Legislator Drafting Bill to Outlaw Non-Compete Agreements in Massachusetts

12/16/08Follow @wroush

Many Massachusetts companies require new employees to sign agreements saying that if they leave, they won’t go to work for a competitor for at least a year. The idea behind these non-compete agreements is to prevent a company’s competitors from gaining access to trade secrets and key personnel. But there’s a growing chorus of entrepreneurs, venture investors, labor-rights activists, and others saying that the agreements are unfair to employees. They not only make it harder for workers to switch jobs, the argument goes, but they retard innovation, and make Massachusetts a less attractive place to work than California, where a statute makes non-competes illegal and employees can switch employers and start new companies at will, as long as they respect traditional confidentiality agreements.

Now the debate is about to make its way anew to Beacon Hill. State Representative Will Brownsberger of Massachusetts’ 24th Middlesex district, which includes Belmont, north Cambridge, and east Arlington, says he plans to introduce a bill in the upcoming legislative session that would abolish non-compete agreements in the Bay State.

Brownsberger says he’s primarily interested in shielding average laborers from the effects of the agreements. Often, he says, these are low-level service workers such as telephone representatives who probably don’t have any valuable trade secrets, but are nonetheless prevented by the agreements from seeking other positions inside their industries. “I’m concerned that these agreements are often entered into by employees who are at a substantial bargaining disadvantage, and that they end up inhibiting those employees from making appropriate job changes,” Brownsberger told me yesterday.

But he says he also worries that non-compete agreements in Massachusetts may steer talented engineers and other innovators toward other states where they feel they will have more freedom to pursue their work. “I am concerned that these agreements in Massachusetts may be a barrier to recruitment of the best technology talent,” he says.

Brownsberger is drafting the bill—which he plans to file in the Massachusetts House of Representatives in mid-January—with help from employment lawyers and from Caroline Huang, a Belmont resident and speech scientist who has become active on the issue recently. “I’ve always felt it was unfair,” Huang says. “I approach this as a labor rights issue.” (Caroline Huang is the sister of Greg Huang, who is Xconomy’s Seattle editor.)

Huang says she first encountered a non-compete agreement back in 1990, when joining her first employer, Dragon Systems. (The maker of a well-known speech recognition system called NaturallySpeaking, Dragon was later acquired by Lernout & Hauspie, whose assets were eventually acquired by ScanSoft, which later changed its name to Nuance.) “It bothered me, because I was worried about getting my next job,” says Huang. “We are very specialized in my field, being speech scientists, and we need to work in speech. I signed it, but my recollection is that I felt very boxed in.”

And, in fact, the non-compete agreement came back to haunt her. After leaving her position at Dragon, Huang went without work for several months, then took a job at a text processing company rather than risk violating the agreement by looking for work with other speech companies. “The agreement seemed very broad, and I was in no mood to see where the limits were,” she says. “They were telling me that I could not work for a direct or indirect competitor, whether it was for compensation or not, in any business that competed with their current business, even with a business being planned. It was very hard to tell what was still in speech that would not have fallen under this.”

Much later—last fall, in fact—Huang says she began to notice that other people were talking and writing about the effects of non-compete agreements. One of these was Bijan Sabet, a general partner at Boston’s Spark Capital who believes the agreements hurt business in Massachusetts; a year ago, Sabet announced that Spark was dropping its old requirement that portfolio companies make their employees sign non-competes, and he urged other Massachusetts venture firms to do the same. (We ran an interview with Sabet on the subject in December 2007.)

“It interested me that a prominent person was against non-competes,” Huang says. Separately, Huang says, she and her Belmont neighbors had been working with Brownsberger on a local environmental issue. “Through that, I saw how the legislative process works, and I thought, ‘Okay, I think something can be done about this.’

The bill Huang and Brownsberger are writing would outlaw non-compete agreements in new employment contracts in Massachusetts. It wouldn’t pertain to mergers, acquisitions, or other situations where competition becomes an issue, and it wouldn’t be retroactive. And it would do nothing to change the law regarding the other trade-secrets protections companies employ, such as non-disclosure agreements.

The bill will have several co-sponsors, according to Brownsberger. Once it’s filed, it will likely be referred to the House Committee on Labor and Workforce Development, which would then be required to schedule a hearing. “That will occur sometime in the spring, probably,” Brownsberger says.

The hearing would be an opportunity for all stakeholders to say their piece about non-compete agreements—including, perhaps, some of the large local companies such as EMC that have attempted to enforce them against former employees in court. “They will certainly have the opportunity to talk—that is the way the process unfolds,” says Brownsberger. “One of the fair questions has to be whether employers can adequately protect their intellectual property using various dedicated tools that are specific to that purposes, such as trade secrets laws, confidentiality laws, and patent and copyright laws,” or whether non-compete agreements are also needed.

Interestingly, however, none of the companies invited to defend non-compete agreements in a Harvard Law School debate on the subject last June actually made an appearance, according to a post on the event by Scott Kirsner.

“We want to have that debate,” says Huang. “We hope it will be civil. We really do care about protecting [employers'] legitimate interests. But I see this as protecting employees’ interests.”

After the hearing, the labor committee would then decide whether to recommend the bill to the full House of Representatives for a vote. But that process could stretch well into 2009, Brownsberger says.

Huang says she has been keeping Bijan Sabet at Spark up to date about her work on the bill with Brownsberger. Sabet is traveling this week, but I reached him by e-mail to get his opinion about the prospect of legislative progress on the issue. He says that he hasn’t yet read the draft bill, but that he is generally in favor of a change in Massachusetts law on non-competes.

“We need a law to match the California statute,” Sabet says. “We need a level playing field for innovation. Now more than ever.”

Wade Roush is Xconomy's chief correspondent and editor of Xconomy San Francisco. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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