Massachusetts Noncompete Bill Set for Hearing
On October 7, the Massachusetts legislature's Joint Committee on Labor and Workforce Development will conduct a hearing on the two noncompete bills sponsored, respectively, by Representatives Lori Ehrlich and Will Brownsberger. While those two bills are technically before the Committee, there is a third bill that reflects a joint effort by the two legislators, which is likely to be the focus of the hearing. The representatives initially made a draft available for public comment in July. Since then, there have been many meetings, emails, and other communications providing input on the draft. We have made an effort to consider them all in drafting the revisions to the July version. We also made an effort to structure the bill in as straightforward a manner as possible, given the complicated nature of the issues and the many interests to be balanced. As before, we have striven to achieve an appropriate balance of protections and incentives to both employers and employees, and make it easier for both sides to predict the outcome of any potential dispute, thereby reducing the need to resort to the courts for resolution of such disputes. The current draft (including changes through September 28) is available here.
As a threshold matter, it is important to note that the bill will not apply retroactively or to noncompetition agreements arising outside the context of employment, nonsolicitation agreements, or nondisclosure agreements. (For definitions of any of the unfamiliar terms, please refer to Back to the Basics... Terms of Art.) The most significant aspects of the current draft are as follows:
- The bill codifies current law, insofar as noncompetition agreements may be enforced if, among other things, they are reasonable in duration, geographic reach, and scope of proscribed activities and necessary to protect the employer's trade secrets, other confidential information, or goodwill. Similarly, courts may continue to reform noncompetes to make them enforceable and refuse to enforce such agreements in certain circumstances.
- The bill requires that noncompetes be in writing, signed by both parties, and, in most circumstances, provided to the employee two weeks in advance of employment. If the agreement is required after employment starts, the employee must be provided with consideration for it (beyond just continued employment). Ten percent of the employee's then-current compensation is considered presumptively reasonable.
- The bill prohibits enforcement of noncompete agreements against an employee whose average annual federal gross income derived from the employer during the three years immediately prior to the cessation of employment is $75,000 of less. This amount increases by $1,500 every year on the anniversary of the bill's effective date.
- The bill restricts noncompete agreements to one year, although it does permit garden leave clauses to be enforced for up to two years. To qualify, the garden leave must require minimum payments to the employ for each year (the greater of 50% of the employee's highest salary with the past two years or $50,000), as well as comply with certain issues concerning the circumstances of payment.
- The bill identifies certain restrictions that will be presumptively reasonable and therefore enforceable (if all other requirements are met).
- The bill requires payment of the employee's legal fees under certain circumstances, primarily where the agreement is not enforced in most respects by the court or where the employer acted in bad faith. The bill does, however, provide a safe harbor for employers to avoid the prospect of having to pay the employee's legal fees, specifically, if the noncompete is no more restrictive than the presumptively reasonable restrictions set forth in the bill. Similarly, an employer may receive its legal fees, but only if otherwise permitted by statute or contract, the agreement falls within the safe harbor, the noncompete was enforced, and the employee acted in bad faith.
- The bill rejects the inevitable disclosure doctrine.
- The bill places limitations on forfeiture agreements.
The hearing is scheduled to begin at 10:30. In an effort to assist the Committee to make the process as informative and efficient as possible, Represenatives Ehrlich and Brownsberger have offered, with the assistance of Caroline Huang (who has been working with Representative Brownsberger on the legislation) and Rep. Ehrilich's legislative aide, Kristen Cullen, to coordinate people's presentation of testimony. If you are interested, please visit Rep. Ehrilich's website here or Rep. Brownsberger's website here.
I think that this bill constitutes a considerable improvement over the status quo in Massachusetts. Nonetheless, I am very disappointed that you are no longer seeking to ban non-competition agreements. In my opinion, the issue is fundamentally one of human rights, in particular, the right of someone to work for whomever he wishes. Business interests should never trump human rights. I believe that eventually (whether in 25 years or 50 years or whenever) the Courts will find these agreements unconstitutional. It is interesting that although you are careful to define many of your terms, you never offer a definition of what exactly "legitimate business interests" might be, and how a non-competition agreement protects them.
One of the weaknesses in the proposed legislation concerns the status of trade secrets and other forms of confidential information. Because companies are allowed to be extremely vague as to what exactly their confidential information consists of, employees generally have no idea what it is that they are allowed to disclose and what must be kept secret. This point is highly relevant to the discussion, because even though the proposed legislation restricts non-competition agreements, an employee may still be frightened to leave his job for fear that at some future time he will be sued over trade secret misappropriation when it suits his former employer's business interests. Employees need the protection of having it made explicit what it is that their employer considers to be secret. Until this loophole is closed, nondisclosure agreements will continue to keep unhappy but fearful employees hostages to their litigious employers.
Thank you for your comment. The issues in this area are, as you can imagine, quite complicated and subject to myriad different viewpoints. I have, however, heard others share your concerns. I can address one of them. Specifically, you will find that “legitimate business interests” is specified in subsection (b)(v) as being trade secrets, other confidential information, and goodwill. Trade secrets are in turn defined by statute (G.L. c. 266, § 30). Confidential information and goodwill on the other hand are developed by case law (and very fact specific). As for the vagueness of what constitutes trade secrets and confidential information, you are correct. As a result, I always think it a best practice for companies to have appropriate protocols in place to ensure that both parties have a clear understanding as to what is considered confidential and what is not. As for the use of nondisclosure agreements, that type of agreement (like most other restrictive covenants) is beyond the reach of the bill (which is why they are left unaddressed).
Thanks for your response. So, to follow up, suppose a company were to sue a former employee for violating his noncompetition clause, even if the company knew that confidential information was not a problem -- let's imagine that the company didn't have trade secrets because it patented everything of value. Suppose, in other words, that the company sued because the employee was a gifted researcher who kept coming up with new and valuable ideas, and it (a) wanted to retain the employee and (b) didn't want a competitor to hire him. By the definition of legitimate business interests you give above, it would not appear that this lawsuit would be valid. Do you agree?
Larry, I do agree. If there is one thing that's clear under existing law (Massachusetts and elsewhere), it's that mere protection from competition (that is competition that is not "unfair") is not a legitimate use of noncompete agreements. (Despite the appellation, they don't apply to garden variety competition.) RB
OK, we agree on that.
So now suppose that a company has some secrets they want to protect, but they are really not so important -- in reality, companies always have some secrets! On the other hand, suppose that employee X is a gifted researcher as above, and it is much more important to retain him and not lose him to a competitor, than it is to preserve their secrets. The company then imposes a noncompete agreement, but the primary reason for imposing it is not because of their secrets but for their (illegitimate) aim of preventing fair competition. Is this not a fundamental problem with allowing noncompetes? You open the door to a form of abuse by employers that it is very difficult to control. Moreover, there is an alternative: protect the trade secrets with NDAs that are specific.
I would argue and will argue in testimony tomorrow that the situation above is actually the usual situation, at least for scientists. Noncompete agreements are primarily vehicles for retention, not for the protection of secrets. By conflating the value of an individual human being as an employee with the existence of corporate secrets that may be known to that person, employers use noncompete agreements unfairly.
I think we can agree on this too. Companies do frequently use noncompetes for their in terrorem effect - both to prevent competition (fair and unfair alike) and to inhibit employee mobility. With the exception of banning noncompetes, you can never prevent this entirely. However, the bill is designed to make this improper use of a noncompete far less likely (and prevalent) than it is today. In particular, the fee shifting provisions of the bill provide a strong disincentive for this type of conduct.
As a related matter, while nondisclosure agreements (NDAs) can be used, the cost of litigating those cases is actually significantly greater than the cost of a typical noncompete case. The reason is that, most often, noncompete cases are resolved early on, with limited if any discovery. In contrast, NDA cases (i.e., so-called "trade secret cases," even though the information need not rise to the level of a true trade secret) typically involve much more work, including extensive discovery (fact and sometimes expert) concerning the use and disclosure of the confidential information itself.
The reason that it is so much cheaper to litigate noncompete cases is that the Courts do not take seriously the possibility that the litigant may be abusing the system by claiming that their secrets are at risk when the truth is that they simply do not wish a certain talented person to work for a competitor. If the Courts insisted that the litigant demonstrate that there are important secrets that were being compromised, then there would have to be discovery.
By the same token, you could decrease the cost of trade secret litigation if highly general NDAs ("everything is secret" NDAs) were declared invalid, and NDAs had to be specific about what the secrets are. If there were a limited list of trade secrets to check for, it would be much easier to determine if there had been misappropriation. In fact, this could potentially be done inexpensively by a third party under some sort of arbitration agreement, maybe outside of the Courts. As it is now, companies typically go on the proverbial fishing expedition, doing discovery and only then announcing what trade secrets had been misappropriated after a lengthy process of analysis.
Here is where I need to disagree. I have found that the courts absolutely take them seriously and try quite hard to make the right decision in the limited time that they have available.
As for NDAs, that's another whole topic, which probably warrants its own separate post. I will add it to my topic list. In short, however, I tend to agree with you in theory. Unfortunately, in practice, it's not nearly that neat.
Because, as you point out, the cost of litigating a noncompete case is not very great, I don't think that the fee shifting you refer to will be much of a disincentive. However, you could strengthen your proposed bill by instituting a system of damages. Being sued is really awful, and I think that it would therefore not be inappropriate to require a company that sues someone and loses, to pay substantial damages. The problem with this solution is that companies often inappropriately win their cases, because there is no discovery.
I agree that Courts do their best in the limited time they have available to take these cases seriously. The problem is that without discovery, they have no way of knowing whether secrets are or are not being compromised -- however well intentioned they are. The problem is structural, I guess
Remember, though, that the discovery that you're describing is discovery that the employer would need. For what it's worth, with rare exceptions (and the exceptions do occasionally happen), employees are not the ones who need the discovery in the context that you are describing.
I'm a little late on this thread, but . . . I believe that a substantial part of the problem is that Massachusetts departs from the exception from the common law (Anglo-American tradition) rule that non-competition agreements are only enforceable to protect trade secrets and good will (originally only for sale of the business). In most other states, that remains the law -- but in 45 other states, "trade secrets" are defined under the Uniform Trade Secrets Act, which is proposed again in pending H.329.
In Massachusetts, the courts extended thecommon law unenforceability execption to protect "confidential information" because our definition of trade secrets was much too strict: Mass. Gen. Laws ch. 266 is a criminal statute, to be read narrowly, and the Supreme Judicial Court (SJC) used the 1939 Restatement of Torts "definition", which other courts have applied to require that trade secrets be in continuous and actual use. However, the nominal statement of the SJC rule proposed to be codified in the Erhlich on its face justifies unenforceability to protect "confidential information" without any conditions. In practice, business-saavy judges look behind this and apply Uniform Trade Secret Act-like considerations, but other formalist judges ("if you didn't agree that everything was confidential unless you could prove it came from outside, you shouldn't have signed the NDA") have erred on the side of enforcement, particularly when there is any technology involved.
Thus, I advocate here as a partial fix that we enact the Uniform Trade Secrets Act (UTSA) and include the application of its standards to any bill stating the enforceability of non-competition agreements on the basis of confidential information. It would be good for the employers too -- there are situations, for example, current strategy such as a product launch, would be protected under the UTSA, at least for a while, and not protected under current Massachusetts law based on the 1939 Restatement.
Steve, I agree with you. However, obviously (and unfortunately) the noncompete bill can't reference the UTSA (H.329) unless and until its adopted and signed into law. If that happens, it's certainly easy enough to amend the bill to reference the new trade secret law. In the meantime, the simplest way to deal with the issue is (as the bill does) to reference back to the current trade secret law and supplement with the common law definition of confidential information.
An alternative is to just include in the bill the UTSA definition of a trade secret: valuable because it is not generally known or easily ascertainable and subject to reasonable efforts under the circumstances to keep confidential -- with some notice to the employee (and subsequent fact finder) that there is some specific information (rather than general skill) that is being protected.
I had actually considered that, but decided against it. The problem with doing that is that it would create yet a third class of information in Massachusetts (the other two being statutorily-defined trade secrets and common law defined confidential information).
I beg to differ as to multiple bodies of law proprietary information applicable here.
The courts have not used the criminal MGL c 266 in civil cases, but have used the common law of trade secrets -- the 1939 Restatement of Torts, which is materially different from UTSA only as construed by the federal district court by requiring continuous actual use. There is no discernible common law of "confidential information" materially different from trade secret law except for the "continuous use requirement." Except where some courts have cited a non-disclosure agreement (suggesting a contract law approach), the few courts looking at the issue (e.g., Dynamics Research) have questioned whether the confidential information was specifiable and subject to reasonable efforts to keep confidential. My concern is that putting "confidential information" without any definition into a statute imparts greater significance to the label than due under the common law.
I have a similar concern as to "good will": whose good will is it? Court decisions are modulated by the facts; statutes are statements of the legislature -- and the plain meaning of protecting "good will" undefined in a statute might be taken to be that protection of any good will including the employee's good will if even slightly mingled with that of the employer.
Because legislative history is not well-established or even documented in Massachusetts, having important undefined terms, particularly in a very detailed statute, is dangerous. (The largely ignored reference to MGL c. 266 is an example of probably unintended meaning in MGL c. 93.) Although the effects might be abated (as to some extent provided in the draft) by limitations on the courts' power, the draft changes the common law exceptions to unenforceability of non-compete agreements to a validation of non-compete agreements that meet certain requirements -- including protection of "confidential information" and "good will" that are undefined. This is not a distinction without a difference: presumptions are changed (and that one purpose of the draft), and common law is overriden if not wiped out. If we want the legislature to say that "confidential information" and "good will" are to be considered as developed under case law, the legislation should so state explicitly.
In other states, there are full-time revisers of statutes and legislative drafting services that go through such matters carefully.
No need to beg. :)
But, we do disagree. The cases come out in different ways on the meaning of trade secrets and confidential information - as well as whether there is even a difference among them, and if so, what the difference is. That's why (for now) I think that it's easiest to reference the statute for trade secrets and back-fill with "confidential information." Given that "confidential information" is left to be interpreted by the courts, I doubt that the courts would simply ignore the extensive body of existing common law attempting to put meat on the bones of its meaning. In other words, I don't see that codifying existing case law in this regard imports additional significance to the terms used in those cases.
The same is true for goodwill. That said, note that the statute specifically references that it's only the employer's goodwill that's protected. There will always be (as currently exists) the factual question of whether the goodwill belongs to the employer or employee.
As a side note, one of the issues that we had in drafting the bill was to avoid unnecessary complexity. If the trade secret bill passes, that can certainly help to clarify this issue, but of course, the legislature has not passed the bill yet, despite the bill having been presented previously. I would be hesitant to circumvent that (presumably intentional) decision by proposing the equivalent definition in this bill, which, albeit related, is targeted to something different.