Update on Noncompete Legislation

Here is an update on new developments in the few weeks since Governor Patrick introduced legislation that would largely abolish employment-based noncompetes in Massachusetts (described here).

As summarized by Russ Beck here, the MA legislature’s Joint Committee on Labor and Workforce Development has favorably reported out a previously-filed bill very similar to Gov. Patrick’s legislation banning noncompetes.  Interesting, Governor Patrick’s bill is being considered by a different committee, the Joint Committee on Economic Development and Emerging Technologies, apparently because it is part of a larger bill focused on economic development.  The committee has not yet scheduled a hearing of the Governor’s bill.  With the current legislative session ending on July 31, 2014, and a new governor being elected this fall, much will have to happen in a relatively short period of time for this to become law.

In the meantime, various industry groups and interested parties have been quite vocal in staking out positions on both sides of the debate.  As detailed by Curt Woodward at Xconomy in his coverage of the ongoing debate (with a couple of quotes from this writer), the New England Venture Capital Association is actively lobbying in support of the Governor’s proposal, has set up an online petition, and has provided instructions for members to communicate with their representatives.  This is a new and interesting addition to the previous debate dynamic.  Previously, there were some notable VCs who supported abolition of noncompetes or reform of existing law, but many others who favored the status quo.  Clearly, the anti-noncompete viewpoint has become more prominent in the most significant local VC organization.

On the other side of the debate, the Associated Industries of Massachusetts last week announced its opposition to the proposed legislation, stating that a survey of its 4,500 members shows continued use and support of noncompetes “in every segment of the Massachusetts economy, including manufacturing, life sciences, medical devices, finance, retail, marketing, publishing, construction, energy, professional services, transportation, food and beverage distribution, insurance and health care.”  AIM makes the point that while many proponents of the legislation assert that it is needed for Massachusetts to compete effectively with California (where noncompetes are prohibited) for new businesses and jobs, many other states with vibrant innovation economies — such as New York and Virginia — continue to enforce noncompetes.  I do think this is an interesting point in the debate.  Proponents of the legislation understandably point to examples of companies in California that were able to grow and prosper without the “braking” effect that potential noncompete enforcement has in other states, including Massachusetts.  However, a larger question remains:  isn’t it possible that the availability of noncompete enforcement in MA creates an economic advantage, rather than disadvantage.  That is, perhaps the current environment creates an incentive for businesses to start up and stay in MA.  If this is true, and if we decide to follow the CA model, some businesses might leave for other states where noncompetes are still enforceable.

Another interesting perspective on the debate is an editorial from Massachusetts Lawyers Weekly (log in required), objecting to an outright ban on noncompetes and urging instead that the legislature “put limitations on non-competes that make the outcome of a dispute more predictable.”  Examples include creating certain presumptions about the duration of a noncompete being reasonable (or unreasonable), and permitting prevailing parties in noncompete disputes to recover their attorneys’ fees.  Of course, these reform measures have been proposed and considered by the legislature during the past few years, but so far have not been successful.

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