Representative Lori Ehrlich and I, with good counsel from engineer Caroline Huang and Attorneys Russell Beck, Rob Mantell and Phil Gordon, have been continuing to work over language to limit the use of non-competition agreements. See previous background discussion.
We have a feeling that we have made some progress and are looking forward to wider discussion about a draft that we currently both feel comfortable with. The issue will probably get its first formal hearings in the fall and the language is likely to continue to evolve through the process.
Here is the full text of the draft . A summary appears below. Input is very welcome, through comments on this site, or otherwise.
Summary of current working draft of non-compete legislation
To protect employees from unfair non-competition agreements while preserving protections for legitimate risks to business assets.
Prohibit non-compete agreements for lower level employees; for others, allow non-compete agreements but clarify guidelines and give employers strong incentives to require only moderate and reasonable agreements.
- Create procedural protections for all employees
- Agreements must be in writing
- Employers making job offers must give early notice that a non-competition agreement will be required, in time for a prospective employee to assess his or her options and decline the job offer before resigning their present job.
- Clarify common law rules that, to be enforceable, non-competition agreements must be necessary to protect trade secrets, confidential information or good will and must be consonant with public policy and reasonable in duration, geographic scope and proscription of activities
- Limit term of agreements to one year (unless garden leave payments of at least 50% of total compensation are made, in which case agreements may last two years).
- Make non-compete agreements unenforceable against employees making under $50,000 and enforceable only to protect trade secrets or confidential information (but not for goodwill) for employees between $50,000 and $100,000.
- Create safe harbors for very moderate agreements — giving employers incentives to choose agreements meeting those terms:
- Six month agreements prohibiting activities of the type the employee was actually engaged in within the geographic area that they were working in.
- Garden leave agreements supported by adequate compensation (greater of $50,000 or 50% of total compensation).
- Punish overreaching by employers by awarding attorneys fees to the employee whenever an agreement is reformed or found unenforceable and was not within one of the safe harbors.
- Otherwise preserving existing law
- Preserve existing common law defenses for employees facing enforcement actions
- Not applying new rules to business purchases, covenants not to solicit employers’ customers, etc.
- Effective as to agreements entered on or after January 1, 2010
Rep. Brownsberger, I had some trouble posting a comment earlier (size limit?) so I posted comments on my blog at http://hypecycles.wordpress.com/2009/07/17/compromise-first-thoughts/
This is a great step in the right direction.
Thanks so much for this very careful read and useful input at your site. We will take these comments carefully into account as the process goes forward. And, Russell Beck, thanks for your detailed response to the comments.
I very much appreciate your attention to detail.
It is not explicitly clear if the section “Create safe harbors for moderate…” applies to employees making over $100K/year.
Many technology middle management and experienced engineering / design personnel easily make over $ 100K/yr. Those are the people likely to start new businesses that make our state competitive and create more jobs. Not to mention they need to pay their mortgages too. I think this proposal must protect those people. At a minimum:
1- Limit NC term to a maximum of 6 months
2- Employers must compensate employees at their full salary and medical coverage for the duration of the NC term. This is a legal requirement in some European companies. There is a MA company offering this to their European based employees, but not to MA employees.
And stretch goals :
3- Employers must keep a current list of their top 1 or 2 competitors, publicly available in HR to guide employees seeking other jobs. Employers can update this list as often as they desire. So as an employee will not be forced to play “Russian roulette” by accepting a job elsewhere without knowing if he will be sued or not. The term “Competition” is too vague and can be interpreted in many ways to sue or intimidate the employee or his new employer.
4- Prohibit a clause in NC agreements that make Employee responsible for Employer’s legal fees in the event employer decides to sue the employee. This is an existing clause in a NC agreement I have seen. Extremely unfair, further intimidation tactics.
5- Also somehow address those employees who chose to sign restrictive NC agreements in order to get a job in 2009 or earlier.
Thanks, Tuncay, or speaking out.
Your points in order:
1-We limit to one year, but give employeers strong incentive to stop at 6 months (much higher likelihood of enforceability and safety from award of attorneys fees).
2-The compensation level under the law is 50% of $50K which ever is greater, so many lower level employees would have close to full income protection in a garden leave situation.
3-Useful idea — we could give some encouragement for this in a future draft.
4-We actually require the award of attorneys fees to the employee if an agreement is found to be overreaching at all. This is a powerful idea and probably addresses the point, but we could add a specific prohibition on clauses which shift fees.
5-Unfortunately, we cannot go backwards — the contract clause of our constitution prohibits this.
Keep the thoughts coming and focus as closely as possible on the language of the act.
Your input is much appreciated.
What does this mean: “enforceable only to protect trade secrets or confidential information (but not for goodwill) for employees between $50,000 and $100,000.” In my industry (the video game business), the only reason anyone uses non-competition agreements is to protect confidential information. In the case of this bill, it means that non-competition agreements would still take effect for anyone making more than $50,000 per year. At most large video game companies, I would guess that 70% of the employees make more than $50,000 per year. This bill, as worded, would only protect 30% of employees in my industry.
The problem here is that when any of those 70% leave or lose their jobs, they are going to be prohibited for a year from working at another game company within a 100-mile radius (which is the most common geographic area I have seen on local noncompetes). This means the worker will have to leave Massachusetts. I don’t want skilled workers to leave Massachusetts.
While I wish we could return to the original bill, which was plainly worded and simply eliminated non-competition agreements, I would recommend that a good start for this draft would be to raise the salary ranges. Non-compete agreements should be simply unenforceable against anyone making less than $100,000 per year, even in cases of trade secrets and confidential information. Those issues can be covered separately in a non-disclosure agreement.
Thank you for this feedback. Your read is correct. The $50,000 threshold is the applicable one in the legislation for people in your industry and I agree it is low. We struggled with this issue in a number of conversations and I personally would be comfortable with a higher threshold, but at least at this stage, we could not maintain adequate support for the bill at a higher threshold.
But don’t focus only on this dimension. For people at every level, the bill offers substantial new protection by giving employers strong incentives to craft very moderate and focused agreements. Our belief is that you will see a shift to shorter, more narrowly drawn agreements — shift which will substantially benefit employees.
Rep. Brownsberger, The $50K limit is too limiting. What percentage of people do you really think this protects? Are these the types of employees (making less than $50K) that companies would require a non-compete from (unless company policy for everyone to sign) or care about going to a competitor? I think you could solve this by not allowing companies to have companywide policy on non-compete agreements in the first place. They should only require it for specific jobs. What happens when the receptionist is making over $50K and now is limited where he/she can work, but has no confidential information whatsoever. Competition is so hard to define. Competitors should be named on a regular basis so employees know who they cannot work for. Why not a yearly posting of competitors and a renewal of the non-compete agreement at the same time. This takes power from people to choose and make a living. I really cannot believe that companies need more protection that employees. Employees vote, companies don’t.
Believe it or not, a lot of companies like hairdressers and phone calling companies have been using these agreements so there are a lot of employees at $50K and a lot more in the $50 to $100K range that would gain full protection from this legislation.
For those over $100K (and those between $50K and $100K with access to trade secrets and confidential information), the bill creates big new legal protections that will change practice substantially. We expect companies to back off on unreasonable agreements — you’ll see a lot of shorter and more narrowly drawn agreements.
This really is not meeting my hopes or expectations. I don’t think there ought to be any legal mechanism in Mass. for restricting professional employment. Employees do not have the benefits they used to receive years ago that may have provided some merit to certain restrictive contracts. For example, professional development by employers, at least in my experience, is very much reduced over the past generation. Furthermore, most high tech employers, at least, are flagrant scofflaws, laying off citizen employees and hiring cheap foreign labor on H1B visas to replace them, or simply outsourcing the jobs, instead of investing in training the citizen employees. In my opinion, such realities invalidate employer claims on employees who need or wish to leave. Employees need to be able to take their hard earned experience elsewhere, otherwise what we have is legitimized indentured servitude. My career was effectively demolished by the mere threat of (unreasonable) enforcement of my NCA when I needed to find new work. I have never fully recovered financially from the damage done by one vindictive employer (which was not even based in Mass.) Professionals invested years of their lives and many thousands of dollars in their own education and professional development. We are certainly entitled to a level playing field in the labor market. Highly skilled workers have correspondingly high value to society and therefore it is to society’s benefit that they be liberated from exploitation and protected from unfair business practices.
Thanks for weighing in. Your experience is very unfortunate. We are hopeful that this legislation will greatly reduce the number of cases like yours. I started in the same place as you — with a desire for simple solution, an outright ban — but I think that the complexity of our bill is necessary and I hope that as you have the opportunity to study it, its features will grow on you.
Rep. Brownsberger, I’m posting here my comments which I’ve sent to you privately.
While I applaud your efforts to even take on this issue, I must tell you that this latest draft of the bill will do very little to improve the situation in Massachusetts. It has been watered down to such an extent as to make it ineffective. I would appreciate it if you could tell the group here who in the State House is responsible for these changes – I would very much like to pass my views along to them directly, and ask them who they claim to be representing on this issue – voters / citizens (i.e. employees) or corporate interests and lobbyists.
Allowing employers to enforce non-competes on employees of a certain seniority (defined by salary level) defeats the entire purpose of removing non-competes from our state. To begin with, senior employees are the one’s most likely to start their own businesses. If one of the key rationales for banning non-competes is that they stifle innovation and entrepreneurship, then with this compromise we’ll have completely failed to address the crux of the problem.
Secondly, how does one define a “senior employee” – salaries vary from industry to industry, company to company, from year to year, and from town to town – even within Massachusetts. $100,000 is certainly not the right number. A “senior” employee working in a company in Southboro does not earn as much as a “senior” employee working in a company in downtown Boston. A senior employee working for a retailer or grocery chain does not earn as much as a senior employee working for a private equity or technology firm.
If employers want to force their employees to sign non-competes, then they should pay for the privilege. A 2-year non-compete should require them to pay that employee 2 years full salary when they leave to make up for the fact that that employee is prevented from leveraging their experience and expertise to earn a living. The system as it stands is too one-sided in favor of the employer.
Please go back to your original plan of banning non-competes completely. This state needs more entrepreneurship and innovation if it’s to get back to economic growth. Non-competes are a barrier to both.
The issue you raise are fair and important.
I believe, at this point, based on all I have heard, that our bill, will, in fact, make a big difference at the senior level. The bill will shift standard practice substantially towards narrower shorter agreements and this will serve both employee fairness and economic development goals. But I look forward to hearing a full round of input on the new bill and we’ll see where we stand after all of that.
Thanks again for weighing in!
Thanks for your work on this issue!
I guess the limitation of one year is better than the current situation for people making above $50K, but one year is a long time to go without a paycheck.
I’d expect that all employers using noncompetes would claim that they protect confidential info. The issue isn’t whether that’s true or not, it’s whether a prospective employer will reject a candidate because they think a previous employer might fight a hire. Perhaps a three month delay in a new hire’s start date would be acceptable to some hiring companies while still protecting information about the most immediate plans of the previous employer.
A few rhetorical questions:
– As written, won’t the $50K limit will effectively be lowered each year with inflation?
– How would a court define “reasonably adequate consideration” from b(iii)?
– Would the employees of an acquired company who are required to sign a noncompete as a condition of being ‘hired’ by the acquirer receive this ‘reasonably adequate consideration’?
– How many people making over $50K can afford to go without a paycheck for a year?
Good points — yes, inflation is a concern and the question of adequate compensation is one that we could not find a perfect answer to. Agreed that few can afford to go without full compensation for a year . . . but our belief is that, with the new law, we’ll not see so many people feeling so broadly restricted that they cannot work, even during the restricted period.
Rep. Brownsberger, it was an enlightening symposium today, which clarified the bigger picture. Here are a few more concrete proposals:
1- In the procedural section, please add a clause that forces NC agreements to be separate from all other agreements. A potential employer recently presented a 7 page combo legal document to me, which bundled NC, NDA, Non-Solicitation, IPR etc. with no separation. Such a simple procedural change will motivate employers to make NC more clear and predictable.
2- Garden Leave: For simplicity, this must guarantee full salary and health benefits until the employee is “emancipated”, up to 12 months. While I appreciate the potential burden on a small business having to pay full salary for an employer who left, the current compromise bill does not protect employees who work for large companies and make higher salaries, whose departure may not have as legitimate business impact on their employer.
I especially like the idea of separating the NCA. This was raised by another attendee at the symposium.
Re garden leave, given that agreements should be narrower under this legislation, most people should be able to work some, even if not exactly at what they want to do. Full compensation seems a bit much. But this number is something that can be compromised at different levels in a final bill.
Rep. Brownsberger, at the BBA event earlier this week, someone from the floor made a comment (in response to Mike Rosen’s line of argument that the market should regulate the non-competes) that the market had in fact responded to the non-competes. If I heard the comment correctly, it was that VC $$ was leaving MA in favor of states like CA.
I did some analysis of that data and some details are on my blog at http://hypecycles.wordpress.com/2009/07/22/bba-non-competes/
The data that I analyzed (from two sources) indicate that the % of VC $ coming into MA has remained reasonably constant over the last 14 years irrespective of the fact that the total amount has changed significantly during that time.
Thanks, Amrith. This VC data that you have unearthed is interesting and important. I’d like to see a posting if anyone has different numbers.
At the bear minimum this bill should make non-compete agreements invalid when an employer terminates the employee unless it’s for cause.
Case in point: I’m a software engineer and I had to sign an 18 months non-compete agreement in my previous job. Last October a was laid-off from that company when I had been working for barely 10 months. So effectively I had a non-compete that lasted almost twice the time I spent in that job. In this case it was not really the company’s fault since their income was slashed by more than half due to the crisis, but still I was bounded by the agreement and I was me how had an obligation to the company and the company none to me. My main focus is User Interface frameworks and this non-compete agreement close the door to any specialised UI job.
In the end I had to take a generic software engineering job and sign another non-compete agreement, because despite the fact that I was making slightly over $100,000, I have a mortgage and two kids and I could not go on without a pay-check for months.
This one is not that hard to get right, if the employer terminates the job agreement the burden should not be on the employer. It’s not only a matter of stifling innovation (which it is), it’s a matter of fairness.
In my current job, there is no reason whatsoever for signing a non-compete agreement. It’s very plain web application development, but if you want the job (or any job in software development) you have to sign the dotted line. It’s a employers market right now and it doesn’t cost companies anything to require it (well maybe 10 cents in paper and ink).
Thanks very much for weighing in with this experience.
This issue of termination by the employer is one that we have struggled with and will continue to struggle with. As written, the legislation would provide some protection by allowing judges to provide relief in unfair situations as allowed under current law.
I’d be interested to know if you got any legal advice. I’m not sure, but you might have found that the agreement you were subject to was not enforceable in the circumstances.
We will continue to talk about this issue and look for the best approach. It’s easy to create unintended consequences if one tries to write hard rules in the termination case.
Thanks again for weighing in.
Thank you very much for answering.
No, I did not get any legal advice. I have a technical background and I’m usually far removed from the business side of things, so it did not occurred to me. But, I’m not sure it would have make much difference.
Usually, when an employer is interested in you, someone in the Human Resources department contacts you. They go through the regular list of questions (compensation, legal status, etc). But in Mass, they also ask if you have any legal restrictions due to prior obligations with former or current employer. I’m not sure it would make much difference if I tell them: “Yes, but my layer thinks that the contract might not be valid”.
My feeling is that non-compete agreements are used in most cases by employers as a cheap employee retention tool.
Thanks again for answering and good luck.
I would like to commend you for bringing this issue to the attention of the Legislature and for your efforts to educate the public about it. It was great to have had the opportunity to hear you and the other panelists speak at last week’s Symposium on Bills Affecting Employee Non-Compete Agreements at the Boston Bar Association and to be able to speak with you directly afterward.
Having worked in sales in the IT industry for many years, including for companies headquartered in Massachusetts and in California, although always as a resident of Mass., I am very well aware of this issue. I have been required to sign non-compete agreements as a condition of my employment with Mass. companies. I have never been asked to sign such an agreement by a Calif. company, even though they could presumably have legally required me to do so since they employed me in Mass. The situation that “wgh” now finds himself in is disgraceful and should not be tolerated.
Here are my thoughts regarding this issue and your legislation:
There are many problems with these so-called “non-compete” agreements, some of which the supporters of your original bill, H. 1794, have done a very nice job of pointing out, but I would like to focus on one very fundamental one, one that I believe gets to the very heart of the problem.
All but a very few employees in the Commonwealth of Massachusetts and throughout the U.S. are employed under a legal doctrine called “employment at-will.” Employment at-will has been adopted by Massachusetts courts as a rule of contract construction whereby if “an employment contract, be it express or implied, contains no definite period of employment, it establishes employment at-will [and] employment at-will is terminable by either the employee or the employer without notice, for almost any reason or for no reason at all.” If you look into the history of the at-will “rule” you will find that it was concocted by U.S. courts beginning in the late 19th century (during a period of time that came to be referred to as the Gilded Age). Over the years, some states, including Massachusetts, have carved out certain limited exceptions to the at-will rule, e.g., discharge in violation of public policy and breach of the covenant of good faith and fair dealing, but the rule is, otherwise, still followed to this day.
The problem is that the at-will doctrine rests on the idea that the employee is required to perform first and the employer is then obligated to compensate that performance as agreed upon prior to the work being undertaken. Once an at-will employment “contract” is thus fulfilled the “contract” is over, period. As much as we might like to not think about it, the at-will rule renders all employees who are subject to it, regardless of their level of expertise or compensation, as day laborers. The rule is also predicated on the absurd belief that the parties have exactly reciprocal rights, that is, the employee can quit at any time and the employer can fire at any time. The notion that there could be engrafted onto such a relationship something such as an employee non-compete agreement is completely ridiculous. Just imagine if an employee attempted to get an employer to agree to such a term.
Putting aside debate over whether or not continued use of the at-will rule itself should be permitted, if we are going to permit our economy to be structured around such a rule then we must recognize it for what it really is and put a stop to the ridiculous notion that an employer can somehow restrict an at-will employee’s right to earn a living in any way he or she desires after the employment relationship has ended.
With regard to the various proposed pieces of legislation, I believe that your original bill is on the right track, but does not go far enough. I would support H. 1794, and would ask the legislators who represent me to do so, provided the following changes were made to it:
Delete: “Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual.”
Delete: “This section shall apply to all contracts and agreements generated after the effective date of this act.”
(With respect to any concern over the constitutionality of outlawing existing non-competes I direct your attention to 163 Mass. 589.)
Add: Section 3. Section 27C of Chapter 149 of the General Laws of Massachusetts is hereby amended by adding prior to all occurrences of the words “section 26” the words: “section 19,”.
Add: Section 4. Section 150 of Chapter 149 of the General Laws of Massachusetts is hereby amended by adding prior to the words “section 33E” the words: “section 19,”.
I realize that this is not the direction you are looking to move in with your legislation, but the compromise bill you are now contemplating is legislation that only a lawyer could love, and it, or anything similar to it, would be a disaster once the courts get a hold of any cases under it.
I would be happy to expand upon my thoughts if you think it would be helpful. Good luck pursuing this issue with your colleagues in the Legislature.
Hey Bill, good to see you.
And thanks very much for weighing in. I very much respect your experience in this area. I do share your concerns about the complexity of the bill we have drafted, but have not seen a good way to simplify it without doing harm to its intentions — which are to reduce the burden of unfair non-competes dramatically without eliminating the ability of employers to protect themselves in fair ways using narrow short-term agreements.
I don’t really feel qualified to engage in an argument about employment-at-will as a legal doctrine. The evidence I have been exposed to doesn’t give me an overall view on the balance between employers and employees under the law. I do feel that employment law is complex and imposes burdens on both employers and employees.
If you have more time to devote to this conversation, it might be helpful for you to share any comparisons between Massachusetts and California as business climates based on your experiences. I’d certainly appreciate that.
My experiences lead me to believe that California’s and Massachusetts’ differing posture toward employee non-compete agreements has been detrimental to Massachusetts’ competitiveness in the IT industry relative to California’s, and probably has been with respect to other “knowledge-based” industries, such as life sciences.
I also think there is another fundamental misunderstanding here with respect to the notion that employee non-compete agreements provide a legitimate way for employers to protect their legitimate business interests. There is already a vast body of law that businesses have at their disposal to encourage innovation and protect innovators from unfair competition. These include patent law, copyright law, and trademark law – all of which have an unfortunate tendency to be lumped together into something called “intellectual property” law, even though they were created for quite different purposes, see http://www.gnu.org/philosophy/not-ipr.html – as well as antitrust law.
Employee non-compete agreements are nothing but an illegitimate tool for businesses that are, in reality, afraid of competition.
> …our belief is that, with the new law, we’ll not see so many people feeling so broadly restricted that they cannot work, even during the restricted period.
This isn’t realistic if the industry is concentrated among a small number of companies locally or nationally, which is the case in many industries, and the employee’s expertise isn’t easily transferable. Finding even an entry level position in a new industry will be complicated by the fact that potential employers will assume the potential hire will only stay until their noncompete expires.
No matter how much supposed protection you place in the bill it will do no good. Just the threat of a law suit, no matter how frivolous, will will discourage a potential employer. To protect a companies IP there is sufficient other means rather than a NC that can be used. They only effective way to handle this is to ban NC outright.
The current bill just gives the legislators who are in the pockets of corporate interests the cover that they are working for the little guy. You need to submit a bill that bans NC outright and let the people see who truly represents the people vs those who serve the corporations.
Thanks for weighing in.
I get the issue that the threat of a lawsuit is a big problem. It’s possible you are right that this bill won’t work to change practice. That’s not what the lawyers advising us think. We have been advised by lawyers who represent employees that the bill is likely to change what employers ask for in the way of agreements. I’m working on the belief that the strong incentives in our bill will result in shorter, more narrowly drawn, non-compete agreements and that this will turn out to make a big difference.
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