Last week, Massachusetts Governor Deval Patrick announced a new economic plan and filed legislation which included a plan to eliminate non-competition agreements (as my colleague, Andrew Matzkin, reported here). The plan was quickly applauded and criticized by those in the business community. Whether or not the proposed legislation will pass remains to be seen, but if your business is reliant on non-competition agreements, you may be rightfully concerned about what passage would mean for your business going forward. It is abundantly clear that business in California has thrived despite its long-standing ban on non-competition agreements (did someone say Google?). We think that business will continue to thrive in Massachusetts as well, and we’re here to reassure you – and to let you know why we (and why you should) feel fine doing business in Massachusetts if the proposed legislation passes.
The other provisions in your current agreements will remain valid. The proposed legislation will apply to non-competition clauses in agreements, even if signed prior to the date the legislation goes into effect. However, the remaining provisions of those agreements will remain valid. So breathe… there is no need to rush out and replace all of those agreements immediately (although this is a good opportunity to take a fresh look at your current agreements).
You likely already have protections in place to protect your valuable trade secrets and other confidential information. The agreements you have in place with your employees today already place obligations on your employees to keep company business information and trade secrets confidential, and restrict the use of that information other than in connection with your company’s business. Those clauses can protect source code for your valuable software, current research and development plans, marketing strategy, product roadmaps and other valuable business information from being taken to competitors by employees.
You may still restrict competition during the term of employment. Importantly, the proposed legislation only prevents restrictions “for any period of time after an employment or independent contractor relationship has ended.” This means that businesses may continue to restrict employees’ competitive activities during the term of the employment relationship (this is permitted in California as well). These restrictions make sense because they keep employees focused on driving value for your business.
There are many express exceptions in the proposed legislation. While the proposed legislation broadly prevents “any written or oral contract or agreement arising out of an employment or independent contractor relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work…”, it also expressly provides exceptions that are helpful for your business. Specifically, the proposed legislation does not apply to:
covenants not to solicit or hire employees or independent contractors of the employer;
covenants not to solicit or transact business with customers of the employer;
noncompetition agreements made in connection with the sale of a business or substantially all of the assets of a business, when the party restricted by the noncompetition agreement is an owner of at least a 10% interest of the business who received significant consideration for the sale;
noncompetition agreements outside of an employment relationship (although not specifically explained in the proposed legislation, we think an independent contractor relationship would be considered an “employment relationship”);
forfeiture agreements (it is unclear from the language of the proposed legislation whether so-called “forfeiture for competition agreements”, where an employee who chooses to compete forfeits certain benefits (e.g., stock options or deferred compensation) is included within the meaning of forfeiture agreements as used here or if this just refers to agreements that impose adverse financial consequences on a former employee as a result of the termination of an employment relationship); and
agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.
Trade secret protection is part of the package. Patrick’s plan also includes a plan for Massachusetts to adopt the Uniform Trade Secrets Act (“UTSA”). Massachusetts currently has its own trade secret act, and UTSA would supersede the current trade secrets act for all misappropriation occurring after the effective date of the legislation. Adopting UTSA would bring Massachusetts in line with the 47 other states (as well as the District of Columbia, Puerto Rico, and U.S. Virgin Islands) that have previously adopted it, and will streamline enforcement of trade secret protection by clarifying certain aspects of trade secret protection.
So relax, and go focus on innovation. This may be the end of the world as we know it, but it certainly isn’t the end of your business.