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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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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            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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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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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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Scott Kirsner, business writer for the Boston Globe, has been perhaps the most active follower of the Massachusetts noncompete debate during the past couple of years.  Last week, he posted on his blog, Innovation Economy , about a recent chat with Gov. Deval Patrick on the issue, including the pending legislation to prohibit or scale back noncompetes.  The bottom line, it seems, is that Gov. Patrick continues to hedge his bets.  Kirsner quotes him as saying, "If there's a consensus in the industry [as to whether they're a good or bad thing], I'm happy to support that."  Well, at the moment there is far from a consensus on the issue.  While some in the emerging-company world are increasingly vocal about their desire to outlaw noncompetes in Massachusetts, many others continue to support them.  Kirsner describes Paul Sagan of Akamai Technologies -- obviously an influential voice in the technology space -- to be in the pro-noncompete camp.  

In a column in yesterday's Globe, Kirsner describes at length his view that non-competition agreements stifle innovation, particularly because they discourage talented workers with new ideas from forming or joining start-ups out of fear of being embroiled in costly and distracting litigation.  He points to the statutory exceptions that already exist for certain occupations -- doctors, social workers and broadcasters -- and questions why, if a TV anchor can move from one station to another, an engineer at a tech company can't.  One answer to that question is that the movement of a TV anchor to a competitor does not threaten any legitimate business interest of his former employer.  There is no confidential information at stake.  The anchor succeeds or fails based mainly on his or her skill at conveying news to an audience.  An engineer joining a competitor, on the other hand, arguably comes with not only her general skills and experience (which she can take with her), but also with detailed knowledge of the former employer's confidential information, and she can't simply forget that information while developing a product for a competitor.  Thus, in moving to the competitor, the engineer places at risk the very confidential information that the former employer spent much time, money and other resources developing and protecting. That, at least, is the principal argument in favor of enforcing noncompetes in certain instances.  

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The Rappaport Institute for Greater Boston at Harvard's Kennedy School next week is holding what promises to be an interesting event on the continuing debate about noncompete agreements and economic development in Massachusetts. The event, part of an ongoing lecture series, is entitled “Using Non-Compete Laws to Spur Economic Development in Massachusetts.” The panelists include Prof. Lee Fleming and Matt Marx, academics who have focused on attempting to quantify the effect of noncompetes on business innovation; State Representative William Brownsberger, who has sponsored legislation which would prohibits noncompetes in Massachusetts in most instances; Bijan Sabet, a venture capitalist at Spark Capital who has spearheaded recent efforts to limit non-competition covenants; and my partner, Robert Fisher, who has a great deal of experience litigating these issues on all sides. (Unfortunately, yours truly will be out of town for this event.) The event will be at the Kennedy School Campus on April 21 at 5:30. More information can be found here.

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For those who have been following this blog’s discussion of the ongoing debate about noncompetes in Massachusetts and recently introduced legislation seeking to prohibit such restrictions, this site is a useful resource on the subject.  Thanks to Caroline Huang for bringing it to my attention.  It contains the text of proposed legislation and background information on noncompetition agreements in Massachusetts.  The site was created by Ms. Huang in consultation with Rep. Will Brownsberger, who is sponsoring one of the bills.  The name of the site, “Prohibit RestrictiveEmploymentCovenants.net,” certainly conveys the authors' views on the subject. 

Interestingly, the contrary viewpoint favoring the status quo -- i.e. that noncompetition agreements truly are necessary to protect the legitimate interests of Massachusetts businesses -- has not generated similar buzz.  Perhaps that will change if the proposed legislation has legs.

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As expected (and first discussed here), Massachusetts Rep. Will Brownsberger has introduced a bill that would abolish the use of noncompete agreements in Massachusetts, at least in the employment and independent contractor contexts.  Here is the text of the proposed law:

"AN ACT TO PROHIBIT RESTRICTIVE EMPLOYMENT COVENANTS

Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear."

As drafted, the bill would prohibit all noncompetes generated in the employment context after its effective date, presumably leaving enforceable those agreements previously executed.  It also appears to be intended to leave unchanged the common law principles applicable to noncompetes in the sale of business context.  

The sentence stating that the law would not "render void or unenforceable the remainder of the contract or agreement"  may be intended to allow for continued enforcement of non-disclosure and non-solicitation covenants, but if that is the intent it is not entirely clear.  Many of the vocal opponents of noncompetes have indicated they would favor continued enforcement of employee and customer non-solicitation restrictions.  However, the legislation, as drafted, could be read to encompass at least customer non-solicitation clauses, as it might be argued that such clauses impair the employment relationship.  In any event, some clarification might be necessary on this point.

Any employer that violates the new law -- presumably by either requiring an employee to sign a prohibited noncompete or attempting to enforce such an agreement -- would be liable for the employee's attorneys' fees incurred in litigating the issue.  And the law specifically opens the door to other actions -- such as unfair business claims under Chapter 93A -- that could provide for multiple damages based on an employer's violation.

As reported in Xconomy, Senator Patricia Jehlen will sponsor a Senate version of the bill.  The House version is expected to be referred to the House Committee on Labor and Workforce Development, which likely will hold a hearing on the subject this spring.   It will be interesting to see how the Massachusetts business community reacts to this proposal.

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Thanks to Wade Roush for bringing to my attention his article posted yesterday in Xconomy, a very informative web publication focused on the tech sectors in Boston and on the west coast.  As with this blog, Xconomy has been closely following what I have described as the Massachusetts noncompete "debate" over the past year or so.  (Scroll down to see earlier posts on this subject.) Wade reports that a Massachusetts legislator, Rep. Will Brownsberger of the 24the Middlesex district, is about to introduce a bill that would abolish or significantly curtail the use of noncompete agreements in Massachusetts.   The article reports that noncompetes would be outlawed in new employment contracts entered into in Massachusetts, except in the sale of business context.  As described, it would be similar to current California law.   

I have not yet seen the bill, which apparently is still in the drafting stage.  This blog will provide further updates as more information becomes available.

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he blogosphere once again is abuzz with continued discussion of whether the enforceability of noncompete clauses in Massachusetts places the state at a competitive disadvantage with California generally and Silicon Valley in particular. The latest causes: a court decision from California and an academic paper from Canada.

A decision earlier this month from California’s highest court makes clear, after some years of simmering debate, that noncompetition agreements are invalid under California law and that even a narrowly drafted prohibition will not be upheld except in a sale of business context. My colleague Sheila O’Leary’s summary of the decision can be found here. The decision places in stark contrast the laws of Massachusetts and California. Just days after it was issued came a new academic study (.pdf), by researchers at the University of Toronto’s Rothman School of Management, which argues that noncompetes may be useful in driving growth in the early stages of a tech industry but that once an industry has matured, noncompetes can hamper further growth by impeding the mobility of the talented employees who otherwise would be inclined to innovate by starting their own companies. The study, authored by April Franko and Matthew Mitchell and entitled “Covenants Not to Compete, Labor Mobility and Industry Dynamics,” focused on a comparison of tech industry growth in the Northeast – and in particular the Route 128 region of Massachusetts -- versus the Bay Area of California during the 1970s and 80s. The study did not focus on more recent events in Silicon Valley and Massachusetts’ Route 128 region. Interestingly, the study begins with the statement that “conventional wisdom among legal scholars is that contractual restrictions on employee mobility . . . led to the overtaking of Massachusetts’ Route 128 by Silicon Valley.” To this writer’s knowledge, while such wisdom may be “conventional,” there is little or no hard objective evidence supporting the proposition that noncompetes have been the cause of Silicon’s “victory” over Route 128.

In any event, the combination of the two events once again has many in the tech community talking about ridding Massachusetts of noncompetes, either by legislation or via something like a “groundswell” movement. See here and here for examples of recent discussion on the topic. The same discussion apparently is happening in Washington state, where noncompetes similarly are enforceable and the subject of debate about their effect on economic growth.

One topic somewhat lost in the din about noncompetes is a sibling in the family of restrictive covenants: the non-solicitation agreement. The Massachusetts opponents of noncompetes are quick to emphasize that they would continue to utilize and would support the enforcement of these clauses barring ex-employees’ efforts to take away customers and former co-workers. Bijan Sabet, who has been leading the charge, is quoted at Xconomy.com saying that he is in “complete support of non-solicitation agreements which are different than non compete agreements . . . [and] should be maintained …as they are in CA.” Yet, the enforceability of a non-solicitation agreement in California is far from clear. Some have suggested that the recent California Supreme Court decision places in doubt earlier decisions on the subject. What’s more, other California appellate courts have held that employee no-hire agreements are unenforceable and that customer and employee non-solicitation agreements can be enforced only if the employer can show that its trade secrets are being utilized by the soliciting employee. This is a far more stringent standard than typically applied in Massachusetts and elsewhere, where courts recognize that companies have a “good will” interest in the relationships their employees develop with customers that alone will justify enforcement of a non-solicitation covenant.

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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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Today I attended the Mass Technology Leadership Council’s 2008 Annual Meeting, at which several speakers, including Governor Deval Patrick, spoke about economic development strategies, the state of the technology industry in Massachusetts, and the like. I attended the meeting in part to see whether the recent noncompete debate (described here and here) would receive any attention. I was quite interested to find that it did. Following his speech, the Governor took questions from the audience, including an inquiry about the Patrick administration’s “position” on noncompetes. The governor responded that he is “hearing” from some quarters that noncompetes may be “a little too stringent.” He said that he is willing to look at the issue. At the same time, he said, his administration is not driving this issue; rather some in the tech community are focused on the issue and are asking the administration to focus on it as well. Essentially he indicated that he is noncommittal and is open to arguments pro and con on the issue.

Stay tuned for further developments on this issue

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Several weeks back this blog discussed a proposal being advanced by some Massachusetts venture capitalists to abolish noncompetition agreements in Massachusetts.  (See Proposal to Eradicate Noncompetes in Massachusetts Creates Stir).  We noted that a Boston Globe article was reporting that supporters of this proposal had written to Governor Patrick urging legislative action to make noncompetes invalid in Massachusetts.  The letter to Governor Patrick, as well as the Governor’s somewhat perfunctory response, can be found here, at the website for an organization calling itself “Alliance for Open Competition,” which describes itself as comprised of “entrepreneurs, venture capitalists and business leaders for innovation.”  The site contains an interesting ongoing discussion about whether noncompetes are good or bad for business in Massachusetts. 

Stay tuned for further developments on this topic

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The blogosphere has been abuzz during the past week with a discussion sparked by a Boston-based venture capitalist who thinks noncompetes are bad for business in Massachusetts, and now the Boston Globe has picked up on the buzz.  Bijan Sabet, of Spark Capital, argued on his personal blog last Saturday that Massachusetts should follow the California model and eradicate noncompetition agreements.  Sabet said that his firm would do away with noncompetes at its portfolio companies.  Stated succinctly, his argument is that a “non-compete clause is a significant barrier to startups and innovation,” and he contrasts the Massachusetts economy with Silicon Valley, where it is easier for tech talent to move between companies and, therefore, for companies to innovate.  Many other posts have echoed Mr. Sabet’s view.  (See posts here and here.)  The Globe reports that Sabet and his partners are urging Governor Patrick to push for legislative action to make noncompetes invalid in the Commonwealth.

It will be interesting to see how this plays out.  Not everyone in the VC and technology communities in Massachusetts is antagonistic to noncompetes.  For example, the Boston Globe quotes EMC’s General Counsel, Paul Dacier, who believes that noncompetes with key employees are essential to protecting the company’s intellectual property. 

Restrictive covenants are the proverbial double-edged sword -- employers often are frustrated about them when they are trying to recruit talent, but sometimes feel differently about them when that talent is walking out the door.  Under current Massachusetts law, noncompetes are enforceable if they are necessary to protect a company’s confidential information or good will and reasonable in temporal and geographic scope.  One oft-stated criticism of this legal standard -- which is dependent on a single judge’s consideration and balancing of numerous factors and interests -- is that it creates uncertainty about whether a particular clause will be enforced in a particular situation.  It is said that this uncertainty in itself places an inappropriate drag on labor mobility and legitimate competition.  

Another state grappling with these issues recently adopted a statutory middle-ground.  The Oregon legislature has enacted (and its governor in August signed) a law that significantly restricts the instances in which noncompetes can be enforced but makes it easier for employers to enforce nonsolicitation agreements restricting employees from diverting customers and employees to a competitor when they leave.  A summary of the Oregon law is available here.  It remains to be seen whether Oregon’s approach will, as hoped, encourage economic growth in that state.

Stay tuned for further developments on this topic.

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A discussion in a BusinessWeek article this week on the telecom giant Sprint’s search for a new CEO raises an interesting question:  have U.S. businesses gone too far in binding their most senior executives to non-compete and other restrictive agreements?  In discussing the Sprint board’s search to replace its current CEO in the wake of poor company performance, the article reports that Sprint has “cast its line overseas not only to broaden the pool of strong candidates but to avoid the snare of noncompete contracts often held by executives who have worked at other U.S. telecoms.”  The article notes that landing its current CEO from competitor BellSouth was problematic because of a non-compete clause in his contract. 

As has been discussed in this blog and elsewhere, in many states, including Massachusetts, a C-level executive often presents the best case for enforcement of a noncompete.  Judges tend to regard such individuals as both sufficiently compensated and sophisticated to knowingly restrict their post-employment career opportunities.  What’s more, courts typically find that companies have a better argument that their confidential information and good will are placed in jeopardy when their most senior people move to competitors.  So, from a practical legal standpoint, the movement of a very senior telecom executive within the telecom industry is going to raise, as BusinessWeek put it in the case of Sprint, “red flags.” Perhaps it is not surprising that such an entity would look to other markets -- such as Europe, where noncompetes are less common and less enforceable -- to find qualified individuals to fill a very senior role in the U.S. 

The fact that a significant U.S. company would need to look overseas to find a qualified candidate unfettered by a noncompete might strike some as an indication that noncompetes are a problem.  Of course, in many quarters there will be little sympathy for a current or recently-unemployed CEO whose career options are temporarily limited by a noncompete:  such individuals typically leave their jobs with generous packages rendering their time on the sidelines financially palatable.  But, the phenomenon described in the BusinessWeek article does point to the larger question of whether such restraints unduly hamper the ability of businesses to compete.  Certainly companies possess compelling arguments that senior executives are precisely the people who are properly subject to post-employment restraints, as they know a great deal about the strategic plans of the companies they have led. 

This blog cannot answer the fundamental question posed here.  There can be no doubt, however, that these trends point to the fact that noncompetition agreements are playing a central role in fundamental business decisions being made by companies large and small.

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