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

This blog has reported on efforts over the past few years to enact legislation that would either prohibit or significantly reform the law of noncompetes in Massachusetts.  During 2009 and 2010, these efforts had stalled, for at least two reasons:  (1) several industry organizations had been vocal in opposing any change to the status quo; and (2) Governor Patrick's administration had been unenthusiastic about reform.  As described here, back in 2009, Gregory Bialecki, Secretary, Executive Office of Housing and Economic Development (a cabinet level post), had stated the following:

 we don't yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem . . .

On September 15, at a hearing of the legislature's Joint Committee on Labor and Workforce Development, the Patrick administration changed its position.  Secretary Bialecki testified in favor of  proposed legislation that would significantly restrict and regulate the enforcement of non-competition agreements in the Commonwealth.  His prepared remarks are here.  The reasons for this support echo the arguments that have been made previously (and until now had been unpersuasive to the administration): 

• economic research has shown that enforcement of non-competition can have a "demonstrable negative effect on the mobility of technology workers, especially those with advanced, specialized skills";
• this hindrance of employee mobility "can adversely affect our innovation economy";
• job creation tends to come in "sudden large bursts" and such explosive hiring is more difficult in a jurisdiction where non-competes are enforced;
• talented employees interested in starting up new ventures are leaving the Commonwealth because of noncompetes;
• noncompetes often are unfairly imposed and/or unfairly enforced; and
• established large employers for which the status quo is advantageous should take a longer view and understand that the current environment is bad for the overall health of the MA economy

The statement ends by stating that there is a "pressing need for serious change."  The administration is supporting the reform bill being sponsored by Representatives Brownsberger and Ehrlich, but the following statement should send chills down the spines of those who support the status quo:

If the relevant stakeholders are not prepared to [engage in a serious conversation] with a sense of urgency, then we ought to consider whether the outright elimination of enforceability altogether is the best course of action for the Massachusetts economy.

These are strong words, and clearly are intended to make clear that from the administration's perspective, change is necessary and will happen with or without the involvement of business groups that favor no change at all.  Interestingly, almost all of the arguments made by the administration -- if accepted -- would justify a ban on noncompetes, rather than the reform approach.

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It's time for another update on the efforts in Massachusetts -- now several years old -- to abolish noncompetes or reform the law governing their enforcement.  In the past week, Scott Kirsner has focused again on this issue both in the Boston Sunday Globe and his Innovation Economy blog.  He provides a very useful summary of the status of the current efforts (as well as his own anti-noncompete stance) here.  Another useful resource for information on current legislative efforts and background on the law is Representative William Brownsberger's blog.  Readers of this blog will recall that Rep. Brownsberger has co-sponsored a bill that would permit the continued enforcement of non-competition agreements but would impose significant substantive and procedural limitations.  Most recently, the proposed reform bill has been revised to eliminate and scale back certain restrictions to which pro-noncompete business groups had objected.   While those reform efforts continue into the 2011-12 legislative session, two new bills have been filed that would more or less follow the California model and prohibit non-competes in the employment context.  (Rep. Brownsberger had started off with this stance back in 2009, then backed off in the face of opposition.)  A bill filed in the MA House of Representatives (here) would prohibit noncompetes except in the context of a sale of business or departure from a partnership or limited liability company.  A bill filed in the Senate (here) does not specifically address these exceptions but focuses on non-competes in the employment and independent contractor contexts.  It's not clear that any of these reform approaches has sufficient legislative support to move forward. 

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This decision by a federal judge in Massachusetts enforcing a non-competition agreement is notable for at least two reasons: (1) it presents yet another example of a court in Massachusetts rejecting an argument that California law should govern a non-compete dispute, and (2) it contains an interesting discussion of the hiring company’s substantial but unsuccessful effort to avoid the noncompete by taking steps to ensure that the new employee protected the confidential information of his previous employer. 

The case, Aspect Software, Inc. v. Gary Barnett, involved an executive vice-president and chief technology officer at a technology company who left to take on a similar role at a clearly competitive company. The plaintiff and former employer, Aspect, is a Massachusetts-based company. While employment by Aspect, the defendant employee, Barnett, was based in Tennessee and Massachusetts. The new employer, Avaya, is based in California. Just before joining Avaya, Barnett moved his residence to California. 

Not surprisingly, the non-compete at issue contained a choice of law provision dictating that Massachusetts law would apply to any dispute between the parties. Notwithstanding that provision, Barnett and Avaya argued that California law – which prohibits non-competition agreements except in very limited instances not applicable here – should apply to the dispute. Judge Denise Casper (who happens to be the newest judge on the U.S. District Court in Boston) rejected that argument. Citing well-established principles that a choice of law provision should be overridden only where another state’s interest in the dispute is greater than the agreed-upon state’s interest, Judge Casper found that California’s interest was either weaker than or at best equal to Massachusetts’ interest. In particular, she found that California’s interest in pursuing its policy against non-competes would not materially outweigh Massachusetts’ interest in ensuring that its contracts are enforced. She therefore applied Massachusetts law to the substantive question of whether the non-compete should be enforced.

On that fundamental issue, the most interesting aspect of the analysis (in my view) relates to the unusually careful attempt by Barnett and his new employer to ensure that Barnett would not use or disclose any of Aspect’s confidential information in his new position.  One can infer that they decided that taking these steps would improve their chances in court in the event that Aspect sought to enforce the noncompete.  It was undisputed that Barnett turned off his company issued Blackberry immediately after tendering his resignation, left his laptop in his office, boxed all of his Aspect property and made arrangements for Aspect to retrieve the boxes. There was no allegation that he retained any of that information or used it in his new position. In addition, Avaya included language in its employment offer and separately in Barnett’s employment agreement making very clear that Barnett was not to use or disclose any Aspect information in his new position. On top of that, Barnett’s new boss at Avaya sent him an email that provided a list of “ground rules” that Barnett was expected to follow in order to ensure that Aspect’s trade secrets and other information were not used by Barnett in his new role. 

Despite these efforts, Judge Casper sided with Aspect and granted it the requested preliminary injunction. The judge acknowledged the “scrupulousness” of Barnett’s and Avaya’s efforts and credited the “sincerity” of their intent. Yet, she found that given the extent of Barnett’s experience at Aspect and the similarity between his positions at Aspect and at Avaya, it was difficult to conceive how all of the information stored in Barnett’s memory could be set aside as he applied himself to a competitor’s business. Thus, summing up the analysis, Judge Casper stated, “even taking into account Barnett’s and Avaya’s commendable efforts to protect the integrity of Aspect’s trade secrets, Aspect has carried its burden of establishing a significant risk of irreparable harm.” She therefore granted the injunction stopping Barnett's work at Avaya.

The take-away?  Even the most proactive and careful hiring efforts will not avoid enforcement of a noncompete if all of the required legal factors line up in favor of the former employer. 

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An increasingly common scenario in the world of noncompete enforcement is the so-called “race to the courthouse,” where parallel actions are brought in separate jurisdictions about the same dispute. In one case, the former employer seeks enforcement of the noncompete. In the other, the employee and his or her new employer seek an order declaring that the noncompete is unenforceable. Many of these situations involve California as the location of the new employer. Upon hiring the employee, the California-based employer will immediately seek a “declaration” from a California state court judge (these are called “declaratory judgment” actions) that the non-competition provision is unenforceable under California law and therefore it is okay to hire the employee. The advantage of this approach is that California precedent supports a holding that would disregard the law of the state in which the employee previously worked, even if the contract contained a provision (a “choice of law” clause) stating that a particular state’s law would apply to disputes under the contract.

Often in these instances, it will be argued that the dispute should be adjudicated in the court where the first lawsuit was filed. This is sometimes called the “first filed” rule, and Massachusetts courts generally have followed it. Thus, we get a “race to the courthouse”: the party that files first gets to dictate what court will decide the dispute.

I mention all of this as background for discussion of a Massachusetts case,Ethicon Endo-Surgery, Inc. v. Pemberton and Intuitive Surgical, Inc., decided in late 2010 (but only recently brought to my attention), in which Judge Lauriat of the Superior Court’s Business Litigation Session had occasion to consider the “first filed” rule in the context of a non-compete dispute with some connection to Massachusetts, California, Ohio, New Jersey, New Hampshire and Maine.

The employee, Pemberton, had been employed by Ethicon Endo-Surgery (EES), an Ohio-based medical device company that is a subsidiary of Johnson & Johnson, a New Jersey company. Pemberton was involved first in sales and then later in educational/training activities for EES customers. He worked in northern MA, NH and Maine. He left EES in October, 2010 and was hired by Intuitive Surgical, a Delaware corporation with a principal place of business in California, where he was to be a sales manager based in the Boston area.

On his last day, Pemberton told EES he was going to work for Intuitive. The next day, Intuitive and Pemberton served EES with a California-based declaratory judgment action. Four days later, EES sued in Massachusetts state court to enforce Pemberton’s 18-month non-competition restriction.

Not surprisingly, Pemberton and Intuitive argued that the “first filed” rule required dismissal of the Massachusetts case, with the expectation that the California court would invalidate the noncompete. But based on the facts of the case, Judge Lauriat was not willing to follow that rule. As it turned out, Pemberton gave EES more than a month of notice of his departure, but he didn’t say where he was going and told EES he was still “working out the details.” He informed EES that he was going to Intuitive only on his last day of work. Meanwhile, unbeknownst to EES, weeks before his last day, Pemberton already had signed an offer letter from Intuitive and he and Intuitive already had filed a declaratory judgment action in California. They simply waited to serve the papers on EES until the day after Pemberton’s last day of work at EES.

Judge Lauriat stated that he could “not condone Intuitive’s behavior” by applying the first-filed rule. He noted that that the situation could not even be called a “race to the courthouse,” because EES didn’t even know there was a race until Intuitive and Pemberton “had already crossed the finish line and hoisted the trophy.”

So, Judge Lauriat kept the case and decided EES’s preliminary injunction motion on the merits. He rejected Intuitive’s argument that California law should trump the parties’ choice of New Jersey law in the contract, finding that either New Jersey or Massachusetts had an equal or greater interest in the dispute given the contacts with those states. He then gave short shrift to Pemberton’s argument that the companies were not competitors. He did find that the nationwide scope of the restriction was too broad, and scaled it back to Maine, New Hampshire and Massachusetts. Finally, in balancing the equities/hardships for each party, Judge Lauriat was swayed by the fact that the contract required that EES would compensate Pemberton for every month in which he could not work due to the non-competition agreement. The fact that Pemberton could have made more money at Intuitive did not change the judge’s view.

Injunction granted, despite the employee’s and new employer’s best laid plans to take advantage of California law.

The lesson? Massachusetts courts are not going to be willing to defer to a California court in a non-compete case where it appears to the judge that the parties engaged in subterfuge or manipulation to get a case filed in that state.

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This decision from the United States District Court in Boston, denying a request for a preliminary injunction to enforce non-competition and other restrictive covenants, is notable for a few reasons. First, the federal court in Massachusetts issues relatively few decisions involving requests to enforce noncompete and/or nonsolicitation agreements; a published decision from a federal judge -- in this case from Judge George A. O’Toole, Jr. -- is inherently of interest. More importantly, the decision, Maine Pointe, LLC v. Starr and Gestion Velocitas, Inc., addresses several procedural and substantive issues that arise with regularity in the world of noncompete litigation.

The plaintiff, Maine Pointe, filed suit and immediately sought to enjoin competitive activities by its former consultant, Peter Starr, a Canadian who operated through his own company, Gestion Velocitas (also sued as a defendant).  The restrictive covenants at issue were in an agreement between Maine Pointe and the Starr’s company, but not with Starr himself (although he signed for the company). 

The defendants sought to derail the injunction request first by raising a procedural barrier: that the court lacked jurisdiction to hear the case, because Starr and his company were based in Canada and never engaged in sales or other activities in Massachusetts. Maine Pointe responded by pointing to a provision in the agreement stating that Massachusetts law would apply and that litigation relating to the agreement would occur exclusively in Massachusetts. Judge O’Toole did not fully decide the jurisdictional issue, but stated that he was sufficiently doubtful about the court’s jurisdiction over Starr -- notwithstanding the forum selection provision -- that he would deny the injunction request against Starr on that basis alone. The lesson for employers seeking to enforce noncompetes? Be sure that you have a strong basis for suing in the particular court you choose. Creating judicial doubt about jurisdiction is a sure way to take the wind out of the sails of your injunction request.

Judge O’Toole also denied the injunction request against the company defendant, this time on substantive grounds. Maine Pointe’s main complaint was that the defendants had violated the non-disclosure and non-solicitation restrictions by soliciting business from two entities they previously solicited -- unsuccessfully -- while engaged by Maine Pointe. Judge O’Toole was unconvinced. He found that the evidence did not sufficiently demonstrate that the contact information defendants used to contact the prospective customers was protected “trade secrets” or “confidential information,” noting that Massachusetts courts in previous cases had held that “general information and routine data” of a company is not protectable. As to the non-solicitation issue, Judge O’Toole found that there was no legitimate interest justifying enforcement of the restriction, because there was no evidence that defendants developed any meaningful relationship with these entities -- that is, "good will" -- while engaged by Maine Pointe. 

As a result, Judge O'Toole refused to give Maine Pointe any of the relief it sought.

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Many thanks to Brad MacDougall of Associated Industries of Massachusetts (AIM) for sending along the text of the revised noncompete bill, which was filed last week.  The new bill is here.  As David Frank of Mass. Lawyers Weekly mentioned in his recent blog post and Lawyers Weekly reported last October, AIM had exerted pressure to block passage of the bill in 2010. 

Stay tuned for information about when the bill will be considered in committee.

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As confirmed here, a bill to reform the law of noncompetition agreements in Massachusetts, which died in the 2010 legislative session, was re-filed on January 19, 2011.  Rep. Will Brownsberger, one of the sponsors of the compromise legislation in 2010, stated on his website prior to the re-filing that it would "look like the last generation of the bill that came out of committee with a few additional changes that reflect input we have been getting."   

The text of the new bill is not yet available, but Russell Beck, an attorney who helped draft the legislation, has summarized the changes from last year's legislation on his blog.  Perhaps the most significant changes are: (1) the salary threshold (which had been $75,000) has been eliminated; (2) garden leave clauses -- originally part of the legislation and then later taken out -- are back, enabling employers to impose up to a two-year noncompete if they are willing to pay for it; (3) the 10% compensation requirement as "consideration" for a mid-employment noncompete is eliminated, and in its place consideration must be only "fair and reasonable"; and (4) the safe harbors for employers to avoid having to pay attorneys' fees are expanded.  

All of the changes appear to have been made to address concerns in the business community that the legislation was overly hostile to the interests of (enforcing) employers.

This blog will provide the text of the bill as soon as its available.

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One of my partners, Jeff Quillen, recently brought to my attention an interesting discussion about non-competes that took place last month at a meeting of the 12x12 group.  As explained here, 12x12 was formed earlier this year in an effort to drive the company formation process in Massachusetts. It consists of “12 world-class CEO’s and 12 senior partners from some of the most active VC firms in town to launch 12 new companies in the next 12 months – and in so doing, launch the career of 12 next generation great entrepreneurs.” Since it was formed, 12x12 has raised $11.5 million and funded five new companies. The group meets regularly along with an Organizing Committee comprised of thought leaders such as Desh Deshpandi (Sycamore Networks, A123 Systems), Steve Vinter (Google in Cambridge), Paul Sagan (Akamai) and Jonathan Kraft (New England Patriots), and sponsors such as Foley Hoag.   (My partner Jeff Quillen is one of the regular participants.)

As described in the blog of Michael Greeley of Flybridge Capital Partners, at a 12x12 meeting last month, the group:

engaged in a surprisingly spirited debate concerning the impact of “non competes” in Massachusetts. After frankly more discussion than I imagined the common ground seemed to be coalescing around the need to soften or do away with non competes.

Jeff reports that a number of the venture capitalists in the room observed that one of the impediments to creating new, successful companies is finding capable, hard-charging entrepreneurs who have experience in a particular industry to take on a lead role in a newly-funded startup. In California, the VCs will find these people in the senior management team (typically not the CEO) of an existing company in the industry; i.e. a competitor. Non-competes present no obstacle to this approach, because California law decrees that they are unlawful. In Massachusetts, in contrast, because of the prevalence of non-competes particularly among senior people at technology companies, the VCs are forced to look for senior talent outside the relevant industry or to hire graduate students with little or no experience. This phenomenon seems to be leading to a growing recognition (at least among the 12x12 meeting participants) that non-competes in and of themselves may be a significant impediment to creating and growing new companies in Massachusetts. Some in the room were postulating that perhaps Massachusetts should follow the California model. The group is going to study the issue and continue its discussions.  If the VC community in Massachusetts solidifies a stance against the status quo, it will find itself at odds with some of the larger, established companies (within and outside the technology community) that have resisted any change in the status quo.

I cannot help but observe a certain irony here given the current status of non-compete reform efforts in the Massachusetts legislature, as described in my previous posts over the past two or three years. The legislation initially filed in the spring of 2009 would have followed the California model and abolished non-competes except in very limited circumstances. The sponsors of that approach quickly concluded that there was insufficient support in the business community.  They then pursued a compromise approach, whereby noncompetes would remain enforceable but various protections would be established to protect against employer overreaching. The compromise bill (which has been revised in minor ways since its introduction) did not gain passage during the last session but is expected to be re-introduced this year. The irony -- in my view -- is that even if the compromise legislation were passed in its current or similar form, it is likely that the people 12x12 are hoping to recruit for its new companies still would be subject to non-compete restrictions that would impede their hire.  

Ultimately, if significant players in the VC and technology communities conclude that noncompetes truly are an impediment to their ability to form and nurture meaningful new technology companies in Massachusetts, they will need to more forcefully express that view in public -- to the Governor, their legislators, industry groups etc. -- before the legislative ship has sailed.

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While this blog focuses on the continuing evolution of the law of non-competition agreements and related issues in Massachusetts, we occasionally look to notable cases and legislative developments in other states.  What happened in Georgia last week certainly can be described as notable.

Here in Massachusetts, we have spent the past three years debating whether to abolish or substantially limit the enforcement of noncompetes. The principal rationale for doing so would be to remove what is perceived as an inappropriate obstacle to labor mobility and, ultimately, economic innovation and growth. In the context of our current debate -- which will continue as legislation to curtail enforcement of noncompetes will be reintroduced during the next legislative session -- what the voters of Georgia just did would be unthinkable.

Until now, Georgia generally was regarded as a state in which it was very difficult to enforce a noncompetition agreement. While noncompetes theoretically could be enforced there, they had to be perfectly drafted for each individual employee’s situation. Georgia’s constitution prohibited judges from modifying a noncompete clause to be reasonable under the circumstances. If the clause as drafted was unreasonably broad, it would not be enforced. 

As described here and here, a significant component of the Georgia business community pushed to make noncompetes more easily enforceable. To accomplish this, however, the Georgia constitution had to be amended, which meant that the issue had to be put before the voters as a constitutional amendment.  

As described here, the debate over what became known as Amendment 1 “boiled over onto Twitter and local news outlets, where businesspeople and members of the public contended that the Amendment would stifle innovation in Georgia in a large Vote No campaign.” Last week, the voters of Georgia overwhelmingly approved Amendment 1, the text of which perhaps could be read as preordaining the result:

Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?

(The issue may have been better described as whether to uphold reasonable non-competition agreements.)  The legislation referred to in the Amendment was passed by Georgia’s legislature and can be found here.  As a result of the amendment, among other changes, courts in Georgia now will be permitted to modify a noncompete to make it reasonable under the circumstances.   More generally, employers will have more confidence going forward that they will be able to enforce in Georgia courts reasonably tailored noncompetes with their employees. 

Whether that result will be good or bad for Georgia businesses will remain to be seen.

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To the uninitiated, a standard non-disclosure, non-competition and non-solicitation agreement may seem like pages of meaningless legal “boilerplate” punctuated by a few interesting sentences containing the guts of the document: the restrictions themselves. A recent Massachusetts court decision illustrates that this approach to noncompetition agreements can be perilous. The case underscores the need for employers that utilize non-competition and non-solicitation agreements to give careful attention not just to the specific restrictions being imposed, but also to other aspects of the agreement they may believe to be standard boilerplate.

In Palladium Group, Inc. v. MacGillivray, a company failed in its effort to enforce restrictive covenants not because of any problem with the restrictions themselves, but because of language elsewhere in the agreement limiting the remedies that were available to the employer when an employee breached. The plaintiff in the case, Palladium Group, filed a lawsuit against three former employees and their new employer, Cervello, Inc., to enforce non-competition and non-solicitation provisions in their employment agreements. As is common in cases where the employer believes that competition by ex-employees poses an imminent threat, Palladium immediately asked the court for a preliminary injunction ordering the individuals to stop working for a competitor. The backdrop to this story is that the employment agreements at issue were entered into by the individual defendants as they were selling to Palladium a company they had founded. In exchange for agreeing to several post-closing restrictive covenants, the individuals received various forms of compensation and equity, including deferred compensation, promissory notes and shares in Palladium.

The agreements contained very standard language acknowledging that in the event the employees breached any of the restrictive covenants, the damage to Palladium would be “irreparable.” Such language is included in non-competition and non-solicitation agreements to buttress a potential argument that monetary damages are not sufficient to remedy any harm caused by a breach and, therefore, that immediate injunctive relief – an order from a judge prohibiting certain conduct – is appropriate. So far, so good.

The problem for Palladium, however, was language elsewhere in the agreements stating that if the individuals breached the restrictive covenants, they would forfeit their rights to compensation and equity that they were promised as part of the transaction, and that this forfeiture would be “the sole and exclusive remedy” for any breach. 

Palladium attempted to get around this exclusivity language by pointing to the language about irreparable harm and asserting that this was indicative of the parties’ intent that Palladium could seek an injunction if the employees breached the restrictions. Superior Court Judge Diane Kottmyer concluded that the inconsistency in the language rendered the document ambiguous and considered external evidence of the parties’ intent. Palladium, however, offered no evidence to rebut evidence from the individuals that the documents were revised after negotiation to eliminate injunctive relief as a remedy. Thus, Judge Kottmyer denied Palladium’s injunction request, leaving the employees free to compete and solicit customers and employees.

As the agreements were interpreted by the court, the exclusive remedy provision essentially converted the non-competition provision into what is sometimes referred to as a "forfeiture for competition" provision.  The agreements did not, in fact, prohibit competition and solicitation.  Instead, they simply extracted a monetary penalty in the event that the employees chose to compete or solicit.  In this particular case, the employees made precisely that choice.  

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As followers of the recent debate about noncompetes in Massachusetts are well aware, a significant impetus in the push for a change in Massachusetts law has been the contrast provided by California, where employee non-competition agreements generally are unenforceable.   As reported here when the MA debate started in earnest, proponents of efforts to prohibit noncompetes have argued that Silicon Valley has fared better than the Massachusetts tech sector in recent years at least in part because, in the absence of noncompete enforcement, it is easier for tech talent to move between companies and, therefore, for companies to innovate. 

With that backdrop in mind, news last Friday from the U.S. Department of Justice of a settlement of claims of anti-competitive practices at several large technology companies is particularly interesting.  The DOJ's press release reports that it reached a settlement with six companies -- Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar -- that prevents them from entering into no-solicitation agreements for employees.   All of these companies are headquartered in California.  According to the complaint filed in court by the DOJ (which is now being settled), each of the companies entered into reciprocal agreements with one or more of the other companies not to solicit each other's employees. 

For example, DOJ alleges that Apple and Google executives agreed not to cold call each other's employees, with each company placing the other company's employees on a "Do Not Cold Call" list.  Similarly, Adobe placed Apple on its internal list of "Companies that are off limits" and Apple placed Adobe on a "Do Not Call List."  The DOJ's perspective on such practices at several large companies within a specific industry is that US antitrust laws were implicated, as these practices "interfered with the proper functioning of the price-setting mechanism that otherwise would have prevailed in competition for employees."  That is, agreeing not to go after each other's employees was anti-competitive and detrimental to affected employees.  DOJ's press release notes that none of the agreements "was limited by geography, job function, product group or time period."  Such limitations, of course, are the hallmark of a narrowly-tailored employee noncompetition agreement. 

Perhaps California needs noncompetes. 

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            The effort to substantially alter the landscape for noncompete agreements in Massachusetts via legislation has stalled. After advancing out of committee in the Massachusetts House of Representatives, the compromise legislation (described here) was included in an economic development bill with many other provisions and proposed amendments relating to business issues in the Commonwealth. As has been reported here on the Associated Industries of Massachusetts (AIM) blog, an economic development bill recently was passed by the House, but the noncompete legislation was dropped from the bill.   

            On July 20th, the Boston Bar Association sponsored a symposium entitled “Employee Non-Compete Agreements and Job Creation: The Status of Law Reform a Year Later,” at which several of the advocates and opponents of changes to current law presented their perspectives. Russell Beck, an attorney who was involved in drafting the compromise legislation, said that the legislation would not pass this year but that it had made substantial progress and is likely to pass in the next legislative year. (The state fiscal year is July 1 to June 30.) He also mentioned that the garden leave provision in the original compromise legislation (extending the permissible duration of a noncompete under certain circumstances), which had been excised from the bill while in committee, likely would be added back to the proposed legislation in light of significant feedback from interested parties. 

            Representative William Brownsberger, one of the sponsors of the compromise legislation, was not quite as optimistic as Russell Beck. Rep. Brownsberger suggested that a number of “big players” in the business community, who advocate the status quo, weighed in and impeded passage of the legislation. He suggested that going forward, a broader dialogue is required, with further input needed from interested parties, including chambers of commerce and industry groups. When asked to make a prediction, he simply indicated that he did not know whether and when noncompete legislation will pass.

            Given all of the publicity this issue has attracted in the past couple of years, it is interesting that this significant new development so far has garnered little attention in the business press and blogosphere.

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As reported here on the website of Rep. William Brownsberger:

legislation to revise the law of non-competition agreements in Massachusetts took a step forward this week. The Committee on Labor and Human Resources reported out a bill with a favorable recommendation.  Here is the new draft.  It is essentially the bill that Representatives Ehrlich and Brownsberger worked out [with] representatives of many interest groups, but we have not yet had the opportunity to study the language carefully. . . . Over the next few days, the House Clerk will evaluate the bill to determine the next referral for the bill.

I have not yet had an opportunity to carefully compare the new draft to the most recent compromise draft (described here).  Based on a cursory review, the new draft appears to be nearly identical to the previous draft, with one notable exception:  the new draft has removed all of the references to "garden leave" clauses contained in the previous draft.  (The previous draft stated that noncompetes of more than one-year in duration would be permitted in connection with a "garden leave" provision providing for compensation during the extended period.)  Thus, it appears that the revised bill is somewhat more protective of employees (and therefore less protective of the interests of former employers), in that it places an absolute limit of one year on employment-based noncompetes.

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It is often said that noncompete cases differ from other types of civil litigation in that the initial battle in the case often decides the war. If you slip and fall while buying groceries and decide to sue the supermarket, your case will follow the typical path of civil litigation: a complaint will be filed, commencing a lawsuit; the defendant will answer; the parties will spend months or even years gathering information in the discovery phase; and the case will be resolved through the summary judgment process or at trial. All of this will take at least a couple of years. Most noncompete cases, on the other hand, have an intense but brief lifespan. The plaintiff in these cases -- the former employer -- typically will say that there is an emergency and that it will suffer "irreparable harm" if the former employee is permitted to compete in violation of his agreement. The plaintiff therefore will seek an immediate remedy from a judge: a temporary restraining order and/or preliminary injunction. The judge’s decision truly often does decide the war. A party’s ability to challenge the initial injunction decision is quite limited. And, while that decision really is only "preliminary," as a practical matter, by the time the case winds it way through the litigation process, it will be too late: if the request was denied, the employee will have been working at the competitor for months or even years; and if the request was granted, the employee will be put on the "beach" for so long that the company will hire someone else.

A recent decision by the federal appellate court in Boston -- Ansys, Inc. v. Computational Dynamics North America, Ltd. -- illustrates this phenomenon and underscores the limited recourse a party has after losing at the injunction stage. Ansys sued its former employee (Dr. Caraeni) and his new employer (CDNA) in federal court in New Hampshire. (For purposes of this discussion, New Hampshire and Massachusetts law are not meaningfully different.) Ansys alleged (among other things) that Dr. Caraeni breached his noncompete and that CDNA intentionally interfered with the contract by hiring him. There was no question that the two companies are direct competitors and that Dr. Caraeni, a seemingly highly-skilled software engineer, had access to confidential information about Ansys based on his seven-year tenure.

As is typical in these cases, Ansys quickly sought a preliminary injunction to enforce the one-year noncompetition clause. After a one-day evidentiary hearing and submission of briefs by both parties, the federal district judge denied the request. It found that Ansys had not shown a likelihood that it would suffer irreparable injury if Caraeni were permitted to work at its competitor. In particular, the judge accepted as credible CDNA’s testimony that Caraeni had not been and would not be (at least for the noncompete’s duration) assigned to perform any work at CDNA that might allow him to use any of Ansys’s information, and that Caraeni’s knowledge was not useful to CDNA because of the different software architecture used by the two companies.

Ansys immediately appealed the injunction denial to the First Circuit Court of Appeals, which heard the appeal on an expedited basis. But in the end, the First Circuit refused to the disturb the lower court’s decision, emphasizing that it could do so only if the judge "mistook the law, clearly erred in its factual assessments, or otherwise abused its discretion . . ." The appellate court’s decision is replete with statements recognizing that Ansys’s arguments may well have been valid but that it could not say that the district judge’s conclusions were "clearly erroneous." What the First Circuit really signaled is that another judge may have made a different decision based on the same facts, but that the appellate court would not (and could not) question that judgment.

At this stage in the case, with its injunction request denied and its emergency appeal of that denial unsuccessful, Ansys’s options are to pursue what may be a nonexistent damages case to trial, or to find a way to end the case quickly and quietly.

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Many employers require that new hires sign a non-competition or non-solicitation agreement as a condition of hire.  Companies expect that these agreements will be valid and enforceable when the employee leaves, even if the employee and his or her job evolve over time.  In 2004, this basic assumption was called into question as a result of three successive decisions by Massachusetts Superior Court judges which held that a noncompete signed at an employee’s hire may later become unenforceable due to changed circumstances in the employee’s job.  A summary of those decisions is here.  The most generous reading of these cases suggested that any time an employee's job changed in a "material" way -- for example, a promotion involving significant greater responsibility or a transfer across departmental or divisional lines -- an employer would need to require the employee to sign a new noncompete, a practice quite uncommon in most companies.  Unfortunately, in the last five years, little guidance has come from the Massachusetts appellate courts on this important issue.  

This is why a recent decision by a federal appellate court -- the First Circuit Court of Appeals (which sits in Boston) -- is interesting.  In Astro-Med, Inc. v. Nihon Kohden America, Inc., the First Circuit was considering an appeal of a jury verdict in favor of a former employer (Astro-Med) that sued a departed employee and his new employer for breach of a noncompete, tortious interference with contract and misappropriation of trade secrets.  On appeal, the defendants argued (among many other things) that after Astro-Med hired the defendant employee (Mr. Plant), it made "material changes" in his employment, including a change from product specialist in Rhode Island to salesperson in Florida and, later, a substantial reduction in his sales territory.  They argued that that these changes voided the noncompete Plant had signed at hire and therefore there was no contract that could be breached.

Interestingly, even though the First Circuit generally was applying Rhode Island law to the dispute, the parties and the court cited Massachusetts law on the subject of "material change."  The court, citing one of the three 2004 Superior Court decisions mentioned above -- Lycos v. Jackson -- wrote the following:

It is apparently correct that under Massachusetts law, "[e]ach time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed."

However, the court was not willing to take this concept to the extreme that some had suggested in the past (and the defendants were suggesting in Astro-Med).  Looking at the origins of the "material change" rule, the court emphasized that the appropriate question is not simply whether the job changed materially but whether the conduct of the parties clearly showed that they had abandoned and rescinded by mutual consent the earlier employment agreement containing the pertinent noncompete provision and had entered into a new employment relationship that included no such non-compete provision.  Significant evidence of such a change would be that the employer requested a new noncompete and the employee refused to sign.  In Astro-Med, the court held that the original noncompete still governed, as there was no evidence that the former employee's job change was a mutual abandonment of the agreement or that the employer had sought and been refused a new noncompete.    

Under this approach to the material change rule, an employer need not seek a new noncompete from an employee every time the employee's job changes in a significant way (although that approach may be appropriate in certain circumstances).  Indeed, employers should refrain from constantly seeking new noncompetes -- if the employee refuses to sign, the employer will be forced either to end the employment relationship or leave itself exposed to the argument that it abandoned the old noncompete when it asked the employee to sign a new one.

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Yesterday, the Joint Committee on Labor and Workforce Development held a public hearing on proposed non-compete legislation (details about the legislation are below).  The co-sponsors of the compromise legislation, Representatives Brownsberger and Ehrlich, introduced the bill, after which various interested parties presented their views to the Committee.  Unfortunately, I was not able to stay for the entire hearing, but a very comprehensive summary of the differing viewpoints that were presented can be found here.  I understand that the bill will be taken up by the Committee, and that the co-sponsors are hopeful that it will be brought to the floor of both houses during the current session.

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The next round in the ongoing debate about noncompetes in Massachusetts has arrived.  As described here, a public hearing on various forms of pending noncompete legislation will take place before the Joint Committee on Labor and Workforce Development on October 7, between 10:30 am and 1:00 pm.  The location is Room A-2 of the State House.  The public is invited to attend and testify. 

Earlier this week, Representatives Brownsberger and Ehrlich, co-sponsors of the compromise legislation introduced this past summer (described here), published a new, revised draft and invited further input.  The revised bill is here.  Highlights include the following:

• Minimum compensation.  Noncompetition agreements would be valid only with respect to employees whose average gross income is $75,000.  The bill appears to dispense with the earlier distinction between agreements intended to preserve only good will (as to which there was a $100,000 minimum salary requirement) and agreements preserving trade secrets and confidential information (as to which the salary minimum was $50,000).

• Advance notice.  If required as a condition of employment, a noncompetition agreement must be provided at least seven days before employment commences or with the offer letter, whichever is earlier.  (The previous draft had a 14 day notice requirement.)  If the offer is made orally, the employer must mention the noncompete requirement at the same time or at least before the employer tenders his or her resignation to the current employer. 

• Signed during employment.  If entered into after employment commences, a noncompete must be supported by additional consideration, which is defined as at least 10% of annual compensation (which apparently includes incentive comp. as well as base salary).  Current law, although not entirely clear, provides that continued employment is sufficient consideration for a noncompete entered into during employment.

• Legitimate interests.  The agreement must be necessary to protect trade secrets, confidential information and/or good will.  This simply codifies existing common law.

• Durational limits.  Very significantly, the duration must be limited to one year, unless there is a garden leave clause providing for payment of the greater of 50% of base salary or $50,000 (on an annual basis) for a longer period, in which case the restriction can extend for up to two years. 

• Presumptively reasonable.  An agreement that is limited in duration to six months is considered presumptively reasonable.  This actually may make it easier to enforce some noncompetes.  It essentially would provide an incentive to employers to limit the duration of noncompetes to six months in return for an easier enforcement environment in court.

• Attorneys' fees.  A court shall award attorneys' fees to an employee if the court declines to enforce a material restriction or reforms a restriction in material respect, or if the court determines that the employer acted in bad faith in attempting to enforce the restriction.  An enforcing employer may recover its attorneys' fees only if the agreement is enforced as is and the court finds the employee engaged in bad faith conduct.  This obviously is drafted to discourage employers from going to court unless they believe they have a strong chance of success.

• Choice of law issues.  Parties cannot avoid Massachusetts law via a choice of law provision.  Massachusetts law will apply if the employee was a resident of or working in Massachusetts at the time of termination.  New Hampshire and Rhode Island employers of employees who work in those states but live in MA may want to take note of this provision. 

• Nonsolicitation/sale of business provisions unchanged.  The proposed legislation would not affect existing common law concerning provisions restricting solicitation of customers and employees, and restrictions in the sale of business context. 

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This week, a top Patrick administration official -- Gregory Bialecki, Secretary, Executive Office of Housing and Economic Development -- posted on his office's blog the Administration's current views on the noncompete debate in Massachusetts.   (Many thanks to Brad MacDougall, of the Associated Industries of Massachusetts, for bringing this to my attention.) This is a significant development; until now, the Patrick administration has taken no position on the issue, indicating that it was studying the situation and receiving comments from all sides.  The bottom line is this statement at the end of the post: 

On balance, we don't yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem.  But we will continue to keep on top of the debate.

Secy. Bialecki made clear that the Administration is on top of the issue, mentioning his awareness of the academic studies and the arguments that have been made on all sides of the issue.  He listed seven reasons why the Administration currently is not prepared to side either with those who propose to abolish employee noncompetes altogether and those who back compromise legislation that would curtail and regulate their use.  As to the pending legislation, he expressed concern that modifying the current standard might lead to uncertainty and litigation.  

Certainly this will ignite further debate and lobbying from all interested parties.

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 On Wednesday, July 22, I participated in the Boston Bar Association’s symposium on employee noncompete agreements in Massachusetts. (I posted the announcement for it here.  A picture is here.) First of all, I want to thank Steve Chow of Burns & Levinson for the opportunity to participate in the panel discussion. I am not going to attempt to summarize here all of the very interesting points made during the event. (However, Amrith Kumar posted a detailed summary on his blog.) Here are some of my thoughts on the event, which started with presentations from each of the panelists and then was opened up to an interactive discussion with the (pretty large) audience.

• Dr. Matt Marx presented data to support his argument that noncompete agreements significantly diminish labor mobility and economic innovation. (I'm hoping to post a link to Dr. Marx's powerpoint soon. His study on the effect of noncompetes in Michigan is here.)  I have some doubts about the relevance of the Michigan "experiment" (non-competes were not enforceable in Michigan before 1985 and were enforceable thereafter, thus providing a rare opportunity to perform a before/after statistical comparison). Dr. Marx readily admits that the challenge he and other researchers face is conceiving appropriate research subjects that will be probative of the question whether noncompetes (and not other factors) materially undermine a region’s economic viability, particularly the rate at which it creates and grows companies.
• One compelling feature of Dr. Marx's presentation was his survey data indicating that a very high percentage of engineers reported being presented with a noncompete by a new employer on or after the first day of employment, rather than during the hiring process or in the offer letter. I am a bit surprised by this evidence; I like to think that most employers tell employees in advance of the first day of work that they will be required to sign a non-competition agreement. Doing so certainly would aid in any future attempt to enforce a noncompete. (This is why employment lawyers draft offer letters making this clear.) If the numbers across multiple industries and jobs are consistent with Dr. Marx’s survey results, they would present a pretty good argument for requiring (perhaps statutorily) advance notice for noncompetes to be enforceable. This is one feature of the compromise legislation introduced by Representatives Brownsberger and Ehrlich.

• I suspect that a large portion of the audience had come expecting to debate the merits of the original bill filed by Rep. Brownsberger, which would have followed the California model and prohibited employee non-competition agreements except in sale of business situations. Some, I am sure, were disappointed to learn that Rep. Brownsberger has backed off that proposal for now and is pursuing a compromise solution to what he believes is rampant noncompete "abuse" by employers.  The compromise bill is here.

• Rep. Brownsberger was quite informative in explaining his rationale for initially introducing the no-noncompete bill and then altering his course with the compromise bill. The change, he said, was motivated by strongly-voiced views from the small business community that noncompetes are necessary to protect the significant investments small business owners make in their companies. Interestingly, he said that large companies in Massachusetts have not been lobbying him on the issue.

• During my presentation, I expressed a concern that the compromise legislation is quite complicated and will be unwelcome by businesses already struggling with Massachusetts’ complicated regulatory environment. Echoing that sentiment, someone in the audience suggested that a better approach would be to have a more focused bill essentially addressing two issues: (1) the concern about noncompetes being foisted upon employees at the last minute, after they have already resigned from another job and perhaps relocated to Massachusetts, by requiring employers to tell candidates ahead of time that they will be required to sign a noncompete; and (2) addressing the concern about employer overreaching after employees depart, by imposing attorneys’ fees shifting where such overreaching occurs. I think that this would be an interesting approach and one that potentially could be more palatable to the business community.

• In response to a statement I made in my initial remarks suggesting that perhaps this is an issue best left to the market (companies can decide whether or not to impose noncompetes and employees can decide whether or not to sign them), Bijan Sabet of Spark Capital stated that he believed the market had already spoken and that investor money has been flowing away from Massachusetts. Obviously, that is a very significant concern and should be taken seriously in this debate. The difficulty that everyone is having in this discussion is in attempting to understand whether there is a causal connection between negative economic performance in Mass. and the availability of noncompete enforcement. (Also, Amrith Kumar suggests that the numbers are actually flat and not decreasing.) In any event, if venture capitalists and other investors are not investing in Massachusetts companies at the same level they previously did because of noncompetes (or if fewer investment opportunities exist in the first place because of noncompetes), I would like to think that it could be demonstrated more definitively than it has been so far. I think such evidence would push the debate in the direction proposed by Mr. Sabet and others.

• One audience member who described himself as a senior manager in a number of companies expressed his view that noncompetes are necessary to protect what he called "intellectual capital," which he then described as something along the lines of reciprocal loyalty: that if a company invests in an individual, it has a right to expect some reciprocal loyalty from the individual for some period of time after he or she leaves. That is an understandable viewpoint, but I believe not helpful in advancing the case for continued enforcement of noncompetes. In fact, as a result of the at-will employment doctrine, companies generally do not owe an obligation to employees to employ them for any period of time, and employees have no obligation to remain employed for any period of time. If there is any duty of loyalty owed by employees to their employers (Mass. law recognizes this duty at least for more senior, responsible employees), that duty is tied to the employment relationship and ends when employment ends. A noncompete, if it is going to be enforceable, must be shown to be necessary to protect the company’s intellectual property and customer relationships. Loyalty is not part of the equation.

• The discussion ended with Rep. Brownsberger indicating that he expects hearings to be held on the proposed legislation this fall. It appears that there is little or no activity on this subject in the Senate at present. As we know from Scott Kirsner’s reporting, Governor Patrick has not yet taken a position on the subject.

   Stay tuned.

   

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As reported in Xconomy, the effort to abolish noncompetes in Massachusetts except in sale of business situations has had a significant setback.  Rep. William Brownsberger, who introduced a bill to accomplish that goal earlier this year, has now combined forces with Rep. Lori Ehrlich (who had proposed a milder limitation on noncompetes) to introduce a compromise bill that would permit continued enforcement of noncompetes, but with several restrictions.  I won't catalog all of them now, but one interesting feature of the compromise legislation would be to create a "presumption of enforceability" in instances where the employer limits the duration of the agreement to six months and observes certain other limitations. 

My initial reaction to this feature is that it might have the opposite effect of that intended by those who are seeking to limit abuses which they believe are inherent in the current common law-based approach.  As described in previous posts, the current debate about noncompetes has been spurred by those who believe that enforcement of noncompetes in Massachusetts stifles employee mobility and technological innovation, resulting in a competitive disadvantage versus California, which prohibits noncompetes.  However, based on my initial reading of the compromise bill, employers would be provided with an incentive to actually increase the number of situations in which noncompetes are enforceable (or at least presumptively enforceable).  This could be more deleterious to employee mobility and innovation than the status quo.   

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