The competitive landscape in Massachusetts will become more challenging for many employers if a new bill on employee non-competition agreements (“non-competes”) becomes law.
The proposed legislation, filed Jan. 20, would restrict Massachusetts employers’ ability to enter into non-competes and would discourage employers from enforcing them.
Employers’ interests relating to non-competes are not always uniform. Employers who use non-competes do so because they protect core business interests, including trade secrets, confidential information and goodwill in ways not achievable through employee non-disclosure and non-solicitation agreements. While the new draft legislation arguably is more balanced than a non-compete bill filed – and then withdrawn – last year, it nevertheless tilts decidedly in favor of weakening the restrictions on employees’ mobility.
Above & Beyond
In some areas, the new bill only codifies existing case law. Non-competes still would be enforceable only to the extent necessary to protect a company’s trade secrets, other confidential information and goodwill. Non-competes still would have to be reasonable in duration, geographic reach and scope of restricted activities. Courts still would have discretion to refuse to enforce such agreements or to revise their provisions to cure deficiencies and make them enforceable.
In other ways, the new bill would clarify the law. It would, for example, end some of the uncertainty in Massachusetts case law by definitively rejecting the “inevitable disclosure” doctrine. This rule holds that, in certain circumstances, a former employee who has not signed a non-compete can be prevented from working for a competitor merely because such employment inevitably would lead to the disclosure of trade secrets or confidential information. This provision in the new bill, however, would not limit an employer’s right to seek an injunction against an employee who has disclosed, threatens to disclose, or is likely to intentionally disclose trade secrets or other confidential information.
The new bill also goes significantly beyond present law, and is contrary to present law, in other respects.
It establishes parameters for determining whether duration, geographic scope, and scope of restricted activities are reasonable. For instance, it generally limits non-competes to no more than one year in duration, unless the employee is covered by a garden leave provision (in which the employer provides a continuing compensation during the restricted period).
The bill also states that the duration is “presumptively reasonable” if it lasts no more than six months. Courts routinely find under current law that businesses are reasonably entitled to have significantly longer periods of protection. Thus, by establishing rigid parameters, the new bill takes a “one size fits all” approach that ignores business realities now being recognized under current law.
Power Shift
The bill also singles out the economic circumstances of the employee and the economic impact on the employee as factors courts “shall” consider in deciding whether to enforce or revise a non-compete. By codifying these particular “David versus Goliath” means of analysis, the bill arguably goes beyond equity considerations informing current law; elevates employee circumstances over the reasonable business needs of the employer; and makes it more likely that the legitimate contractual expectations of private parties will be negated.
Under current law, each party is generally responsible for paying its own attorneys fees and costs. The new bill would lower the bar for awarding attorneys fees to employees. Under the new bill, an employer could prevail at the injunction level (for example, establishing the reasonableness of preventing an employment with a competitor) but still have to pay the employee’s attorneys fees if a judge reduces the duration of the non-compete from 12 to eight months. For many small companies, this risk of having to pay the employee’s attorneys fees could be a significant deterrent to seeking to enforce the non-compete. And as enforcement becomes more expensive, many employers may decide to abandon the use of non-competes entirely.
Also of concern is that changes in the law could go well beyond the statutory provisions of the bill. For example, while the bill says it does not apply to non-competes entered into before 2012, the reality is that judges, in some cases, will have to take account of the new law in evaluating older non-competes. As a matter of equity, it would be difficult to hold similar employees of the same company to non-compete agreements of very different durations.
Employees can easily walk away from their jobs with thousands of pages of confidential company information on a flash drive attached to a key chain. This makes it more important than ever that companies have reasonable tools for preventing trade secrets and other proprietary information from falling into the hands of competitors.
Massachusetts courts already have equitable powers sufficient to protect all interests in a non-compete dispute. This new bill unnecessarily restricts an important legal tool for protecting important legitimate business interests and shifts the balance of power considerably.
David C. Henderson is a partner in the litigation department and a member of the labor, employment, and Benefits practice group at Boston law firm Nutter McClennen & Fish LLP. He can be reached at dhenderson@nutter.com.
