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

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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