Compromise Bill Would Allow, But Scale Back, Noncompete Agreements in Massachusetts

7/20/09Follow @wroush

A new draft bill that would limit but not outlaw noncompete agreements in employment contracts in Massachusetts is being floated by two members of the state’s House of Representatives.

The bill combines elements of separate bills introduced earlier this year by Representatives William Brownsberger of the 24th Middlesex district and Lori Ehrlich of the 8th Essex district. Brownsberger told Xconomy this morning that the new bill is intended in part to head off objections among business leaders to his earlier bill, which would have outlawed noncompete agreements altogether.

Many employers in the state believe that noncompete agreements are needed to keep employees from leaving with company secrets and starting directly competitive businesses. Some venture capitalists and technology executives, on the other hand, argue that the agreements punish budding entrepreneurs and harm the local economy, by forcing employees either to stay with their current companies and forego starting new ventures, or to abandon Massachusetts for places like California, where noncompete agreements are unenforceable.

The compromise bill, which adopts much of the language in Ehrlich’s first bill, will likely be heard by the House Committee on Labor and Workforce Development this fall. Unlike Brownsberger’s original proposal, it allows companies to require workers to sign noncompete agreements as a condition of employment. But it creates incentives for employers to limit the terms of these agreements to 6 months, down from the 12 months in typical employment contracts today. It also cuts out restrictions that judges in contract dispute cases might see as overreaching—and it automatically awards attorneys’ fees to employees in such cases.

For employees who make less than $100,000 a year but more than $50,000, the bill limits the acceptable rationale for enforcing noncompete agreements to just two: protecting trade secrets or confidential information. And for employees who make under $50,000 a year, the bill makes noncompete agreements unenforceable for any reason.

At this point, Brownsberger’s earlier blanket proposal to outlaw noncompete agreements—a proposal endorsed by a coalition of venture capital partners, company executives, and industry associations—would seem to be dead in the water. But the new proposal would still bring significant changes to Massachusetts employment law, and probably has a much greater chance of surviving the coming legislative debate.

“We got a very positive response [to the earlier bill] from the VC community and from employees who had had bad experiences, but we got a very negative response, particularly from smaller businesses and many of the smaller high-tech companies,” Brownsberger says. “Companies are very emotional about this issue and feel very strongly that we were taking away from them protections that are vital to their survivability. So we listened carefully to those concerns and attempted to craft a bill that would improve the venture climate, provide employees with some real relief from overreaching noncompete agreements, yet at the same time allow businesses—particularly small businesses—to protect what they feel is vital to their survival.”

The Brownsberger-Ehrlich bill appeases employers by preserving most of the existing legal levers available to them when enforcing noncompete agreements in court. A noncompete agreement should be seen as valid, the bill says, whenever it’s needed to protect an employer’s trade secrets, confidential information such as product development plans and marketing strategies, or “goodwill,” meaning customer relationships.

But there are exceptions in the bill: the goodwill argument can’t be applied to employees making under $100,000, and employees making under $50,000 are exempted altogether. To keep employers from imposing draconian terms, the bill would award attorney’s fees to employees in any cases where a judge finds that the employer has overreached. And the bill explicitly scraps a legal argument sometimes used to keep ex-employees from going to work for competing companies, even in the absence of a signed noncompete agreement: the “inevitable disclosure doctrine,” under which courts presumed that any departing employee would betray trade secrets.

“What we’ve done in the final legislation is give employers very strong incentives to draft only the most reasonable noncompete agreements,” says Brownsberger, who represents a district including Belmont, north Cambridge, and east Arlington. What’s considered reasonable? The bill spells that out, too: “Number one, they can be no more than 6 months in duration,” Brownsberger says. “Number two, they have to be limited in geographic scope to where the employee was actually working. Number three, they have to be limited to the kinds of work the employee was actually engaged in.” (The bill defines a reasonable geographic scope as the “area in which the employee provided services or had a material presence or influence.”)

Brownsberger says he’s gotten an earful of feedback since beginning his effort to roll back noncompete agreements, and apparently some of it has stuck. For example, he says he’s now skeptical of the argument that California is a comparative haven for entrepreneurship simply because its courts have held noncompete agreements to be unenforceable. “There’s a little bit of a fiction there,” he says. “What a couple of different attorneys have said is that what happens in California is simply that people rely on other protections. It’s like a balloon between squashed down in one area—it comes up elsewhere, with more aggressive trade-secrets and confidentiality enforcement.”

So far, few people in Massachusetts have spoken out publicly either in support of existing employment law or in opposition to Brownsberger and Ehrlich’s bills. (One exception: Akamai CEO Paul Sagan, who called the argument over non-compete agreements a “red herring” at a June meeting of Governor Patrick’s IT Collaborative. “I’ve seen no data that indicates [noncompete agreements] retard growth,” Sagan said. “Emotional arguments, but no data.” Patrick himself has not taken a definite stance on the issue. “I don’t have a stake in the status quo,” he told Boston Globe columnist Scott Kirsner, who buttonholed him after the meeting.)

But legal experts I’ve spoken with suggest that there are significant forces in the state opposed to any tempering of the law around noncompete agreements, and that these parties are merely biding their time, waiting to see whether Brownsberger and Ehrlich’s efforts gain any real steam on Beacon Hill before they step in.

Brownsberger certainly expects more pushback as hearings on the bill approach. “There will inevitably be people on all sides of the process who feel that we should do more or less than what we’re doing,” he says. “We’re trying to strike a balance and do the best thing for the state as a whole, but I have no doubt whatsoever there will be continued opposition to this bill, and we will continue to listen to that opposition and address concerns.”

Brownsberger will be among the panelists at a Boston Bar Association symposium on noncompete agreements at 4:00 p.m. this Wednesday in Boston. The event is open to the public.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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