MA Governor Pushes to Abolish Noncompetes

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.

 

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Rare Massachusetts Superior Court Decision Interpreting the CFAA Takes the Narrow View Without Squarely Addressing the Broad

            Judge Peter M. Lauriat of the Massachusetts Superior Court decided late last year that an employee who takes confidential documents from her employer’s electronic document system to use in a discrimination lawsuit against her employer is not liable to the employer under the Computer Fraud and Abuse Act (CFAA), especially when the employer knew about the lawsuit but nonetheless did not restrict the employee’s access to those documents while she was working for the employer.  In so deciding, Judge Lauriat had to grapple with two different interpretations of the CFAA, which generally makes individuals criminally and civilly liable for accessing information from a computer without authorization or in excess of authorized access.  The “narrow” view limits liability to those who “hack” into a computer and do not have any authorization to access the information, while the “broad” view expands liability to employees and others who have access to the information (e.g., they have a password that allows them to view the information), but then use that information for a purpose adverse to their employer.      

            As the facts indicate, this case involved the latter situation.  The plaintiff employee, Kamee Verdrager, starting working as a labor and employment associate at defendant Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. (Mintz Levin), one of the largest law firms in Boston.  On her first day, she signed an offer letter stating that she understood and accepted Mintz Levin’s confidentiality policy, which she received and which, among other things, stated that all documents produced by the firm were Mintz Levin’s property and should not be disclosed unless for the delivery of legal services on behalf of the firm.  Shortly after she started working, Verdrager felt that she was being discriminated against and, between May 2007 and November 2008, searched the electronic document system at the firm on six separate occasions for documents that might support her claims.  If she found a document that she thought was helpful, she copied it or emailed it to her personal email account.  She even found hundreds of transcriptions of voicemail messages to Robert Popeo, the managing partner of the firm, and she emailed them to her lawyer.  She also found documents about her own case against Mintz Levin before the Massachusetts Commission Against Discrimination, which she filed in December 2007.  In November 2008, Verdrager told a partner at the firm that she was aware of documents indicating widespread discrimination at Mintz Levin.  Just days later, after Mintz Levin conducted a review of Verdrager’s computer activities, Verdrager was fired.  She continued to pursue her discrimination claims in Superior Court, and Mintz Levin counterclaimed, alleging, among of things, that Verdrager violated the CFAA.  Meanwhile, Mintz Levin also complained to the Massachusetts Board of Bar Overseers (BBO) about Verdrager’s conduct, but ultimately the BBO determined that she had not violated the rules of professional conduct.  Verdrager then moved for summary judgment on Mintz Levin’s counterclaims. 

            In considering the CFAA claim against Verdrager, Judge Lauriat first acknowledged the two different interpretations of the CFAA, but then cited a recent case from the Massachusetts federal district court that favored the narrow view.  He then stated that “it was not the obtaining of the documents that creates the basis for the defendants’ claims against Ms. Verdrager, but for what use she sought to obtain them,” adding that “Ms. Verdrager’s disloyalty cannot amount to a violation of the CFAA.”  He then dismissed the CFAA claim against Verdrager. 

            This decision is hard to square with the decision of another federal district court judge who took the narrow view of the CFAA.  In particular, Judge Nathaniel Gorton allowed a CFAA claim where the plaintiff employer alleged that the employee breached his duty of loyalty to the employer by copying confidential documents which he intended to use for a competing venture.  All in all, the Verdrager case shows how hard it has become for judges to decide CFAA cases while courts continue to battle over which interpretation is the best.  The Supreme Court or Congress need to step in and settle the issue.

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If You Have a Trade Secret, You Better Protect It

            Late last month, Judge Cornelius J. Moriarty of the Massachusetts Superior Court granted summary judgment for a defendant company and two individual defendants on a trade secret misappropriation claim because the plaintiff company did nothing to protect what it claimed were trade secrets.  One element of a trade secret claim is that the plaintiff must demonstrate that it took sufficient actions to protect its trade secret from unauthorized disclosure.  Among the factors the court considers is (1) whether the plaintiff had agreements with employees and others restricting disclosure, and (2) any security precautions to prevent unauthorized access to the trade secret.  In this case, the plaintiff could produce no evidence that it had any policy to protect confidential information, and it never had any of the defendants sign a confidentiality agreement.  In fact, certain information that the plaintiff claimed as trade secrets was freely available on the plaintiff’s computers, and the plaintiff even publicly disclosed some of what it claimed were trade secrets on its websites.   

            So what’s the lesson?  If you have trade secrets or confidential information as part of your business, make sure you protect it.  Make your employees, independent contractors, and vendors sign non-disclosure agreements if you will be disclosing confidential information to them, and restrict access to confidential information to those with a need to know it by using technological barriers to access, among other things.  If you don’t, your secrets might be exposed, and the legal system might not be able to help you.

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CFAA and Noncompete News

            Over the past two months, several interesting items of Computer Fraud and Abuse Act (CFAA) and noncompete news have crossed my desk.  Below are summaries of the two most important items:

            1. Encryption Can Be a CFAA Violation: In early December, Judge Denise J. Casper of the U.S. District Court in Massachusetts ordered a former employee of a company to, among other things, disclose the password that he put on an important file on the company’s server because the company was likely to prevail on its CFAA claim against the employee under the “preliminary injunction” standard.  In the case, just before the employee left the company, he ordered his assistant in China to condense the files from a project that he had been working on at the company into one file and to encrypt it with a “very long” password that he provided to her.  The employee then ordered the assistant to send a copy of the file to him.  Since that time, the company had been unable to access the file and continue the project.  Judge Casper applied the CFAA, which, among other things, imposes liability when a person exeeds his or her authorization to computers under certain circumstances.  Although she ruled, among other things, that the company had not demonstrated a likelihood of sucess on its trade secret claim against the employee because the parties had no agreement about who owned the information in the file, the company had shown that the employee likely violated the CFAA by “exceeding authorized access” to the company’s computers.  First, although the employee’s assistant actually accessed the computer, nothing in the CFAA bars liability as a co-conspirator or as an aider and abettor.  Second, because the employee was not authorized to “copy, download, encrypt and delete confidential technology files,” and because the employee acted without the employer’s consent or knowledge and tricked his assistant into believing that encryption was “necessary,” the employee “exceed[ed] his authorized access” and acted with the “means of deception” necessary under the CFAA.  Judge Casper made this decision by following the middle path that reconciles the narrow and broad interpretations of the CFAA that Judge Timothy Hillman of the District of Massachusetts took in a recent case.  Judge Casper’s decision in her case, Enargy Power Co. v. Wang, is available here

            2. Do Noncompetes Make Employees Less Motivated?: The answer is “yes” according to a new study out from the Harvard Business Review.  According to an article in the Boston Business Journal, volunteers in the study were paid to perform tasks online, some boring, some more creative.  Some of the participants in each group were then told that they would be asked to perform another paid task, but it would not be the same task.  61% of those under the “noncompete” restrictions gave up, but only 41% of those not under the restriction quit.  And the restricted volunteers made twice as many mistakes and spent less time on the “job.”  But one interesting find was that, for the people doing the creative tasks, the restriction had no effect.  From my experience, if a person does not like his or her job, that person will not be motivated even if the person has no noncompete, so I am not entirely sure whether this study adds much to the debate about whether noncompetes are worth it.  Even so, it is interesting to know that people are studying the economic and psychological effects of noncompetes.

Massachusetts Federal Court Refuses to Dismiss CFAA Claim But Permits the Defendants to Ask Again Later

            Echoing a new theme in the federal district court in Massachusetts, last month Chief Magistrate Judge Leo T. Sorokin refused to dismiss a Computer Fraud and Abuse Act (“CFAA”) claim brought against the former CEO of a company, but did so without prejudice, meaning that the defendants could ask the Court to dismiss the claim again later in the case.  Under the CFAA, “[a] defendant is liable where he or she ‘knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value . . . .”  MOCA Systems, Inc. v. Bernier, C.A. No. 13-10738-LTS, 5 (D. Mass. Nov. 12, 2013) (quoting 18 U.S.C. sec. 1030(e)(6)).  As Judge Sorokin noted, courts are divided on the meaning of “exceeds authorized access” and “without authorization” in the statute, something I have written about extensively elsewhere on this blog.  Some courts interpret these phrases narrowly, meaning that a defendant actually has to “hack” into another’s computer system to be liable, while others interpret the law more broadly and permit liability when a defendant violates a contract with his or her employer by accessing certain information and using it for a prohibited purpose (such as to compete with the employer). 

            In this case, Judge Sorokin referred to a decision by Judge Timothy Hillman, another federal judge in Massachusetts, in which Judge Hillman decided not to dismiss a CFAA claim and to wait until summary judgment, a later stage of the case after the parties have taken discovery, to see whether the plaintiff could meet the narrower standard.  Michael Rosen and I both discussed that case here.  This approach allowed Judge Hillman to avoid deciding whether the narrower or broader interpretation was correct, although Judge Hillman found the narrower interpretation “preferable.”  Judge Sorokin took a somewhat similar approach.  Although he found that the allegations of the complaint in his case fit even the narrower CFAA standard, he denied the motion to dismiss without prejudice, which means that the defendants can ask the court to dismiss the complaint later should the actual evidence show that they did not “hack” to meet the narrower standard.  Such a motion likely would require Judge Sorokin to decide whether the narrower or broader interpretation is correct.  This new, “wait and see” approach that Judge Hillman and now Judge Sorokin have taken with respect to the CFAA shows just how controversial the CFAA really is, and how judges are beginning to avoid that controversy whenever they can.

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More on the Noncompete Debate

An Op-Ed in last Sunday’s Boston Globe joins the chorus of advocates for noncompete reform in Massachusetts.  The author, Jeremy Hitchock, CEO of New Hampshire-based Dyn, prefers California’s “prohibition” approach (in which employee noncompetes generally aren’t enforceable) , arguing that California’s model  “has created a unique employment ecosystem that thrives on employee movement.”  Conceding that this model “reduces the protection of an individual company’s business know-how,” Hitchcock asserts that “major trade secrets” are adequately protected by the Uniform Trade Secrets Act (UTSA).  Massachusetts has not yet adopted the UTSA, but there is renewed impetus in the legislature to do so now, perhaps coupled with noncompete reform.  Those on the other side of this issue argue that enhanced trade secret protection by itself is not an substitute for the protection provided by enforcement of a noncompete in those instances in which an employee’s defection to a direct competitor places trade secrets immediately at risk.

Hitchock does a nice job of summarizing the state of the debate and current legislative efforts, including the fact that there is far from a consensus within the high technology industry in Massachusets that following the California  model would help recreate the success of Silicon Valley.   He calls for individual companies to be “agents of change” on this issue.  And he concedes that the current proposed legislation — simply limiting noncompetes to six months (in most instances) and otherwise leaving the current law intact – is only a start toward the goal he advocates.

What remains to be seen (at least to this observer) is whether there is even enough momentum to pass the modest legislation currently being proposed.  Certainly Governor Patrick has indicated that he wants reform.  We’ll know in the next six months or so whether it will happen.

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