A Study in Persistence and Compromise

Background

Ten years ago, a friend in Belmont told me how her career had been derailed by an unfair contract.  She asked for a legislative remedy — not for herself, but to protect others.

I agreed to work with her.  The project became a central focus for me across five sessions of the legislature.  Finally, last week, the Governor signed legislation limiting the use of “non-competition agreements.”  The legislation is not the complete remedy she sought ten years ago, but it is a big step forward.

She had earned a prestigious advanced degree in a specialized engineering field.  In one of her first jobs as a young engineer, she had felt compelled to sign a non-competition agreement with her employer. That agreement prevented her from working in her chosen field for two years.  She felt that the gap put her career on the “slow track” which it ultimately never left.

Working with an employment attorney, Robert Mantell, we developed legislation modeled on the 19th-century law in California that outright prohibits the use of non-competition agreements.  In Massachusetts, as in the majority of other states, there was no statutory regulation of non-compete agreements — they were regulated entirely by the common law evolved by judges.

When I filed the outright ban proposal in January 2009, it generated a lot of positive interest from other engineers who resented the limitations that their employers had imposed on them.

It also generated interest from some in the venture capital community who argued that non-competition agreements limited their ability to form teams for new ventures.  They suggested that California’s prohibition of non-competition agreements was a major reason for California’s dominance in technology entrepreneurship.

I began to feel that my friend had led me to a wonderful proposal — one that would benefit workers and the economy generally at the same time.  But then I met with the board of the Small Business Association of New England.   Some of the board members were literally shaking with anger as they explained how my legislation would put all that they had worked to build at risk.

They felt that non-competition agreements were an essential device for protecting the ideas that they had developed through great effort.  They promised to leave the state if my legislation passed.  Their concerns were echoed by some of the larger business organizations — the Associated Industries of Massachusetts and the Greater Boston Chamber of Commerce.

I soon discovered that another colleague, State Representative Lori Ehrlich, had developed legislation working with her own constituent, Russell Beck an attorney and expert on non-competition agreements.   That legislation codified the common law of non-competition agreements — allowing them, but regulating them:  They should be limited in term and scope and should be only as broad as necessary to reasonably protect legitimate business interests in confidential information, trade secrets or client relationships.

Lori and I began working together to develop a shared approach and met with workers and leaders in many different industries.  Over the years of conversation and debate that followed, my conviction deepened that non-competition agreements were being overused in Massachusetts to the detriment of workers and the economy broadly.

But I also learned that non-competition agreements have very different implications in different business settings and are not always unfair.  They are a relatively efficient mechanism for protecting business interests as compared to alternative mechanisms like non-solicitation and non-disclosure agreements which can lead to very expensive litigation.

The legislation that became law last week is a hard fought compromise, banning non-competes for lower level workers, limiting them for higher level workers and providing procedural protections to assure that workers know what they are getting into when they sign them.

Overview of the Legislation as Passed

Here are the specifics of the legislation.  It is section 21 of the economic development bill and adds a new section 24L to Chapter 149 of the General Laws.

It defines a “non-competition agreement” as

“an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.  . . .

It makes clear that non-disclosure agreements, non-solicitation agreements and agreements in the context of the sale of a business are not included.

Independent contractors are treated as employees for the purposes of this law and so benefit from all the same new protections.

“Employee”, an individual who is considered an employee under section 148B of this chapter; provided, however, that the term “employee”, as used in this chapter, shall also include independent contractors under section 148B.

It imposes procedural requirements to give employees more opportunity to negotiate about them.  If they are to be enforceable, they must:

  • be in writing
  • be signed by both the employer and the employee
  • expressly state that the employee has the right to counsel before signing
  • be provided to the employee when or before employment is offered.

It codifies the basic common law of when non-competition agreements may be used:

The agreement must be no broader than necessary to protect one or more of the following legitimate business interests of the employer: (A) the employer’s trade secrets, as that term is defined in section 1 of chapter 93L; (B) the employer’s confidential information that otherwise would not qualify as a trade secret; or (C) the employer’s goodwill.

It limits the scope of non-competition agreements in three dimensions, more or less codifying existing common law, but hopefully moving practice in the direction of narrower agreements.

First, it limits them generally to one year in duration.

In no event may the stated restricted period exceed 12 months from the date of cessation of employment, unless the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment.

Second, it establishes a presumption in favor of limits to geographic areas in which the employee has actually worked in the last two years:

The agreement must be reasonable in geographic reach in relation to the interests protected. A geographic reach that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable.

Third, it establishes a presumption in favor of limits to services the employee has actually provided in the last two years.

The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected. A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable.

It categorically prohibits enforcement of non-competition agreements against several classes of workers.  These exclusions speak to some of the most egregious examples of overreach of non-competition agreements

(i) [an hourly worker –] an employee who is classified as nonexempt under the Fair Labor Standards Act, 29 U.S.C. 201-219;

(ii) undergraduate or graduate students that partake in an internship or otherwise enter a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;

(iii) employees that have been terminated without cause or laid off; or

(iv) employees age 18 or younger.

One of the hardest fought issues over the past few years was the issue of “garden leave” — the concept that employees should be paid during the period of a non-competition agreement.   There is a fairness argument for compensation while employment is limited.  On the other hand, we do have unemployment insurance and, in practice, non-competition agreements are not disabling; they usually do not actually prevent people from working — they just limit employment options.

Massachusetts would have been unique in requiring garden leave payments.  (Oregon does have a garden leave rule for broadcasters.)  The compromise language does not really require garden leave compensation.  It just requires garden leave or other “mutually agreed open consideration”.  This language leaves the door wide-open for simply considering some component of usual employment compensation to be the incremental consideration for entering the non-compete agreement.

The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement.

Another hard fought issue was reformation.  If a noncompete agreement is litigated and a court finds that the agreement is unreasonable in scope, what should the court do?  The compromise preserves the existing common law, which is the most common rule in other states:  The court can trim the agreement to make it reasonable.

A court may, in its discretion, reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests.

My own preference on the issue of reformation would be to make the agreement unenforceable if it is found unreasonable, especially if it appears that no effort was made to make it reasonable by tailoring it to the circumstances of the situation.  Some agreements I have seen are terribly broad and under the reformation rule, employers have no real incentive to make agreements reasonable — if they come to court, the worst that will happen is that the agreements will be rewritten.  Employers see it differently — they do not feel that they should be at risk to entirely lose protection just because a judge disagrees as to what scope is reasonable.  This may be an area for further conversation.

The legislation is prospective, applying only to agreements entered into after October 1, 2018.

Section 24L of chapter 149 of the General Laws may be referred to as the Massachusetts Noncompetition Agreement Act and shall apply to employee noncompetition agreements entered into on or after October 1, 2018.

Next Steps and Summary

I’m well aware that some feel that this legislation did not go far enough.   It is not an absolute ban and will not provide the blank check for employee recruitment that some venture capitalists seek.  Nor will it fully liberate young engineers from obligations to their employers.

But only three other states fully prohibit enforcement of non-compete agreements:  California, North Dakota and Oklahoma.   Our legislation does prohibit enforcement of non-compete agreements against a great many workers — lower level workers and those actually laid off, certainly the workers most in need.

It will also raise the profile of the decision to sign a non-compete and encourage scrutiny of the reasonability of the terms of the agreements.  It may influence hiring practices for higher-level workers.  We will need to live into the new law to find out how it actually works.  It may be that we have continuing problems or it may be that the soft changes we impose have a greater impact than some expect.

Certainly, no one should underestimate the significance of creating a statutory framework where none previously existed.  We now have a framework that we can modify if necessary.  The hardest challenge was to create the framework.  Adjusting it materially in the future will engage all the same political forces, but the issues will be much narrower.

I’m terribly grateful to a number of my colleagues in both the House and Senate who worked together over the past session to carry the legislation across the goal line — Speaker Deleo and Representatives Wagner and Brodeur, Senate President Karen Spilka and Senators Lewis and Lesser all had critical roles in getting the job done.   I am also grateful to Governor Baker for choosing to sign it into law.

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.

Join the Conversation

20 Comments

  1. Senator, thank you for the tireless effort on this topic. It’s good to see that progress towards a balance can be struck between corporations controlling ones career post employment and the needs of a business to protect their intellectual property. As noted above, the new legislature only applies to non-compete agreements entered into after October 1, 2018. One question in my mind still remains though, what remedy is there for those that have already signed overly broad non-competes with not provisions for garden leave or compensation during a window of reduced employability? Besides expensive legal wrangling, is there any recourse for the employee?

  2. This is a significant accomplishment that will do a lot of good for the Commonwealth. Congratulations!
    Arn

  3. Thank you. I am weeping with joy. The non compete agreement that I was compelled to sign really did derail my career when the company faltered and I was one of the very last employees to be laid off. I remember talking to you about this many years ago as your work began. I am so grateful for your long work on this.

  4. Thank you for persisting on this important issue and sharing the results in detail. It is definitely an important step forward.

  5. In my mind, this legislation legitimizes intellectual property theft by officially stating ” … unless the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment.”

  6. Thank you for taking action on this subject matter.

    Employers have long been abusing their position of power.

    Denying employees the right to earn a living without compensation is simply abusive.

    If companies want to prevent an employee from competing post-separation, the least they should do is to pay for the salary of the person during that period.

    Finally, a high-level career can suffer from a one-year gap, which may justify supplemental compensation.

  7. Will, if an engineer or scientist has specialized in a particular area of research, then a non-compete does really make that person unemployable in their field. Imagine you specialized in real estate law and were prevented from working in that area for a year you could, in theory, do some other sort of legal work but this would presumably pose a significant hardship. Of course I suppose an engineer could work at Home Depot for a year or two but that is hardly the same thing.

    Highlighting the importance of the non-compete is not helpful either. If you require employment and if most employers require them then you really don’t have much power to negotiate the agreement. To state otherwise is naive. I am sure employers don’t like the idea of banning or limiting non-competes. They hold most of the cards right now. Why would they want to give that up?

    If the legislature had required significant cash payment for companies that wanted to enforce non-competes that would certainly cause most to tightly limit their scope. It would also have upset some employers. Again, most employers don’t want to give up any power.

    In the end I suppose this is better than nothing but it falls well short of what is fair and necessary.

  8. Thanks for your work on reasonably regulating non-competes. I hoped the law would go further, and I’m grateful for these changes.

  9. I’m not sure how wide an effect this will have — but at least it flatly voids such agreements if the employee is laid off. I was laid off (after being told to train a replacement for one of my responsibilities!) some years ago, and felt that my employer was being unfair by demanding that I sign a noncompete in order to get severance, but at the time it seemed there was nothing I could do. It was especially aggravating because I had worked on a number of utilities rather than the core of the software they sold; I couldn’t have carried anything useful to a competitor, but any general advantage I had from knowing about the field was lost. This legislation corrects a serious problem; we’ll find out how much effect it has — and whether employers are foolish enough to move to a less-innovative state (rather than comply) and hope employees will stay with them

  10. I’m not well versed enough in the law nor have I been involved in such a case (though I’ve signed non-competes or not signed them and been told they apply anyway when imposed after hire) to judge what degree of progress this represents, but thanks for your work on it all the same. From your efforts on transportation and the environment, I can only assume it was the best deal available given the other players involved and the general configuration of power within the state.

    An issue somewhat related I wonder about: what about contract terms that claim ownership to work you do while not on company time and not using company facilities? The example I think of is writing free software as a hobby evenings or on the weekend. My present employer is reasonable on this, but my last one, at least on paper, took the usual hardline default of claiming “ownership” (copyright or patent rights, I’m unclear which now, perhaps both) to anything I made, whether I did it at work or not and whether it had anything to do with what they did. I believe California also has better law on this issue. Might this be something MA could take up next (but lower priority than limiting emissions from vehicles somehow 😉 )?

    I have to agree with those who suggest excessive employer power hurts society by limiting movement of employees and ideas. I think of a friend of my Dad’s who along with a co-worker got fed up with the big old engineering company they worked for and went out on their own to “do it right.” They now have one of the most successful civil engineering companies in Canada, one with quite a lot of international business. I suppose the original company wound down by now. (Today perhaps they would have kept going on the value of the tax breaks and subsidies they got from the state or by shopping their jobs to another state for better gifts.)

  11. I am usually a big supporter of your work, and even now I applaud your transparency, not just of the law but of the process.

    But this law is, unfortunately, essentially meaningless to me. The garden leave is almost a non-factor: I’d have to either be unemployed for a year, or find a company willing to hire me and then wait a year before I start — during which my income is cut in half. The “reasonable scope” clause means the non-compete can “only” apply it where I live and work, and in my field of specialization — that’s not much of a restriction. And saying I can have counsel isn’t much of a benefit, either: how many employees will actually fight back against a non-compete, knowing that if they reject the offer, then (a) the employer will just give it to someone else and (b) the next employer they talk to will just have the same deal? I could see it for VP-level positions, but for everyone else, I think it overlooks the balance of power in those negotiations.

    The part about internships and layoffs is just about the only bit of this law that I think will actually matter.

    Frankly, I think the business community bluffed. How much have non-competes left California? How many of their businesses have run away?

    I hope you are right that the framework this builds will one day grow into a meaningful restriction or ban on non-competes. For now, I don’t consider this law to be that restriction.

    1. True, the garden leave provision has minimal impact.

      I am hopeful that the legislation as a whole will turn out to be more valuable for you than you think — we need to find out how the reasonability definitions work out in the real world. We’ll keep listening.

      From day one it will help lower level workers. That’s not you, but it is a lot of people.

      I agree that the threat to leave is not necessarily real, but the threat expresses a discomfort which is real and strong — enough to get the attention of many legislators. This deal was as good a compromise as was available given the current balance of forces and perceptions.

  12. I’m glad to see that some progress has been made on this issue, especially banning non-competes for hourly workers and limiting the time to one year, but I can’t help but feel that this legislation doesn’t go far enough, and that employers will continue to pursue overly-broad non-competition agreements that hurt workers. I think employers were bluffing when they said they would leave the state if non-compete clauses were banned.

    I suppose something is better than nothing.

  13. So, if I am employed under a 1 year non-compete today, if I get laid off, no benefit, still limited by the non-compete?

  14. Non-competes are not a tool for businesses to protect trade secrets. Massachusetts already has some of the strongest trade secret law in the country, companies don’t need non-competes for this. What they do use non-competes for is to restrict wage growth and employee mobility. Non-competes restrict workers’ job mobility and therefore reduce their BATNA (leverage) in future salary negotiations. A business likes non-competes because they control salary cost increases and improves retention rate. These are the real concerns so let’s ban non-competes and at the same time address the real concerns.
    Retention is especially important to firms who spend a lot of money on training. A competitor could hire away fully trained specialized employees and save themselves on training costs. A non-compete would be the obvious solution here but there are other options. A vesting schedule for stock options or contributions to 401k are a couple good ways to do this. If the unvested benefits outweigh the cost of training, then a competitor would have to overpay for that employee at a cost greater than training one themselves.
    Senator, I would like to see non-competes banned eventually and exceptions could be made to that (not the other way around). Small companies without the resources to give out vesting benefits would be good candidates for exemption. If this is not politically feasible how about this compromise? Set a limit on the length of enforceability (right now they are enforceable for as long as worker is employed +1). If, instead, non-competes automatically expire every 2 years then a worker could actually bargain for a wage increase in exchange for signing another 2yr non-compete instead of perpetually being under the thumb of the original contract they may forever regret.

    1. Yes. The idea of forcing renegotiation of non-competes every couple of years is a good one.

      That was included in some versions of the bill and I would happily support it.

      It is not something that survived the final compromise, unfortunately.

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