact business with customers of the employer.
- The legislation permits noncompetition agreements made in connection with the sale of a business or substantially all of the assets of a business, when the party restricted by the noncompetition agreement is an owner of at least a 10 per cent interest of the business.
- The legislation also excludes from its reach “forfeiture agreements,” which are agreements pursuant to which an employee who chooses to compete forfeits certain compensation otherwise owed.
The various exceptions described above obviously are intended to soften the impact of the noncompete prohibition and make it more palatable to employers. (Some of these exceptions are not recognized under California’s very stringent law.) In addition, one of the carrots dangled as a sort of consolation prize is a proposal for Massachusetts finally to adopt the Uniform Trade Secrets Act, which arguably strengthens employers’ ability to pursue claims of trade secret theft against former employees.
The next few months should be very interesting. The administration has marshalled a number of legislators and prominent business leaders in support of the legislation. It seems that more members of the very influential venture capital community are in favor of the proposal. At the same time, other significant players, including industry groups and significant technology companies, oppose any change to the status quo. It also remains to be seen whether the administration ultimately would accept some form of reform legislation, which would permit continued enforcement of noncompetes but reduce the incidence of perceived abuses of these agreements.