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Yesterday, I attended a panel presentation at the Boston Bar
Association on the status of noncompete legislative reform in
Massachusetts. As Michael Rosen has discussed in numerous
prior posts on this blog, recently there has been a push to limit
noncompetes in order to increase employee mobility and
productivity, led by state Rep. Lori Ehrlich (D-Marblehead) and
state Sen. William Brownsberger (D-Belmont). The presentation
was designed to update the legal community on the movement.
At the presentation, Professor Matthew Marx of MIT summarized
his research into the impact of noncompetes on economic
activity. He studied the case of Michigan, where noncompetes
became enforceable in 1985 after a long period when they were
not. According to his research, the public firms in Michigan
initially did quite well after noncompetes became enforceable, but
the gains did not last. The firms failed to innovate because
they had a harder time getting "new blood" and talent
from competing firms. He concludes that noncompetes lead to
less employee mobility and exchanges of ideas.
Rep. Ehrlich then talked about how, because noncompete reform is
a controversial topic, it likely will not be taken up again before
the end of the year. She promised to file legislation in the
next session (2013), which perhaps will combine noncompete reform
with trade secret legislation (a topic I previously discussed
here).
Russell Beck, an attorney in Boston who has helped Rep. Ehrlich
draft noncompete legislation, then discussed the differences
between reform proposals and current law. Interestingly, the
latest reform proposals would not affect nonsolicitation agreements
(of customers or employees), confidentiality agreements, or
invention-assignment agreements. But the proposed legislation
would require an employer to give advance notice to employees of
the noncompete agreement before making the employee sign it and to
allow the employee to obtain counsel. One version of reform
(the "pending bill") also would require an employer to
pay the employee's attorney's fees if the employer (1) acts
in bad faith; or (2) is unsuccessful in enforcing the noncompete
because either the court does not enforce it or the court
substantially reforms a material restriction in it. The
pending bill would limit noncompetes to a duration of one year with
a presumption that six months is a reasonable length of
time. The pending bill would also allow up to two years of
"garden leave" (i.e., the employer pays the employee not
to work for a competitor after the employee leaves), and would
require that the space and scope of agreements be
"reasonable." Provisions restricting an employee
from competing in the geographic area where the employee provided
services for the employer and from doing the same type of work the
employee did for the employer at some point during the past two
years would be presumed reasonable. A pared-down version of
the pending bill (the "modified bill") would carry these
same presumptions but would limit the duration of noncompetes to
six months (but would allow them to last up to two years in
separation agreements).
Andrew Botti, an attorney in Woburn, Massachusetts who formerly
was chair of the Small Business Association of New England,
discussed the potential negative impacts of reform on
businesses. It would cost businesses money to adjust to any
new law. Many in the business community also believe that the
one-year or six-month time limits in the legislation are too short,
and that the attorney's fees provisions will cost businesses
during a time when the economy is already slow. In an
environment where many businesses find patents to be too
complicated and expensive to obtain, they are relying on trade
secrets more and more for protection of their intellectual
property, and confidentiality agreements are not enough for
protection. Overall, he thought the fact that California's
unemployment rate (where noncompetes are not enforceable) is much
higher than Massachusetts's unemployment rate was telling.
I think the take-away from this presentation is that the reform
movement has been met with substantial resistance, but it is not
going away. "California-style" reform, which would
eliminate all noncompetes for employees, is not likely to be the
focus in the Massachusetts legislature in the near term, but more
moderate change like that outlined above might be coming soon.
To view Foley Hoag's Massachusetts Noncompete Law
Blog please click
here
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