Legislative Initiatives

Beacon Hill Buzz:

Non Compete Act thumbnail

Massachusetts  Noncompetition Agreement Act

–5/17/2016:HO Bill 1701

Out of the Joint Committee on Labor and Workforce Development has come the proposed “Massachusetts Noncompetition Agreement Act,” which would be an amendment to Chapter 149 of the General Laws.

The major provisions are as follows:

  • the non-compete must be provided to the employee with a formal offer
    of employment or 10 days before employment, whichever is earliest;
  • restrictive period of no more than 12 months;
  • requires that the non-compete contain a garden leave clause such that
    the employee will be paid for the duration of the restrictive period;
  • prohibits enforcement of non-competes against certain types of workers
    including those classified as nonexempt under FLSA, as well as employees
    that have been terminated without cause or laid off.

The proposed Act would also eliminate the Superior Court present ability to reform the given contract in such a way as to better fit its provisions to the situation at hand.

The Act does not apply to covenants prohibiting the solicitation or hiring of employees; covenants not to solicit a former employer’s customers; non-compete agreements tied to the sale of a business; and non-disclosure agreements.

The proposed bill would also adopt in modified form the Uniform Trade Secrets Act.

–In early March of 2016, the Massachusetts Speaker of the House, Robert DeLeo, revealed that the House plans to unveil so-called “non-compete reform” legislation sometime prior to the end of this legislative session.

Although the precise formulation has yet to be published, the Speaker laid out some parameters which the proposed bill will likely incorporate:

  1. non-compete periods shall not exceed 12 months;
  1. the employer must make any non-compete part of the initial offer of employment;
  1. complete ban of non-competes for “low wage” earners, anyone under 18 years of age, and for those fired without cause.

None of the above proscriptions currently exists under Massachusetts law. The biggest issue will likely be No.’s 1 and 3. The problem with No. 1 is that it assumes “one size fits all,” which is not the case. The problem with No. 3 is that the circumstances of termination should not dictate whether a lawful contract is enforceable. The threat to an employer’s loss of goodwill and trade secrets is not ameliorated by the circumstances of an employee’s departure.

Stay tuned for updates on this on-going issue.

Capitol Hill Buzz:

–5/16/16: “What’s Yours is Mine and What’s Mine is Mine” – The Defend Trade Secrets Act of 2016

General Provisions
On May 11, 2016, President Obama signed into law amendments to the Economic Espionage Act, 18 USC §1832 et seq. which added a civil component to what was formerly a federal crime, i.e., the theft of trade secrets. The new law – known popularly as the “Defend Trade Secrets Act of 2016” – authorizes a federal private right of action which carries with it a big stick – or big perhaps more accurately- a big hand! The Act authorizes the seizure of property consisting of misappropriated trade secrets by federal law enforcement officials under the auspices of the United States District Court.  The Act defines “misappropriation” as the acquiring of a trade secret by a person who knows the trade secret was acquired by improper means, i.e, theft, bribery, misrepresentation, or electronic espionage. The Act also defines misappropriation as the disclosure or use of another’s trade secret without consent by a person who used improper means to acquire knowledge of the trade secret.

Civil Seizure – The Big Hand
The most compelling provision of the Act allows for the ex parte seizure of property to prevent the dissemination of the misappropriated trade secret. Typically, when one goes to court seeking an injunction, the court will direct that the party against whom the injunction is sought be notified of the injunction hearing in advance so as to allow that party an opportunity to present evidence to defeat the requested injunctive relief. In “extraordinary circumstances,” the Act allows the District Court to issue an order directing law enforcement to seize the subject property without notice to the other side. The Court may only due so, however, if another form of equitable relief would be inadequate where its appears that prior notice to the party in possession would result in that party attempting to evade or avoid complying with the seizure order. Also, immediate and irreparable injury must be manifest without such an order, and the balance of harm for granting the order must weigh in favor of applicant. These legal standards are the ones required when seeking injunctive relief generally in state court.

Seizure Details
The Act requires that the seizure order itself direct that the seizure process per se minimizes any interruption to the business of third parties, as well as the legitimate business operations of the one accused of misappropriation. Also, the District Court order must inform law enforcement of the hours during which the seizure may occurred, as well as whether force may be used to access locked areas.

Hearing on the Seizure
Not later than 7 days after the seizure order has issued, the District Court must hold a hearing on same. The party who obtained the order has the burden of proving facts supporting the seizure.  The other side may, of course, set forth arguments against the justifications for the seizure order.  If it turns out the claim of misappropriation was made in bad faith, the District Court can award attorney’s fees to the prevailing party.

Recoverable Damages
In circumstances where the reviewing court deems injunctive relief to be inequitable, the court may fashion an injunction to allow for “future use of the trade secret upon payment of a reasonable royalty” for the period of time that unlawful use could have been prescribed.  Damages for actual loss may be recovered, as well as damages for unjust enrichment. Where a trade secret is willfully and maliciously misappropriated, exemplary damages of not more than 2 times the actual and unjust enrichment amounts may be awarded. The District Court may also award attorney’s fees to the party who justifiably seeks and obtains the seizure order.

Effect on Non-compete Agreements
The general remedies provision of the Act provides that the District Court may grant an injunction “to prevent any actual or threatened misappropriation,” as long as the order does not “prevent a person from entering into an employment relationship[.]” This provision has been interpreted as possibly preempting state law which currently allows for post-employment restrictive covenants, such as non-compete agreements. Enforcement of such agreements is typically accomplished via the seeking of an injunction in state court which prohibits the ex-employee from working for a direct competitor for the time period specified in the non-compete agreement. The Act, however, seems not to run contrary to this traditional state law contract-enforcement mechanism for several reasons. The Act expressly recognizes that an injunction may place “conditions … on such employment…based on evidence of threatened misappropriation[.]” The nature and extent of any such conditions specified in an injunction are not defined, and clearly left to the District Court’s broad discretion. Thus, in granting an injunction under the Act, the District Court may tailor an order which delays the start of employment for a specified amount of time – such as the amount of time set forth in a non compete agreement. After all, the word “prevent” means, “stop from happening” or “make impossible.” A time-limit condition would not stop or make impossible the subject employment relationship.

Construction with Other Laws
The “Defend Trade Secrets Act of 2016” expressly follows the rule of construction under §1838 of the Economic Espionage Act, to which it is now an amendment. That section states that the Act (now a part of Chapter 90 of Title 18, §§ 1831 – 1839) “shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by …State, commonwealth … law for the misappropriation of a trade secret[.]” Moreover, the Act itself expressly declares that it is not to be construed to “preempt any other provision of law.”  Thus, it seems that going to court to enforce the provisions of a non-compete agreement (which may cover confidential business information not rising to the level of a trade secret per se) via an injunction – a long recognized remedy – should not run afoul of the Act’s “employment relationship” provision.

–4/28/16: The U.S. House of Representatives voted 410-2 yesterday to approve the “Defend Trade Secrets Act” after being unanimously passed by the Senate earlier this month.  The legislation heads to the desk of President Obama.  Click here to read an overview of the law.

HR 3326 – to amend chapter 90 of title 18, United States Code, to provide Federal jurisdiction for the theft of trade secrets, and for other purposes.

–A form of H.R. 3326 (filed July 29, 2015) entitled “Defend Trade Secrets Act” is scheduled to come up for a vote in Congress soon. The Senate version is S. 1890.

The bill allows for certain equitable remedies (already available at common law), as well as the award of money damages for trade secret theft. The bill gives a trade secret owner a private right of action or ability to sue in federal court for the theft of a trade secret. Presently, there is no federal statute which allows for such a civil action.

Interestingly, the bill expressly allows for an ex parte seizure order – in extraordinary circumstances. Such an order can be asked of the court without notice to the offending party.  According to a Senate Report, “the ex parte seizure provision is expected to be used in instances in which a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately[.]” Senate Report 114-220 on S. 1890, dated March 7, 2016.

A controversial aspect of the bill is section 1836(b) which some have read as possibly preempting state non-compete law. Such an interpretation may be possible since this section limits injunctive relief in such a way as to “protect employee mobility.” However, the Senate Report referenced above expressly states that, “the remedies provided … are intended to coexist with, and not to preempt, influence, or modify applicable State law governing when an injunction should issue in a trade secret misappropriation matter.” Id.

Massachusetts does have a very basic trade secret statute codified as Chapter 93, §42, which deals with the theft thereof. Section 42A allows for the filing of “a petition in equity…to obtain appropriate injunctive relief including orders or decrees restraining and enjoining the respondent” from taking, concealing, or transferring the trade secret.