Massachusetts Noncompete Bill Set for Hearing

September 28, 2009 — Russell Beck

On October 7, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development will conduct a hearing on the two noncompete bills sponsored, respectively, by Representatives Lori Ehrlich and Will Brownsberger. While those two bills are technically before the Committee, there is a third bill that reflects a joint effort by the two legislators, which is likely to be the focus of the hearing. The representatives initially made a draft available for public comment in July. Since then, there have been many meetings, emails, and other communications providing input on the draft. We have made an effort to consider them all in drafting the revisions to the July version. We also made an effort to structure the bill in as straightforward a manner as possible, given the complicated nature of the issues and the many interests to be balanced. As before, we have striven to achieve an appropriate balance of protections and incentives to both employers and employees, and make it easier for both sides to predict the outcome of any potential dispute, thereby reducing the need to resort to the courts for resolution of such disputes. The current draft (including changes through September 28) is available here.

As a threshold matter, it is important to note that the bill will not apply retroactively or to noncompetition agreements arising outside the context of employment, nonsolicitation agreements, or nondisclosure agreements. (For definitions of any of the unfamiliar terms, please refer to Back to the Basics… Terms of Art.) The most significant aspects of the current draft are as follows:

  • The bill codifies current law, insofar as noncompetition agreements may be enforced if, among other things, they are reasonable in duration, geographic reach, and scope of proscribed activities and necessary to protect the employer’s trade secrets, other confidential information, or goodwill. Similarly, courts may continue to reform noncompetes to make them enforceable and refuse to enforce such agreements in certain circumstances.
  • The bill requires that noncompetes be in writing, signed by both parties, and, in most circumstances, provided to the employee two weeks in advance of employment. If the agreement is required after employment starts, the employee must be provided with consideration for it (beyond just continued employment). Ten percent of the employee’s then-current compensation is considered presumptively reasonable.
  • The bill prohibits enforcement of noncompete agreements against an employee whose average annual federal gross income derived from the employer during the three years immediately prior to the cessation of employment is $75,000 of less. This amount increases by $1,500 every year on the anniversary of the bill’s effective date.
  • The bill restricts noncompete agreements to one year, although it does permit garden leave clauses to be enforced for up to two years. To qualify, the garden leave must require minimum payments to the employ for each year (the greater of 50% of the employee’s highest salary with the past two years or $50,000), as well as comply with certain issues concerning the circumstances of payment.
  • The bill identifies certain restrictions that will be presumptively reasonable and therefore enforceable (if all other requirements are met).
  • The bill requires payment of the employee’s legal fees under certain circumstances, primarily where the agreement is not enforced in most respects by the court or where the employer acted in bad faith. The bill does, however, provide a safe harbor for employers to avoid the prospect of having to pay the employee’s legal fees, specifically, if the noncompete is no more restrictive than the presumptively reasonable restrictions set forth in the bill. Similarly, an employer may receive its legal fees, but only if otherwise permitted by statute or contract, the agreement falls within the safe harbor, the noncompete was enforced, and the employee acted in bad faith.
  • The bill rejects the inevitable disclosure doctrine.
  • The bill places limitations on forfeiture agreements.

The hearing is scheduled to begin at 10:30.  In an effort to assist the Committee to make the process as informative and efficient as possible, Represenatives Ehrlich and Brownsberger have offered, with the assistance of Caroline Huang (who has been working with Representative Brownsberger on the legislation) and Rep. Ehrilich’s legislative aide, Kristen Cullen, to coordinate people’s presentation of testimony. If you are interested, please visit Rep. Ehrilich’s website here or Rep. Brownsberger’s website here.

Posted in Garden Leave, Massachusetts, Noncompete, Nonsolicitation Agreement, Restrictive Covenant, Trade Secrets. Tags: , , , , , , . 17 Comments »

Back to the Basics… Terms of Art

August 2, 2009 — Russell Beck

Sometimes as a discussion progresses, the details become obscured or lost altogether.  The discussions about noncompete agreements are no exception.  So, below are some definitions with which people should be familiar:

Common Types of Agreements:

  • Restrictive covenant:  An agreement that limits a party’s ability to perform similar work.  Generally, people think of the limits as applying after the parties’ relationship ends, but typically the restrictions apply during the term of the contract as well.  (The reason for the post-contract focus is that the parties’ interests are more likely to diverge at that point.)
  • Noncompete agreement (also known as “noncompetition agreements”):  A type of restrictive covenant in which the applicable limitation precludes a party from providing services to a competitor of the other party.  These agreements can arise in many contexts (sale of a business, independent contractor agreements, partnerships, etc.), but most often arise in the employment context.  (Those that arise in the employment context are commonly referred to as “employee noncompete agreements.”)
  • Garden leave clause:  a type of employee noncompete agreement for which the employer compensates the employee while the employee is restricted from competitive activities.  There are two types: one in which employment continues during the restricted period (essentially the employee is required to provide a minimum amount of notice of resignation); one in which the employment terminates and the restrictive period begins.  For more on the garden leave clause, see Christi Adams’ post, Garden Leaves.
  • Forfeiture-for-competition agreement:  a form of employee noncompete agreement by which an employee forfeits certain benefits if he engages in activities that are competitive with his former employer.
  • Compensation-for-competition agreement:  a form of employee noncompete agreement by which an employee pays his former employer (sometimes a percentage of the revenues from the competitive activities) if he engages in activities that are competitive with his former employer.  (This agreement can be viewed as a form of forfeiture-for-competition agreement, insofar as the employee forfeits some of the compensation for competitive activities.)
  • Forfeiture agreement:  an agreement by which an employee forfeits benefits when his employment terminates – regardless of whether he engages in competitive activities.
  • Nondisclosure/confidentiality agreement:  an agreement by which an employee agrees not to use or disclose an employer’s confidential information.
  • Nonsolicitation agreement:  an greement by which an employee agrees not to solicit – and, if well drafted, not to accept – business from the employer’s customers.
  • Antipiracy agreement:  an agreement by which an employee agrees not to solicit – and, if well drafted, not to hire – the employer’s employees.
  • No-hire agreement:  a type of antipiracy agreement by which a party agrees not to hire the other party’s employees.
  • Invention assignment agreement:  an agreement by which an employee assigns to the employer any potential inventions conceived of during employment.  (Typically, the inventions are only those that somehow relate to the work of the employer.)

For more information on these agreements, see, Beyond the noncompete. 

Terms:

  • Blue pencil:  A process by which a court reviewing an agreement deletes the offending language (literally crossing it out, with no new language written in).  The court then enforces the re-written agreement if – but only if – the agreement still makes sense with such language omitted, enforces the balance of the contract as written.
  • Red pencil:  A process by which a court reviews an agreement and, if the agreement purports to be more restrictive than necessary, deems the agreement unenforceable in its entirety, regardless of whether it is capable of being narrowed. 
  • Reformation:  A process by which a court rewrites aspects of an agreement in an effort to give effect to the parties’ intent while avoiding wholesale rewriting of the agreed-upon restrictions based solely on the court’s judgment.
  • Legitimate business interests:  Those aspects of a company’s business that it may protect through noncompete agreements.  Although they vary, most states recognize trade secrets, confidential information, and goodwill as legitimate business interests.  Some recognize other things as well, including, for example, special skills and training.  General skills and knowledge, however, are not legitimate business interests. 
  • Goodwill:  Those aspects of a company’s business that tend to enable it to retain its patronage, including, for example, the company’s name, location and reputation.
  • Confidential information:  As its name suggests, it is any information that a company keeps secret.  It need not rise to the level of a trade secret (see below), although the distinction is subtle and frequently ignored.
  • Trade secret:  There are many definitions of trade secrets, including statutory and judge made definitions.  The salient point, however, is that it is a type of confidential information that gives a company a competitive advantage.  The classic example is the secret recipe for Coca-Cola.
  • Inevitable disclosure doctrine:  A judge made rule that allows a court to prevent a former employee from working for a competitor (where the employee is not otherwise restricted by a noncompete agreement) if the court finds that the employment would inevitably lead to a disclosure of the trade secret.
Posted in Garden Leave, Noncompete, Restrictive Covenant, Trade Secrets. Tags: , , , . 2 Comments »

Garden Leaves

July 26, 2009 — Christi Adams

Boston Garden

In these extraordinary economic times, many employers are learning to think outside of the box and explore employment arrangements that may be new to the United States. Many employers are familiar with restrictive covenants such as noncompetition agreements and non-solicitation agreements. However, if the employer’s objective is to delay the employee’s termination of employment for a short period of time, there is another option available that may assist the employer. The employer may consider using a “garden leave” provision.

There are two types of garden leave clauses: one in which an employee is paid to “sit in the garden” and not compete for a post-employment period (essentially a noncompete agreement with pay); and another that restricts when employees may resign their employment by requiring that the employees provide a minimal amount of notice before their resignation becomes effective. As to the latter, once employees provide notice of their resignation the employees may continue to work in order to transition job responsibilities to their replacements, or the employers may immediately relieve the employees of their responsibilities and continue to compensate the employees for their time. 

Using this latter type of garden leave, the agreement may be structured such that, in that event the employer chooses to immediately relieve the employee, the employee will be provided with pay during the restricted period. In that case, the employee’s employment terminates, but the company agrees to pay the employee during the restricted period. However, the employee’s ability to continue to receive a paycheck may or may not be conditioned on proof of the employee’s inability to find other work as a result of the noncompete provision. 

The same benefit to the employer may be achieved through the type of garden leave provision that simply requires notice of resignation. The employees are still prevented from working for a competitor for a certain period of time after they give notice of their resignation. The garden leave provision also provides employers with sufficient notice that employees are leaving their employ so that the employers may take steps to ensure that the employees do not have access to trade secrets during their notice period. By the time the employees’ employment is terminated, the employers’ current pricing structures or marketing initiatives may have changed. Thus, the notice period should be long enough to allow the employers to insulate themselves from the negative effects the employees’ terminations may cause the companies. The exact amount of time that the courts may agree to enforce is not clear at this time. Courts may fall back upon the same time periods enforceable under state laws for restrictive covenants. Thus, if employers are thinking about utilizing a garden leave provision, they should consider their local laws. 

A garden leave provision that requires only notice does not replace the purposes of noncompetition and non-solicitation agreements. They do, however, provide employers short-term relief when valuable key employees decide to voluntarily terminate their employment. Especially in this economy, where competition may be more fierce than ever, employers may want to consider their various options to protect themselves from the loss of their most important assets – their employees.

Posted in Garden Leave, Noncompete, Restrictive Covenant, Unfair Competition. Tags: , , , . Leave a Comment »

Freedom To Compete? A Symposium on Bills Affecting Employee Non-Compete Agreements

July 2, 2009 — Russell Beck

This is the inaugural posting to Foley & Lardner LLP’s Trade Secret/Noncompete Blog.  And, what better way to kick it off than with an announcement of a symposium about whether noncompete and trade secret laws need overhauling?  The symposium will be held at the Boston Bar Association (and simulcast through WestLegalEd) on July 22, 2009, from 4:00 to 6:00 p.m.

The panel’s analysis and discussion will focus on relevant pending legislation in Massachusetts.  Those bills are as follows:

1.         A bill to abolish noncompetes presented by State Representative William Brownsberger.

2.         A bill to codify, clarify, and to modify the current common law presented by State Representative Lori Ehrlich.

3.         A bill to adopt a version of the Uniform Trade Secrets Act presented by State Representative Daniel E. Bosley.

Massachusetts, however, is not alone in its recent review of these areas of law.  Several states (including, for example, Georgia, Idaho, Illinois, and Oregon) have been considering, or have recently adopted, noncompete legislation, and many recent judicial decisions have made significant clarifications to the laws of various states.  Accordingly, and with myriad reports of noncompete litigation on the rise, the issue should prove to be an important one.

The panelists will be:

State Representative William N. Brownsberger, Esq.

Russell Beck, Esq., Foley & Lardner, LLP, drafter of the bill presented by Rep. Ehrlich and author of the book,  Negotiating, Drafting, & Enforcing Noncompetition Agreements & Related Restrictive Covenants (3rd ed. MCLE 2009).

Stephen Y. Chow, Esq., Burns & Levinson LLP, symposium organizer and drafter of the bill presented by Rep. Bosley.

Michael L. Rosen, Esq., Foley Hoag LLP, author of the Massachusetts Noncompete Law Blog.

Hon. Gordon L. Doerfer (Ret.), JAMS, moderator.

Dr. Matthew Marx, MIT Sloan School, investigator on longitudinal study of electrical engineer parties to non-compete agreements.

Mr. Scott Kirsner, “Innovation Economy” columnist, Boston Globe

Posted in Garden Leave, Massachusetts, Noncompete. Tags: , , . 1 Comment »