Recent Events Provide More Fodder for Debate About Noncompetes in Massachusetts

The 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 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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