Noncompete agreements are little more than memory in several states, including California and Colorado. Legislative measures there have all but eradicated employment agreements that restrict an employee's ability to work for a competitor after leaving his or her job. These states view noncompetition agreements as unfair restrictions on trade that are against public policy. They also contend that noncompetes stifle creativity and innovation because employees cannot leave their employer and "create" the new thing. This is the backbone of the law in California, which is home to Silicon Valley giants like Apple, Google, and Facebook. Recently, Massachusetts Governor Deval Patrick introduced similar legislation that would eliminate most noncompete agreements here in the Commonwealth. Governor Patrick claimed the law will significantly benefit employees in the technology and life science fields. However, the proposed legislation has far broader implications.
Current state of the law
In Massachusetts, noncompete agreements are difficult to enforce – but not impossible. Courts will honor narrowly crafted agreements that are reasonable in duration and geographic scope, i.e., for a reasonable period of time and in a reasonable geographic area. The agreement also must be necessary to protect legitimate business interests, such as guarding confidential business information or customer goodwill. Practically speaking, no matter how reasonable and narrow in scope, noncompete agreements are costly to enforce if the departing employee decides to fight back, and the matter ends up in litigation. Over the last few years, various versions of noncompete legislation have floated around the legislature, but none have gained significant attention from the Governor's Office.
Proposed legislation
The new legislation introduced by Governor Patrick would abolish traditional employee noncompete agreements, with some exceptions. The proposed law is somewhat buried in a larger bill – the Growth and Opportunity Act of 2014 – which is aimed at economic growth in the Commonwealth.
The proposed law prohibits any employment agreement that restrains an employee's ability to seek employment following the termination of his or her employment or independent contractor relationship. There is no exception for highly compensated employees or management/executives, as is the case in some other states that have enacted similar legislation. Previous noncompete bills filed in Massachusetts included exceptions like these, but those exceptions are absent from the pending legislation.
Some restrictions untouched
The proposed law does permit some post-employment restrictions. First and foremost, nonsolicitation agreements and covenants not to hire are not affected by the legislation. This means employers will still be able to prevent employees from poaching their clients if the agreement includes a nonsolicitation provision. Similarly, businesses can continue to prohibit a departed employee from soliciting or hiring his former co-workers after he leaves. The proposed legislation also permits noncompetition agreements that are part of the purchase and sale of a business, or substantially all of the businesses assets, if the person whose future employment opportunities are restricted owns at least 10 percent of the business that is being sold. Agreements that restrict employee dissemination of trade secrets and confidential information, commonly referred to as nondisclosure agreements ("NDAs"), are also not impacted by the legislation. Finally, forfeiture-for-competition agreements, where an employee agrees to waive her right to certain compensation if she competes with her former employer (such as giving up the right to a stock incentive or some other type of deferred compensation) are also permissible under the proposed legislation.
Legislative hoops
Governor Patrick's proposed bill still needs to pass through the legislative committee process and be passed by both the House of Representatives and the Senate before the Governor can sign it into law. However, on April 29, 2014, the Massachusetts Legislature's Joint Committee on Labor and Workforce Development favorably reported out a bill that was very similar to Governor Patrick's. This may be a sign that noncompetition legislation will make it through the legislature this year. The legislative session ends on July 31, 2014, so stay tuned for developments.
Bottom line
Employers need to be aware that noncompetition agreements are under attack here in the Commonwealth. Even if this new round of legislation does not become the law, courts are routinely finding new ways to invalidate these types of agreements. However, nonsoliciation, nondisclosure, and no hire agreements are safe and, traditionally, more favorable in the eyes of a court because they don't prohibit someone from actually working for a new employer. Instead, these agreements simply place a restriction on certain types of post-employment conduct, such as sharing confidential information or poaching clients of the former employer. You may want to consider converting your existing noncompetition agreements into nonsolicitation/nondisclosure agreements, if such an arrangement will adequately protect your business interests. If you need assistance revising or enforcing employment agreements, contact experienced labor and employment counsel to guide you through the process.
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