Competing to Compete

Controversy Brewing over Non-compete Agreements

Non-competition agreements are controversial. This issue has divided lawyers, judges, and academics for a long time. The controversy has spread to the business world, where non-competition agreements have been an accepted practice for years. Our state Legislature has weighed in on the controversy by proposing a bill that would change this accepted practice by significantly restricting the enforceability of non-competition agreements in Massachusetts.
Recently, an active and organized segment of the business community has come out supporting restrictions on the use of non-competition agreements. This support has given traction to the proposed legislation.

Why Non-competes Are Used
To protect themselves from competition by departing employees, Massachusetts employers frequently require employees to sign non-competition agreements. As the name suggests, these agreements restrict the ability of former employees to work for a competing business.
Judges do not particularly like these agreements because they tend to limit an employee’s ability to earn a living in his or her chosen field; however, judges will enforce non-competition agreements if they protect the legitimate interests of the employer, and they are otherwise reasonable in the duration and geographic scope. The courts will not enforce non-competition agreements if they are only designed to protect a company from ordinary competition.

Protecting the Business
Proponents of non-competition agreements cite the role they play in protecting trade secrets, confidential information, and goodwill. They argue that, if businesses cannot protect these business assets, they will be unable to compete against businesses that can, and if businesses cannot protect their trade secrets, confidential information, and goodwill, job loss and economic stagnation will follow.
Business groups like Associated Industries of Massachusetts are wary of any change in the enforceability and use of non-competition agreements. They argue that reform is unnecessary because our courts can and do strike the right balance between protecting employers’ interests and employee freedom of mobility. They further caution that it would be unwise to make it harder for businesses to compete in the current challenging economic climate.

Non-compete Agreement Opponents
On the other hand, there are those in the business world that think non-competition agreements stifle economic growth. The Alliance for Open Competition (opencompetition.wordpress.com), a self-described group of entrepreneurs, employees, investors, and executives dedicated to fostering innovation, sees non-competition agreements as a barrier to entrepreneurialism because they force potential entrepreneurs who are subject to non-competition agreements to risk legal and financial ruin in order to start or join competing ventures. California is held up as the model because that state prohibits most non-competition agreements, and the theory is that this prohibition resulted in a vibrant entrepreneurial economy, although California’s economy is certainly less than vibrant today.

House No. 4607
Legislative proponents of reform, among them Rep. Cheryl Coakley-Rivera of Springfield, appear to have gotten behind House No. 4607, which is a consolidated version of two other bills authored by Coakley-Rivera. House No. 4607 reflects a middle ground between those in the business community who want no change at all and those who seek to eliminate non-competition agreements altogether. But make no mistake; if enacted, House No. 4607 would force major changes in the use of non-competition agreements.
Among the changes that House No. 4607 would bring, if enacted, would be to prohibit the use of non-competition agreements with employees who earn less than $75,000 a year. In addition, House No. 4607 would limit the duration of non-competition agreements to six months. Any agreements for a longer term would be presumed to be unreasonable.
Employers that require the signing of non-competition agreements as a condition of employment would also have to notify prospective employees of this requirement before the employees quit their current jobs, and, for existing employees, employers would have to offer a financial inducement for them to sign: at least 10% of annual compensation.
Moreover, if an employer sues to enforce a non-competition agreement, House No. 4607 would require the payment of the former employee’s attorneys fees if the employer acts in bad faith or the court does not enforce a term of the agreement (unless it is presumptively reasonable as defined in the bill). If the former employee sues to have a non-competition agreement invalid and wins, the employer would also have to pay the former employee’s attorneys’ fees.
House No. 4607 would not affect non-competition agreements arising out of the sale of a business or business assets. It would also not limit an employers’ ability to use non-solicitation agreements to prevent former employees from poaching existing customers or employees.
As this article is being written, passage of House No. 4607 this summer appears to be a long shot. A recent effort to attach it as an amendment to another bill under consideration failed. Whether House No. 4607 passes or not, the controversy surrounding non-competition agreements is likely to continue.

Timothy F. Murphy is a partner at the law firm Skoler, Abbott & Presser, P.C., a boutique firm that practices only labor and employment law and represents only the interests of management. The firm’s practice areas include all aspects of labor and employment law, including traditional labor law, contract negotiations, union avoidance and arbitrations, employment litigation in state and federal courts and before administrative agencies, employment counseling, policy review, and training; (413) 737-4753; [email protected].