Six bills have been introduced in the Massachusetts Legislature that would limit or eliminate the enforcement of non competition agreements. These proposals were a favorite of the Patrick Administration. The thinking was that Massachusetts could be made more competitive by eliminating non competition agreements; after all, that thinking supposed that California was eating the commonwealth’s lunch when it came to attracting tech because California had long prohibited those agreements.

On January 14, 2015 Senator Jason M. Lewis introduced a new bill that is far more restrictive than the bill commented on in the prior post. Senate No. 169 would make “void and unenforceable” any non competition agreement of an employee or independent contractor to work after the employee or independent contractor relationship has ended, except in certain limited instances.[1]   The Bill also includes a version of the Uniform Trade Secrets Act with respect to the protection of trade secrets.

The Joint Committee on Labor and Workforce Development held a hearing on June 23, 2015 regarding the proposed legislation.

I attended the hearing and was frankly surprised and disappointed by the testimony, which was mostly for the proposed legislation. Much of it was related to the “brain drain” in high tech from Massachusetts to California. The proponents of the bills then attributed the drain to Massachusetts’s enforcement of non competition agreements. Yet those proponents offered no empirical evidence, at the hearing, that non competition agreements caused this “brain drain.” Could climate, business climate or favorable financing opportunities have made California more attractive?   The “pro” testimony also gave anecdotal—not empirical—evidence of the abuses of non competition agreements.

Both pros and cons missed the point.  Two somewhat competing considerations are involved with respect to enforcement of non competition agreements; (1) the protection of trade secrets and other intellectual property and (2) an employee’s free access to employment opportunity.

A non competition agreement is the best and least expensive way to protect trade secrets and intellectual property.   In litigating those agreements, I have found that if an employee, subject to a non competition agreement, is employed by a competitor, the former employer could seek a temporary restraining order against the individual prohibiting him or her from working for the competitor.  Thereafter, we would seek that prohibition for the remainder of the case’s pendency; a preliminary injunction. Although the case could proceed to trial, cases are generally settled at this point. There is little reason to proceed to trial because, while the case winds through the court system for a couple of years, the employee is either permitted to keep his job with the competitor or in enjoined from doing so. In short, within 10 or so days or less, any intellectual property or trade secrets are protected or the employee is free to compete. Because of the abbreviated time frame, the cost to both litigants is low and the decision swift.

Senate No. 169 contemplates enforcement of intellectual property and trade secrets.   Trade secret litigation, however, generally requires enormous amounts of discovery and, in my estimation, frequently a trial several years later to determine whether to prohibit the disclosure of the trade secret and, if disclosed, what the damages are.[2] I have found that, without extensive (and expensive discovery) it is difficult to determine what, if any, trade secrets or intellectual property has been appropriated and whether, if appropriated, what has been communicated to the competitor. This is a very expensive proposition for the party seeking to enforce the trade secret and the employee who may or may not have misappropriated the trade secret.

On the pro side, the lack of a non competition agreement promotes the free flow of information and innovation. Employees are free to start competing businesses. Businesses are forced to innovate or change. As mentioned above, enforcing a trade secret is difficult and expensive and many a trade secret or proprietary intellectual property, in the absence of a non competition agreement, finds its way to a competitor. I do not think this is necessarily bad; copying and improvement of technology advances business. Mozart and Beethoven copied other composers’ work in pre copyright days. In a local example, the textile mills of Lowell and Lawrence owed their being to (clandestine) copying the English textile mills. They did nicely until their technology was copied in a cheaper labor market. The upshot is that better goods were produced for a cheaper price and the public gained. It is no surprise that venture capitalists are in favor of the proposed legislation—it fosters more and better ventures to fund.

Neither side mentioned that if one of the bills were to become law, companies might devise devious methods that have the effect of non competition agreements. In the absence of non competition agreements in California, several tech companies in that state allegedly colluded to prevent employees from being hired by the other participants.

Neither side mentioned that, at the present time, enforcing a non competition in a Massachusetts court requires the proponent to show necessity. To obtain a temporary restraining order and a preliminary injunction, the proponent must first show, among other things, that it will suffer irreparable harm without the order and that the balance of equities favors the proponent—this is no easy task. Next, a proponent must then show need and reasonableness. The highest court in Massachusetts stated:

“A covenant not to compete is enforceable only if it is necessary to protect a legitimate business interest, reasonably limited in time and space, and consonant with the public interest . . . Covenants not to compete are valid if they are reasonable in light of the facts of each case.”[3]

A federal court in Massachusetts stated that in, addition to the foregoing, “[c]ourts will not enforce non-compete provisions if their sole purpose is to limit ordinary competition.”[4] I believe the fact that courts view non competition agreements in the foregoing manner is an important consideration. It is thus misleading not to disclose that non-competition agreements are given judicial scrutiny to determine fairness.

There are valid reasons for limiting or eliminating non competition agreements and there are valid reasons for continuing their use in Massachusetts. I’ve found both sides a bit disingenuous and a little short on facts. As the discussion continues, I hope both sides do better. Both positions should be explored thoroughly. Few states have eliminated non competition agreements and if Massachusetts becomes one of those states, I hope it does so carefully and intelligently.

______________________________________________________________________________________________________

[1]           Those instances are:

  • Covenants not to solicit or hire employees or independent contractors of the employer,
  • Covenants not to solicit or transact business with customers of the employer,
  • Non disclosure agreements,
  • Covenants in connection with the sale of a business if “the party restricted is an owner of at least a 10 percent interest of the business who received significant consideration for the sale,”
  • Covenants outside of an employment relationship,
  • Forfeiture agreements, and
  • Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.

[2]           An additional drawback of a trade secret case is that damages in this kind of case are extremely difficult to prove.

[3]           Boulanger v. Dunkin’ Donuts, Inc., 442 Mass. 635, 639 (2004).

[4]           RE/MAX of New England, Inc. v. Prestige Real Estate, Inc., 2014 WL 3058295 (D. Mass. 2014).