An earlier blog post commented upon a bill limiting non-competition agreements presented by Senator Brownsberger and Representative Ehrlich and submitted during the 2011-12 session of the legislature.  This year, a more simplified bill, S846, was presented by Senator Brownsberger.

The bill provides that a non-competition agreement having a duration of longer than six months is presumed unreasonable, and shall be unenforceable unless:

• The employee has breached his or her fiduciary duty to the employer,

• The employee has unlawfully appropriated the employer’s property, or

• The employee has at any time received an annualized taxable compensation of $250,000 or more.

In the event any of the foregoing exceptions exist, a court may enforce the restrictive covenant for a period “determined by the court to be appropriate.”

While this may seem unduly restrictive another section of the bill provides that the following agreements are not so restricted:

• Covenants not to solicit or hire employees of the employer,

• Covenants not to solicit or transact business with customers of the employer,

• Covenants in connection with the sale of a business if the party restricted “is an owner of at least a ten percent interest of the business who received significant consideration for the sale,”

• Covenants outside of an employment relationship,

• Forfeiture agreements, or

• Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.

The bill applies to agreements signed on or after January 1, 2014.

Two other bills are also pending in the Massachusetts legislature; both of which would adopt the California approach to non-competition agreements.  California, by constitutional edict, renders void any non-competition agreements.  Representative Bradley presented a bill, H 1225, which would adopt the Uniform Trade Secrets Act.  Part of that bill renders void a covenant not to compete that is part of an agreement of employment (without rendering void the remainder of the agreement).  Representative Harrington presented another bill, H. 1729, which would effectively render “unlawful” any contract that serves to restrict an employee from engaging in any lawful employment, excepting restrictions in the sale of a business or of departing partners or LLC members.

The Joint Committee on labor and Workforce Development is conducting hearings on these bills in September of 2013.

The absence of non-competition agreements would have the effect of making protection of intellectual property and trade secrets extremely difficult, time consuming and expensive.  A non-competition agreement may be enforced by simply seeking and obtaining a temporary restraining order and/or a preliminary injunction preventing the employee from competing.  If this relief is granted the employer’s trade secrets and/or confidential information are secure—or at least protected by a court order.  Such relief can be obtained in days with little or no discovery.   If the “California” approach is adopted, however, an employer would have to show that the employee has revealed or appropriated trade secrets and confidential information in order to get relief from a court.  I have found this a very difficult task which involves protracted discovery and more than a little luck.  Rather than a court proceeding under a non-competition agreement that lasts days, one faces weeks, if not years of protracted litigation—all the while the competitor and the ex-employee may be utilizing the former employer’s confidential information or trade secrets.

Massachusetts adherents of the California approach, point to the drain of entrepreneurial businesses leaving or not starting up in the Commonwealth and attributing it to the lack of mobility of the workforce.  I would suggest California’s climate, availability of financing and a larger population plus the attitude of Californians have a lot more to do with its business generation than its absence of non-competition agreements.