Governor Patrick Proposes Bill to Ban Certain Non-Competes in Massachusetts but Preserve Enforceability of Other Restrictive Covenants

Governor Patrick’s Bill

On April 10, 2014, Massachusetts Governor Deval Patrick introduced “An Act to Promote Growth and Opportunity,” a legislative bill which, if enacted, would void certain non-competition provisions in agreements with employees and independent contractors.  The Governor’s bill is the latest in a series of attempts to limit the enforceability of non-competition agreements in Massachusetts.  In addition to enforcing other restrictive covenants such as non-solicitation and non-disclosure agreements, Massachusetts has historically enforced non-competition restrictions that are reasonably tailored to protect an employer’s goodwill and confidential information.  The state legislature declined to enact proposals limiting the enforceability of non-competition agreements in 2008 and 2013.

Among other things, the most recent bill prohibits the enforcement of post-employment/service non-competition restrictions, regardless of geographic scope or duration of time, including for those agreements entered into prior to the bill’s potential enactment date.  However, the bill would not void other important restrictive covenants, including: (i) agreements not to solicit an employer’s employees or independent contractors; (ii) agreements not to solicit or transact business with an employer’s customers; (iii) agreements not to disclose an employer’s confidential information; and (iv) agreements not to compete entered into by employees/owners with at least a 10% equity stake in connection with the sale of a business.  The bill also carves out non-competition agreements outside of an employment relationship, forfeiture agreements (whereby a competing employee forfeits certain compensation, including equity) and agreements not to reapply for a position with an employer after termination.

Like all bills, this proposed legislation will be subject to legislative process, including a committee’s review and recommendation report, which is not due until June 25, 2014.  It is anticipated that business interests will be divided on this issue with smaller technology companies more likely to support it, and larger established companies more inclined to oppose it.  In its current form, the bill allows employers to protect their business interests via non-solicitation and non-disclosure agreements even as it severely limits outright non-competition restrictions.

What Employers Should Do Now

To the extent this legislative proposal creates uncertainty about the future viability of non-competition restrictions, employers that currently utilize restrictive covenants should review their agreements and, to the extent they have not already done so, consider separating non-competition obligations from other restrictive covenants, such as non-solicitation provisions, to help ensure that these non-solicitation provisions survive if non-competition restrictions become ineffective.  In the event that non-compete obligations are prohibited in the future, properly drafted non-solicitation and non-disclosure agreements will continue to be available to provide some protection of an employer’s confidential information and its goodwill with customers and employees.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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