Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

Last year, I reported on the status of a new non-compete bill that, for the first time in Massachusetts, attempted to codify its non-competition law. After summarizing the details of the bill in April, I reported in October that the bill had died in Committee. However, as stated at that time, Senator Brownsberger, one of its sponsors, promised to present a new bill on the same subject in a future session. Well, the future is now.

The new bill clarifies and modifies the old bill, mostly in an attempt to satisfy businesses that found portions of the bill unacceptable. As modified, the new bill appears to have a good chance of passing this coming spring. Rather than summarize each provision of the modified bill, this article highlights some of its unique provisions.

Highlights of the Modified Bill

1. The new non-compete bill is limited to employment agreements. The bill specifically does not include: agreements not to solicit or hire employees from the employer; agreements not to solicit customers of the employer; non-competition agreements made in connection with the sale of a business; or agreements by employees not to reapply for employment after termination.

2. The new bill limits the length of a valid non-compete agreement to one year, however, it re-introduces the concept of garden leave, which is the only method in which one can extend the covenant not to compete to two years.

3. Unlike the old bill, the modified bill excludes any salary that one must exceed for the agreement to be enforceable. Instead, the new bill simply states that the employee’s compensation be “reasonably adequate,” thus allowing the court to take into consideration the economic impact on the employee.

4. In addition to non-competition agreements entered into at or in anticipation of hire, the new bill also deals specifically with agreements that are entered into during the term of employment. No longer is “continued employment” adequate consideration alone, a concept that some Massachusetts courts have already questioned. If the bill becomes law, the employee must also receive “fair and reasonable” consideration if the agreement is signed during the term of employment.

5. The new bill provides that the non-compete agreement must be in writing and signed by both parties, along with prescribed minimum notice requirements to the employee, before it becomes effective.

6. The new bill rejects the inevitable disclosure doctrine.

7. The new bill creates presumptions of what constitutes reasonable duration and scope of the non-compete agreement, thus providing some guidance to the parties.

There are other important provisions in the attached bill and I am sure that amendments will be proposed before the final bill is presented for a vote. As always, I will keep you posted.
 

Last April, I summarized in detail a pending bill (House No. H4607) which would amend the current law on noncompetes. (See April 13, 2010 Blog Entry).  The bill was considered a compromise bill since there was other legislation filed that sought to make all noncompetes in Massachusetts unenforceable (similar to California).  While that bill has not progressed at all, many observers thought that the “compromise bill” would have support, even though it would have made many current agreements unenforceable and would have made it more difficult for employers to protect proprietary information.

Last week, the bill died in Committee.  Obviously, the hearings that were supposed to occur this coming January will not happen.  In essence, the current law on noncompetes in Massachusetts remains intact.  However, one of the bill’s sponsors, Senator Brownsberger, stated to the press last week that he plans to introduce another bill on the same subject.

As in the past, we will continue to monitor the progress of this new legislation and keep you posted.
 

There has been a serious push to clarify the way Massachusetts regulates noncompetition agreements. Many legislators and those in the high tech industries have voiced concern that the current approach hampers Massachusetts companies from competing with California high tech businesses where noncompetition agreements are not enforceable because they are contrary to public policy. The advocates of this approach feel that the freer movement of employees between competitors would create more innovation and competition. But the issue is not clear cut. There are many that want to enforce noncompetition agreements with no change in approach to protect innovation that the company has created.

A bill that attempts to reach a compromise between these two views has been making its way through the legislature. Recently, the latest version of House No. H4607, is now with the House Committee on Steering and Policy which decides when the bill will be considered by the full House. The following is a summary of the highlights of the bill which amends Chapter 149 of the General Laws by inserting a new section 24L.

While the amendment allows noncompetition agreements, it provides the following:

I. EXCLUSIONS

- Noncompetition agreements made in connection with the sale of a
business, sale of assets of a business, or otherwise outside the employment relationship.
- Agreements by which the employee agrees to not reapply for
employment to the same company after termination.

II. ELEMENTS NECESSARY TO BE VALID AND ENFORCEABLE

- A separate agreement in writing signed by employee and employer.
- Applicable to an employee with average annualized federal gross income
of at least $75,000 plus $1,500 for each full year from the amendment’s effective date.
- If a condition of employment, to the extent feasible, must provide copy
7 days before commencement of employment with notice that it is a condition of employment.
- If entered into after commencement of employment, must be supported
by adequate consideration which cannot be continued employment. 10% or more of current annual pay is presumptively adequate.
- Must protect one of the types of legitimate business interests
listed in the bill.
- Reasonable duration, but in no case more that 1 year from cessation of
employment. Duration of no more than 6 months is presumptively valid. Tolling is allowed under certain circumstances.
- Reasonable geographical scope in relation to interests served. Area
limited to where employee provided service or had influence is presumptively reasonable.
- Limited in scope of proscribed activities. If limited to type of service
that employee is performing at the time presumed reasonable.

III. GENERAL

- The Court can reform an agreement in its discretion to make agreement
valid and enforceable.
- The Court can refuse to enforce the agreement if:
- Against public policy.
- In extraordinary circumstances.
- Necessary to avoid a harsh result.
- Based on common law or equitable factors that would militate
non-enforcement.
- The Court can award attorneys’ fees to the employee or the employer
under certain circumstances outlined in the bill.
- No choice of law allowed that would avoid Massachusetts law if the
employee has been a resident and working in Massachusetts for at least 30 days.

According to prevailing views about the pending legislation, additional changes will certainly be made. We will report on its progress.
 

In January, Massachusetts State Representative William Brownsberger filed a bill which would seek to void any contract that restricts an employee’s ability to search for and obtain another position with a different employer. While this bill has gained some support, it is unclear whether this will resolve the issues regarding non-compete agreements in Massachusetts. The Small Business Association of New England is working with Representative Brownsberger to draft a compromise bill which would limit who can be covered and the duration for which the agreements can last.

With the pending legislation in Massachusetts to do away with non-compete agreements, both sides are struggling to find the solution to the problem. The question is: How can Massachusetts make itself more attractive to the tech community? Is the answer to do away with non-compete agreements or to simply modify them and restrict their duration and scope?

Supporters of the current Massachusetts laws regarding non-compete agreements argue that such agreements foster competitiveness between companies, prevent confidential information from being shared, and protect business relationships which may be hurt when an employee leaves a company. Many large companies believe that non-competes are essential to attracting employees. Such employers argue that non-competes are voluntary in that they are not required by all companies and employees are not required to sign them although refusing to sign may result in a potential employee not being hired.

Opponents of non-competes believe that such agreements are restricting the growth of the tech industry in Massachusetts because they make it more difficult for employees to move between companies, thereby encouraging employees to take positions with larger companies to the detriment of smaller start-ups. Additionally, opponents argue that employees gain more knowledge and experience as they change positions and move from company to company. Further, opponents believe that the elimination of non-competes will make Massachusetts a competitor with Silicon Valley and will encourage the start-up of tech companies in Massachusetts. 

For now, the question still remains: Will the elimination or modification of non-compete agreements in Massachusetts make the state a better, more attractive location for the tech industry and help to boost the economy or will it diminish competitiveness between companies? Public hearings for Representative Brownsberger’s bill are scheduled for sometime this fall, during which we expect these questions and many others to be addressed. We intend to follow the legislation and report on its progress in this blog.
 

Last week, we wrote briefly about EMC v. Donatelli, a case that is being litigated simultaneously in California and Massachusetts. On May 4, the Superior Court in Massachusetts ruled that EMC, a Massachusetts corporation, could obtain injunctive relief preventing Mr. Donatelli, who had been President of one of EMC’s major divisions, from starting a job at HP in California even though California has a statutory prohibition on covenants not to compete. The Court made some important findings in its decision which are summarized below.

Choice of Law - The court relied on the language of the agreement that Donatelli signed to find that Massachusetts law applied. Rejecting Donatelli’s argument that California’s fundamental policy against enforcement of non-competes made it futile for EMC to proceed in Massachusetts, the Massachusetts Court stated it “did not agree that California’s legislative policy, at least in this case, is somehow more ‘fundamental’ than, and therefore trumps, Massachusetts’ common law.”

Equitable Considerations - Donatelli also argued that Massachusetts should defer to California’s strong policy of protecting its workers. The Massachusetts Court rejected this argument as well, finding that Donatelli was not a California resident, and therefore not one of its workers. He was still a Massachusetts resident.  The Court also took Donatelli to task for “escaping” the obligations of the non-compete where the expectations of the parties were that he would be bound by it.

Enforceability of Covenant Under Massachusetts Law - The Court dealt with two issues that are of particular interest to practitioners in Massachusetts. The first is whether there was adequate consideration for the covenant even though it was signed 15 years after Donatelli started working at EMC. In ruling in favor of EMC, the Court found that even though the law in Massachusetts on this issue is somewhat unclear, under the facts of this case, continued employment constituted adequate consideration. However, regarding the breadth of the covenant, the Court allowed Donatelli to supplement the record to demonstrate that the covenant was broader than necessary to protect EMC’s interests.

The ball is now in the California Court. The Massachusetts Court was clear in ruling that California’s law against enforcement of non-competes did not trump Massachusetts’ common law in enforcing them, at least with respect to Massachusetts residents who move to California to escape the obligations of a Massachusetts non-compete. We will continue to follow this case as it no doubt progresses through the courts.
 

An executive’s resignation and intention to begin work for a competitor of his former employer has resulted in a bicoastal battle of lawsuits over the terms of a noncompete clause in his employment agreement.

On April 27, 2009, David Donatelli resigned his position as president of EMC Corp.’s storage division. That same day, Donatelli filed a lawsuit in California state court asking for a declaratory judgment voiding the noncompete clause in his employment agreement with EMC Corp. Donatelli’s attorneys are no doubt cognizant of California law’s hostility to noncompete clauses and sought to establish jurisdiction where the chances of enforcement of the noncompete are minimal. Donatelli intended to begin working at Hewlett Packard on May 5, 2009.

Placing a close second in the proverbial race to the courthouse, on April 28, 2009, EMC Corp. filed a suit in the Superior Court, Suffolk County, Massachusetts, alleging that Donatelli violated the noncompete in his employment agreement. EMC Corp. quickly moved for preliminary injunctive relief, and on May 4, 2009, Judge Stephen E. Neel issued a temporary injunction preventing Donatelli from starting his new position at Hewlett Packard as planned, pending a full hearing, noting: “Donatelli’s intention to work for HP in California, which has a statutory prohibition on covenants not to compete, does not warrant denial of EMC’s request for injunctive relief.”

It will be interesting to see if the California court renders a decision prior to the hearing in the Massachusetts court, and whether one court will defer to the other.