History

A History of The Massachusetts Legislature’s Efforts Concerning Non-Competes and Other Forms of Post-Employment Restrictive Covenants

There has been a flurry of activity on Beacon Hill in recent years concerning the law of post-employment restrictive covenants in Massachusetts. Many Massachusetts companies are familiar with the use of non-competes, particularly when it comes to the employment of sales personnel. And Massachusetts law has for well over a century favored the enforcement of well- crafted non-competition agreements. Since 2009, however, there has been some willingness within the Massachusetts Legislature to completely revamp the existing non-compete legal landscape. Several proposed bills have sought to bring sweeping changes in the law of non-competes, as well as other post-employment restrictive covenants. These efforts within the Legislature have  in essence attempted to move Massachusetts more in the direction of California when it comes to the enforceability of non-competition agreements. Although stopping short of California’s complete ban of non-competes, the Massachusetts legislative proposals would certainly result in the creation of barriers to enforcement which many businesses may not be able to overcome.

For example, on January 5, 2009, House Bill No. 1794, “An Act To Prohibit Restrictive Employment Covenants,” was introduced in the Massachusetts House of Representatives.[1]  The Act proposed to amend Section 19 of Chapter 149[2] of the General Laws by adding the following paragraph:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

HO 1794. This simple paragraph inserted into the General Laws of the Commonwealth would have effectively brought to an end the enforceability of any type of post-employment restrictive covenant, effectuating a sea change in the present state of the common law. The broad proscriptive language would have outlawed not only non-competition agreements, but also other forms of post-employment restrictive covenants such as non-solicitation agreements and anti-piracy agreements.  Under this formulation, one could easily argue that a non-solicitation agreement prohibiting a former employee from contacting the customers he serviced at his prior workplace would be illegal, since it arguably “impairs … a person’s ability to seek, engage in or accept” employment.

On January 13, 2009, an “Act Relative to Non-Compete Agreements,” House No. 1799[3] was introduced during the same legislative session.  This bill deals only with non-competition agreements, and no other form of post-employment restrictions.  Nevertheless, HO 1799 established certain bright-line enforceability rules not currently found in the common law of Massachusetts.  For instance, Section (c) prohibits the enforcement of a non-competition clause against an employee “whose annual gross salary and commission, calculated on an annual basis at the time of the employee’s termination, is less than $100,000[.]”  Also, HO 1799 prohibited non-competition provisions extending beyond 2 years.  The Act also allowed for garden leave provisions, but only if the employer paid the ex-employee the greater of: 50% of the employee’s annual gross base salary and commissions, or $100,000. Clearly, this was a high price to pay in order to protect one’s intellectual property and customer goodwill.

Both Acts would have altered considerably the existing “non-compete” jurisprudence in Massachusetts, particularly for employers who rely on post-employment restrictive covenants to protect customer goodwill, and to minimize the possibility of unfair competition by former employees.  Several business interests in Massachusetts, such as the Smaller Business Association of New England (“SBANE”) and Associated Industries of Massachusetts (“AIM”), weighed in on these legislative formulations, characterizing them for the most part as too “employee biased.”[4]  Subsequently, a new formulation of “An Act Relative to Non-Compete Agreements” appeared late in 2009 as a “compromise bill.” It called for the following minimum requirements for enforceable non-compete agreements:

  • the agreement must be in writing and signed by the employee and the employer;
  • must apply only to employees making more than $75,000 annually;
  • can only be of one (1) year’s duration;
  • must be provided 7 business days before commencement of employment;
  • makes additional consideration in the amount of 10% of the employee’s compensation presumptively reasonable where a non-compete agreement is put before an employee after the commencement of employment.

Such bright-line rules for enforceability do not exist in the present common-law jurisprudence. They are clearly meant to establish baseline legal requirements, and also impose certain employer costs of enforceability which presently do not exist. Perhaps the most controversial aspect of HO 1799 is its attorney’s fees provision.  The Act calls for the mandatory award of attorney’s fees to the employee even in cases where the employer was successful in Court in enforcing the non-compete provision. This provision is contrary to the long-standing and well-recognized “American Rule” which requires litigants to bear their own costs and expenses, irrespective of outcome.

In October 2010 the Joint Committee on Labor and Workforce Development held the requisite public hearing on the latest formulation of the HO 1799. The author testified at the hearing along with various other business owners who felt essentially that the bill as formulated would weaken the business climate in Massachusetts by making it more difficult and expensive for businesses to protect customer goodwill and other proprietary matter. The bill was reported favorably out of committee, but was not taken up by the full Legislature.  Accordingly, the Act and its various formulations effectively died at the end of the 2010 legislative session.

The 2011-2013 legislative session saw the introduction of yet another round of bill proposals regarding restrictive covenants. On January 20, 2011, “An Act Relative to Noncompetition Agreements,” was reintroduced in the Massachusetts House of Representatives as HO 2293. [5] The mandatory minimum salary requirement was eliminated, as was the 10% payment as presumptively adequate consideration when a non-compete agreement is presented to an employee after commencement of employment.  The new version of HO 1799 also recognizes garden leave provisions.  The mandatory attorney’s fees provision remains in place as a substantial “wild card” and deterrent concerning enforcement actions.  On January 21, 2011, “An Act Relative to the Prohibition of Noncompetition Agreements”[6] was filed with the Massachusetts House as HO 2296.  This proposal is very simple in formulation but profound in impact – should it become law.  It provides in pertinent part:

Except as provided in this Section, any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade or business of any kind is deemed unlawful.

The language of HO 2296 is similar to that of HO 1794 introduced in 2009.  In a way, HO 2296 “was déjà vu all over again,” as it more or less mirrored the restrictions set forth in HO 1794 which began the legislative foray into this area back in January 2009. It would serve effectively to outlaw in Massachusetts most forms of post-employment restrictive covenants.

Both HO 2293 and HO 2296 have been assigned to the Joint Committee on Labor and Workforce Development.  Public hearings on these bills are expected to occur in the fall of 2011.

Since their initial appearance in 2009, these bills have been touted as “job creation” mechanisms, the argument being that prohibiting non-competes would allow for greater employee mobility and therefore increased hiring.  A 2009 study of the effect of non-compete agreements on the biotech industry, however, reached a very different conclusion:

Our results suggest that the legal structure in California that places no restrictions on post-employment activities hinders firm’s research and development activities.  We believe this occurs because firms cannot protect the tacit knowledge held by employees.  We also considered the issues of whether legal structure was more important to younger and smaller firms.  Our results here suggest that smaller firms are particularly affected by the legal structure in California.  The results clearly highlight the importance of legal structure when firms are particularly reliant upon competitive advantages based upon tacit knowledge.

See Non-Competition Agreements And Research Productivity in the Biotechnology Industry, Cooms and Taylor (University of Richmond, 2009).  An earlier study from 2000 compared the legal environment of Silicon Valley, California, where non-competes are illegal, to that of other high-tech areas such as Route 128 in Massachusetts, North Carolina’s Research Triangle, and Austin, Texas.  This study found no “growth-stifling effects” of non-competes in the geographic areas which enforce them:

There is no doubt that Silicon Valley has experienced unmatched success over the last few years, but when data reflecting the success of the four regions is adjusted to measure the successes of the four regions in relative terms, it seems clear that all four areas are experiencing very high rates of growth, in terms of the number of new technology-related businesses, the amount of venture capital investment, and the number of venture capital transactions.  In short, all four are high technology boomtowns.  If there is validity [to the] theory that California’s prohibition of noncompetition clauses in employment agreements was a critical factor in the development of Silicon Valley culture and its associated success, then one would expect the four regions’ levels of success, as measured by growth in the high technology and emerging companies sector, to correlate in some fashion with the extent to which each region tends to enforce such covenants.  Unfortunately, the available data for the last few years does not seem to correlate with each region’s law in such a fashion: despite significant legal differences between the regions, they all seem to be experiencing phenomenal growth and success.

See A Comparison of the Enforceability of Covenants Not to Compete and Recent Economic Histories of Four High Technology Regions, Woods, 5 Va. J.L. and Tech. 14 (2000). A look at the unemployment figures for these regions also tends to negate any purported connection between the prohibition of non-compete agreements and job creation.  For example, in May 2011 the unemployment rate for Silicon Valley was 9.7%.  During the same time period unemployment in Massachusetts was 7.6% and in the Research Triangle, 7.5%.  The statistics for 2010 were even more disparate (see Exhibit 5 hereto). The statewide unemployment rate in California as of June 2010 was 12.3% and in Silicon Valley 11.8%, much worse than the national average of 9.7%.  In Massachusetts – where non-competes are routinely enforced – the unemployment rate for the same time period was 9.1% statewide. In the Research Triangle (North Carolina) the unemployment rate in 2010 was 8.0% – much better than the national average at that time.  North Carolina also enforces non-competes. (Source: U.S. Bureau of Labor Statistics).   

In July 2014, at the very end of the last full two-year legislative session, the Massachusetts Senate passed an economic development bill (S. 2241) which had buried deep within it a non-compete “reform” measure which would have made it much harder for employers to enforce such restrictive covenants. Then Governor Duval Patrick had filed “An Act to Promote Growth and Opportunity,” in April 2014, later denominated HO 4045. Section 53 of the Act proposed adoption of the Uniform Trade Secrets Act. The same section contained the following language:

Any written or oral contract or agreement arising out of an employment or independent contractor relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after and employment or independent contractor relationship has ended, shall be void and unenforceable with respect to that restriction. (Emphasis added.)

HO 4045 (lines 1239 – 1243). The Act exempted from this proscriptive language “covenants not to solicit or transact business with customers of the employer,” as well as non-compete covenants attendant to the sale of a business. The Act also expressly provided that it was to apply retroactively to all such agreements, “including those executed before the effective date” of the Act.  The House of Representatives subsequently filed its own version of an economic stimulus bill (HO 4181) in response to the Governor’s which did not include any language relative to non-competes. The Senate actually passed its version of a stimulus (S. 2241) which included a comprehensive revamping of the Massachusetts non-compete law. The Senate bill declared a six month non-compete periods presumptively reasonable, as well geographical restrictions limited to the area in which the employee worked within the last two years of employment. The Senate bill also contained an “escape clause” which would allow a reviewing court to decline to enforce an otherwise valid non-compete “if necessary to prevent injustice or an unduly harsh result, including those arising from the employee’s economic circumstances[.]” This “Massachusetts noncompetition agreement act” was not contained in the final economic stimulus bill which passed both the House and the Senate, and subsequently landed on the Governor’s desk, and was signed into law. This was the first time in Massachusetts history, however, where a so-called non-compete reform bill actually passed in one of the branches of the legislature.

Part of the reform bill included the following section:

(d) Notwithstanding anything to the contrary in this section, a court may, in its discretion, reform an employee noncompetition agreement so as to render it valid and enforceable, provided, however, that a court may reform the duration, the scope of proscribed activities, and the geographic reach only if the provision to be reformed was either presumptively reasonable as set forth above or the employer made objectively reasonable efforts to draft the particular provision so that it would be presumptively reasonable as set forth above. Further, a court may decline to enforce some or all of the restrictions in an otherwise valid and enforceable employee noncompetition agreement where necessary to prevent injustice or an unduly harsh result, including those arising from the employee’s economic circumstances, or based on any other common law or statutory legal or equitable defense or doctrine.

This section would have made it nearly impossible to predict whether any given non-compete agreement between two private parties would be enforced in court should the signatories wind up there. What constitutes preventing “injustice” or an “unduly harsh result” in any given enforcement case is any one’s guess. Our courts already possess tremendous equitable powers in this respect. I recently had a non-compete enforcement case where the contract at issue called for a two year non-compete period, and an all-New England geographical scope. After hearing the evidence in the form of affidavits, the court enforced the non-compete against a former sales employee, but limited the period to one year, and cut the geographic scope back to one state only. The court felt that these new parameters were enough to protect the goodwill of the business seeking full enforcement of the contract’s terms.

In the current Legislative Session (2015 -2017), several “non-compete bills” have been filed and are now pending. One Senate version (S. 957; Docket No. 809), filed on January 15, 2015, provides for a complete proscription of non-compete covenants:

Any written or oral agreement arising out of an employment or independent contractor relationship that prohibits, impairs, restrains, restricts or places any condition on a person’s ability to seek, engage in, or accept any type of employment or independent contractor work, for any period of time after an employment or independent contractor relationship has ended, shall, to that extent, be void and unenforceable.

S. 957, Lines 4 – 8. This language would effectively eliminate the use and enforcement of non-compete agreements in their entirety within the Commonwealth. The proposed statutory language would not affect “covenants not to solicit or transact business with actual or prospective customers, clients, or vendors of the employer[.]” Nor would it impose any restrictions on nondisclosure agreements or noncompetition agreements  made in connection with the sale of a business, where the person subject to the restrictions is at least a ten percent owner “who received significant consideration for the sale[.]”

The House counterpart to S. 957 contains the exact same proscriptive language. H. 1701 was filed on January 15, 2015, as House Docket No. 2332. There is also pending in the House of Representatives a bill – H. 1761 – which provides that “any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade, or business of any kind is deemed unlawful.” H. 1761, Lines 18 -20. This version also contains exceptions where the sale of a business is concerned. H. 1719 contains the same prohibition against non-competes.

Also pending this legislative session is S. 169 entitled, “An Act to protect trade secrets and eliminate non-compete agreements.” (Senate Docket No. 334 filed January 14, 2015). The proposed legislation is a form of the Uniform Trade Secrets Act. Section 11 of the proposed legislation contains the same language as S. 957 cited above which in essence puts an end to non-competes in Massachusetts. The proposed trade secrets act also contains several provisions which set much higher barriers for trade secret protection than does the uniform law which has been adopted in most states.

 

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Footnotes:

[1] House Docket No. 385

[2] Section 19 of Chapter 149 provides: “No person shall, by intimidation or force, prevent or seek to prevent a

person from entering into or continuing in the employment of another person.”

[3] House Docket No. 1078

[4] The author served as Chairman of SBANE from October 2009 – October 2011.

[5] House Docket 02018

[6] House Docket 02713