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

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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In a recent post at Innovation Economy, Scott Kirsner describes a discussion he had with an attorney who has been involved with negotiating severance deals for several employees.  The attorney has sought to avoid future noncompete complications for his clients by essentially trading severance pay for noncompete relief.  The attorney told Kirsner that “employees can often get released from the non-competes by giving up about 25% of their severance payment.”  This may be a desirable outcome for departing executives, but employers that regularly engage in this practice are playing with fire.

There is no doubt that waiving or scaling back non-competition or non-solicitation restrictions for departing employees may be an effective tool to reduce the cost of severance.  However, doing so may have an unintended result:  in a future case in which the company is seeking to enforce a restrictive covenant, its earlier waivers may come back to haunt it.  A practice of releasing employees from noncompetes will expose the company to what I refer to as the “selective enforcement” problem.  That is, the attorney for the defendant (i.e. breaching) employee will argue that the company has not sought to enforce the provision at issue against similarly-situated employees who have departed for competitors.  Thus, the argument goes, the employer is not really seeking to protect its legitimate interests – confidential information, trade secrets and/or good will – but rather is trying to stop ordinary competition (which is not a permissible basis for enforcing a noncompete).  When I am involved on the defense side of these cases, I often will try to develop evidence of selective enforcement.  In my experience, judges will be quite interested to learn that a company that is seeking to enforce a noncompete against, say, the director of product development, actually allowed another senior employee (say, the head of engineering) out of his or her noncompete.  Such waiver practices suggest that the company is picking and choosing whom it wants to restrain from competition.  Doing so undercuts the company’s argument that it is consistent and vigilant about protecting its legitimate interests.  Thus, a company that lets people out of restrictive covenants in exchange for cost savings ultimately may find itself penny-wise, but pound-foolish.

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The Boston Bar Association has organized an event -- open to the public (and free) -- on the various bills that would significantly alter the law governing non-competition agreements in Massachusetts.   The panel of speakers will include yours truly (speaking in this setting for the "status quo") as well as the following: 

State Rep. William N. Brownsberger, Esq., Sponsor of H. 1794 (bill to eliminate non-competes)

Russell Beck, Esq. Foley & Lardner, LLP, Drafter of H. 1799 (bill to restrict non-competes)  

Stephen Y. Chow, Burns & Levinson LLP, Massachusetts Uniform Law Commission, Drafter of H. 87, Symposium organizer 

Gordon L. Doerfer, a retired Massachusetts judge and mediator, who will moderate  

Dr. Matthew Marx, MIT Sloan School, who has studied the economic effects of noncompetes

Scott Kirsner, Boston Globe columnist, author of the Innovation Economy Blog, and noncompete skeptic 

More information about the event and a link for registration are here.   
 

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