Yesterday, I attended a panel presentation at the Boston Bar Association on the status of noncompete legislative reform in Massachusetts. As Michael Rosen has discussed in numerous prior posts on this blog, recently there has been a push to limit noncompetes in order to increase employee mobility and productivity, led by state Rep. Lori Ehrlich (D-Marblehead) and state Sen. William Brownsberger (D-Belmont). The presentation was designed to update the legal community on the movement.
At the presentation, Professor Matthew Marx of MIT summarized his research into the impact of noncompetes on economic activity. He studied the case of Michigan, where noncompetes became enforceable in 1985 after a long period when they were not. According to his research, the public firms in Michigan initially did quite well after noncompetes became enforceable, but the gains did not last. The firms failed to innovate because they had a harder time getting “new blood” and talent from competing firms. He concludes that noncompetes lead to less employee mobility and exchanges of ideas.
Rep. Ehrlich then talked about how, because noncompete reform is a controversial topic, it likely will not be taken up again before the end of the year. She promised to file legislation in the next session (2013), which perhaps will combine noncompete reform with trade secret legislation (a topic I previously discussed here).
Russell Beck, an attorney in Boston who has helped Rep. Ehrlich draft noncompete legislation, then discussed the differences between reform proposals and current law. Interestingly, the latest reform proposals would not affect nonsolicitation agreements (of customers or employees), confidentiality agreements, or invention-assignment agreements. But the proposed legislation would require an employer to give advance notice to employees of the noncompete agreement before making the employee sign it and to allow the employee to obtain counsel. One version of reform (the “pending bill”) also would require an employer to pay the employee’s attorney’s fees if the employer (1) acts in bad faith; or (2) is unsuccessful in enforcing the noncompete because either the court does not enforce it or the court substantially reforms a material restriction in it. The pending bill would limit noncompetes to a duration of one year with a presumption that six months is a reasonable length of time. The pending bill would also allow up to two years of “garden leave” (i.e., the employer pays the employee not to work for a competitor after the employee leaves), and would require that the space and scope of agreements be “reasonable.” Provisions restricting an employee from competing in the geographic area where the employee provided services for the employer and from doing the same type of work the employee did for the employer at some point during the past two years would be presumed reasonable. A pared-down version of the pending bill (the “modified bill”) would carry these same presumptions but would limit the duration of noncompetes to six months (but would allow them to last up to two years in separation agreements).
Andrew Botti, an attorney in Woburn, Massachusetts who formerly was chair of the Small Business Association of New England, discussed the potential negative impacts of reform on businesses. It would cost businesses money to adjust to any new law. Many in the business community also believe that the one-year or six-month time limits in the legislation are too short, and that the attorney’s fees provisions will cost businesses during a time when the economy is already slow. In an environment where many businesses find patents to be too complicated and expensive to obtain, they are relying on trade secrets more and more for protection of their intellectual property, and confidentiality agreements are not enough for protection. Overall, he thought the fact that California’s unemployment rate (where noncompetes are not enforceable) is much higher than Massachusetts’s unemployment rate was telling.
I think the take-away from this presentation is that the reform movement has been met with substantial resistance, but it is not going away. “California-style” reform, which would eliminate all noncompetes for employees, is not likely to be the focus in the Massachusetts legislature in the near term, but more moderate change like that outlined above might be coming soon.