Massachusetts Noncompete Law

Battles that Decide Wars

blogs@foleyhoag.com (Michael Rosen) — Mon, 01 Mar 2010 22:04:41 -0500

It is often said that noncompete cases differ from other types of civil litigation in that the initial battle in the case often decides the war. If you slip and fall while buying groceries and decide to sue the supermarket, your case will follow the typical path of civil litigation: a complaint will be filed, commencing a lawsuit; the defendant will answer; the parties will spend months or even years gathering information in the discovery phase; and the case will be resolved through the summary judgment process or at trial. All of this will take at least a couple of years. Most noncompete cases, on the other hand, have an intense but brief lifespan. The plaintiff in these cases -- the former employer -- typically will say that there is an emergency and that it will suffer "irreparable harm" if the former employee is permitted to compete in violation of his agreement. The plaintiff therefore will seek an immediate remedy from a judge: a temporary restraining order and/or preliminary injunction. The judge’s decision truly often does decide the war. A party’s ability to challenge the initial injunction decision is quite limited. And, while that decision really is only "preliminary," as a practical matter, by the time the case winds it way through the litigation process, it will be too late: if the request was denied, the employee will have been working at the competitor for months or even years; and if the request was granted, the employee will be put on the "beach" for so long that the company will hire someone else.

A recent decision by the federal appellate court in Boston -- Ansys, Inc. v. Computational Dynamics North America, Ltd. -- illustrates this phenomenon and underscores the limited recourse a party has after losing at the injunction stage. Ansys sued its former employee (Dr. Caraeni) and his new employer (CDNA) in federal court in New Hampshire. (For purposes of this discussion, New Hampshire and Massachusetts law are not meaningfully different.) Ansys alleged (among other things) that Dr. Caraeni breached his noncompete and that CDNA intentionally interfered with the contract by hiring him. There was no question that the two companies are direct competitors and that Dr. Caraeni, a seemingly highly-skilled software engineer, had access to confidential information about Ansys based on his seven-year tenure.

As is typical in these cases, Ansys quickly sought a preliminary injunction to enforce the one-year noncompetition clause. After a one-day evidentiary hearing and submission of briefs by both parties, the federal district judge denied the request. It found that Ansys had not shown a likelihood that it would suffer irreparable injury if Caraeni were permitted to work at its competitor. In particular, the judge accepted as credible CDNA’s testimony that Caraeni had not been and would not be (at least for the noncompete’s duration) assigned to perform any work at CDNA that might allow him to use any of Ansys’s information, and that Caraeni’s knowledge was not useful to CDNA because of the different software architecture used by the two companies.

Ansys immediately appealed the injunction denial to the First Circuit Court of Appeals, which heard the appeal on an expedited basis. But in the end, the First Circuit refused to the disturb the lower court’s decision, emphasizing that it could do so only if the judge "mistook the law, clearly erred in its factual assessments, or otherwise abused its discretion . . ." The appellate court’s decision is replete with statements recognizing that Ansys’s arguments may well have been valid but that it could not say that the district judge’s conclusions were "clearly erroneous." What the First Circuit really signaled is that another judge may have made a different decision based on the same facts, but that the appellate court would not (and could not) question that judgment.

At this stage in the case, with its injunction request denied and its emergency appeal of that denial unsuccessful, Ansys’s options are to pursue what may be a nonexistent damages case to trial, or to find a way to end the case quickly and quietly.

The Perils of Promotions: Your Noncompete May be in Jeopardy

blogs@foleyhoag.com (Michael Rosen) — Sun, 01 Nov 2009 15:38:49 -0500

Many employers require that new hires sign a non-competition or non-solicitation agreement as a condition of hire. Companies expect that these agreements will be valid and enforceable when the employee leaves, even if the employee and his or her job evolve over time. In 2004, this basic assumption was called into question as a result of three successive decisions by Massachusetts Superior Court judges which held that a noncompete signed at an employee’s hire may later become unenforceable due to changed circumstances in the employee’s job. A summary of those decisions is here. The most generous reading of these cases suggested that any time an employee's job changed in a "material" way -- for example, a promotion involving significant greater responsibility or a transfer across departmental or divisional lines -- an employer would need to require the employee to sign a new noncompete, a practice quite uncommon in most companies. Unfortunately, in the last five years, little guidance has come from the Massachusetts appellate courts on this important issue.

This is why a recent decision by a federal appellate court -- the First Circuit Court of Appeals (which sits in Boston) -- is interesting. In Astro-Med, Inc. v. Nihon Kohden America, Inc., the First Circuit was considering an appeal of a jury verdict in favor of a former employer (Astro-Med) that sued a departed employee and his new employer for breach of a noncompete, tortious interference with contract and misappropriation of trade secrets. On appeal, the defendants argued (among many other things) that after Astro-Med hired the defendant employee (Mr. Plant), it made "material changes" in his employment, including a change from product specialist in Rhode Island to salesperson in Florida and, later, a substantial reduction in his sales territory. They argued that that these changes voided the noncompete Plant had signed at hire and therefore there was no contract that could be breached.

Interestingly, even though the First Circuit generally was applying Rhode Island law to the dispute, the parties and the court cited Massachusetts law on the subject of "material change." The court, citing one of the three 2004 Superior Court decisions mentioned above -- Lycos v. Jackson -- wrote the following:

It is apparently correct that under Massachusetts law, "[e]ach time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed."

However, the court was not willing to take this concept to the extreme that some had suggested in the past (and the defendants were suggesting in Astro-Med). Looking at the origins of the "material change" rule, the court emphasized that the appropriate question is not simply whether the job changed materially but whether the conduct of the parties clearly showed that they had abandoned and rescinded by mutual consent the earlier employment agreement containing the pertinent noncompete provision and had entered into a new employment relationship that included no such non-compete provision. Significant evidence of such a change would be that the employer requested a new noncompete and the employee refused to sign. In Astro-Med, the court held that the original noncompete still governed, as there was no evidence that the former employee's job change was a mutual abandonment of the agreement or that the employer had sought and been refused a new noncompete.

Under this approach to the material change rule, an employer need not seek a new noncompete from an employee every time the employee's job changes in a significant way (although that approach may be appropriate in certain circumstances). Indeed, employers should refrain from constantly seeking new noncompetes -- if the employee refuses to sign, the employer will be forced either to end the employment relationship or leave itself exposed to the argument that it abandoned the old noncompete when it asked the employee to sign a new one.

Legislative Hearing on Noncompetes

blogs@foleyhoag.com (Michael Rosen) — Thu, 08 Oct 2009 14:45:04 -0500

Yesterday, the Joint Committee on Labor and Workforce Development held a public hearing on proposed non-compete legislation (details about the legislation are below). The co-sponsors of the compromise legislation, Representatives Brownsberger and Ehrlich, introduced the bill, after which various interested parties presented their views to the Committee. Unfortunately, I was not able to stay for the entire hearing, but a very comprehensive summary of the differing viewpoints that were presented can be found here. I understand that the bill will be taken up by the Committee, and that the co-sponsors are hopeful that it will be brought to the floor of both houses during the current session.

Upcoming Hearing and Revised Legislation

blogs@foleyhoag.com (Michael Rosen) — Fri, 02 Oct 2009 16:46:36 -0500

The next round in the ongoing debate about noncompetes in Massachusetts has arrived. As described here, a public hearing on various forms of pending noncompete legislation will take place before the Joint Committee on Labor and Workforce Development on October 7, between 10:30 am and 1:00 pm. The location is Room A-2 of the State House. The public is invited to attend and testify.

Earlier this week, Representatives Brownsberger and Ehrlich, co-sponsors of the compromise legislation introduced this past summer (described here), published a new, revised draft and invited further input. The revised bill is here. Highlights include the following:

Minimum compensation. Noncompetition agreements would be valid only with respect to employees whose average gross income is $75,000. The bill appears to dispense with the earlier distinction between agreements intended to preserve only good will (as to which there was a $100,000 minimum salary requirement) and agreements preserving trade secrets and confidential information (as to which the salary minimum was $50,000).

Advance notice. If required as a condition of employment, a noncompetition agreement must be provided at least seven days before employment commences or with the offer letter, whichever is earlier. (The previous draft had a 14 day notice requirement.) If the offer is made orally, the employer must mention the noncompete requirement at the same time or at least before the employer tenders his or her resignation to the current employer.

Signed during employment. If entered into after employment commences, a noncompete must be supported by additional consideration, which is defined as at least 10% of annual compensation (which apparently includes incentive comp. as well as base salary). Current law, although not entirely clear, provides that continued employment is sufficient consideration for a noncompete entered into during employment.

Legitimate interests. The agreement must be necessary to protect trade secrets, confidential information and/or good will. This simply codifies existing common law.

Durational limits. Very significantly, the duration must be limited to one year, unless there is a garden leave clause providing for payment of the greater of 50% of base salary or $50,000 (on an annual basis) for a longer period, in which case the restriction can extend for up to two years.

Presumptively reasonable. An agreement that is limited in duration to six months is considered presumptively reasonable. This actually may make it easier to enforce some noncompetes. It essentially would provide an incentive to employers to limit the duration of noncompetes to six months in return for an easier enforcement environment in court.

Attorneys' fees. A court shall award attorneys' fees to an employee if the court declines to enforce a material restriction or reforms a restriction in material respect, or if the court determines that the employer acted in bad faith in attempting to enforce the restriction. An enforcing employer may recover its attorneys' fees only if the agreement is enforced as is and the court finds the employee engaged in bad faith conduct. This obviously is drafted to discourage employers from going to court unless they believe they have a strong chance of success.

Choice of law issues. Parties cannot avoid Massachusetts law via a choice of law provision. Massachusetts law will apply if the employee was a resident of or working in Massachusetts at the time of termination. New Hampshire and Rhode Island employers of employees who work in those states but live in MA may want to take note of this provision.

Nonsolicitation/sale of business provisions unchanged. The proposed legislation would not affect existing common law concerning provisions restricting solicitation of customers and employees, and restrictions in the sale of business context.

Patrick Administration Weighs in on Noncompete Debate

blogs@foleyhoag.com (Michael Rosen) — Thu, 30 Jul 2009 08:10:17 -0500

This week, a top Patrick administration official -- Gregory Bialecki, Secretary, Executive Office of Housing and Economic Development -- posted on his office's blog the Administration's current views on the noncompete debate in Massachusetts. (Many thanks to Brad MacDougall, of the Associated Industries of Massachusetts, for bringing this to my attention.) This is a significant development; until now, the Patrick administration has taken no position on the issue, indicating that it was studying the situation and receiving comments from all sides. The bottom line is this statement at the end of the post:

On balance, we don't yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem. But we will continue to keep on top of the debate.

Secy. Bialecki made clear that the Administration is on top of the issue, mentioning his awareness of the academic studies and the arguments that have been made on all sides of the issue. He listed seven reasons why the Administration currently is not prepared to side either with those who propose to abolish employee noncompetes altogether and those who back compromise legislation that would curtail and regulate their use. As to the pending legislation, he expressed concern that modifying the current standard might lead to uncertainty and litigation.

Certainly this will ignite further debate and lobbying from all interested parties.

Thoughts on BBA Noncompete Symposium

blogs@foleyhoag.com (Michael Rosen) — Sat, 25 Jul 2009 10:26:01 -0500

On Wednesday, July 22, I participated in the Boston Bar Association’s symposium on employee noncompete agreements in Massachusetts. (I posted the announcement for it here. A picture is here.) First of all, I want to thank Steve Chow of Burns & Levinson for the opportunity to participate in the panel discussion. I am not going to attempt to summarize here all of the very interesting points made during the event. (However, Amrith Kumar posted a detailed summary on his blog.) Here are some of my thoughts on the event, which started with presentations from each of the panelists and then was opened up to an interactive discussion with the (pretty large) audience.

Dr. Matt Marx presented data to support his argument that noncompete agreements significantly diminish labor mobility and economic innovation. (I'm hoping to post a link to Dr. Marx's powerpoint soon. His study on the effect of noncompetes in Michigan is here.) I have some doubts about the relevance of the Michigan "experiment" (non-competes were not enforceable in Michigan before 1985 and were enforceable thereafter, thus providing a rare opportunity to perform a before/after statistical comparison). Dr. Marx readily admits that the challenge he and other researchers face is conceiving appropriate research subjects that will be probative of the question whether noncompetes (and not other factors) materially undermine a region’s economic viability, particularly the rate at which it creates and grows companies.
One compelling feature of Dr. Marx's presentation was his survey data indicating that a very high percentage of engineers reported being presented with a noncompete by a new employer on or after the first day of employment, rather than during the hiring process or in the offer letter. I am a bit surprised by this evidence; I like to think that most employers tell employees in advance of the first day of work that they will be required to sign a non-competition agreement. Doing so certainly would aid in any future attempt to enforce a noncompete. (This is why employment lawyers draft offer letters making this clear.) If the numbers across multiple industries and jobs are consistent with Dr. Marx’s survey results, they would present a pretty good argument for requiring (perhaps statutorily) advance notice for noncompetes to be enforceable. This is one feature of the compromise legislation introduced by Representatives Brownsberger and Ehrlich.
I suspect that a large portion of the audience had come expecting to debate the merits of the original bill filed by Rep. Brownsberger, which would have followed the California model and prohibited employee non-competition agreements except in sale of business situations. Some, I am sure, were disappointed to learn that Rep. Brownsberger has backed off that proposal for now and is pursuing a compromise solution to what he believes is rampant noncompete "abuse" by employers. The compromise bill is here.
Rep. Brownsberger was quite informative in explaining his rationale for initially introducing the no-noncompete bill and then altering his course with the compromise bill. The change, he said, was motivated by strongly-voiced views from the small business community that noncompetes are necessary to protect the significant investments small business owners make in their companies. Interestingly, he said that large companies in Massachusetts have not been lobbying him on the issue.
During my presentation, I expressed a concern that the compromise legislation is quite complicated and will be unwelcome by businesses already struggling with Massachusetts’ complicated regulatory environment. Echoing that sentiment, someone in the audience suggested that a better approach would be to have a more focused bill essentially addressing two issues: (1) the concern about noncompetes being foisted upon employees at the last minute, after they have already resigned from another job and perhaps relocated to Massachusetts, by requiring employers to tell candidates ahead of time that they will be required to sign a noncompete; and (2) addressing the concern about employer overreaching after employees depart, by imposing attorneys’ fees shifting where such overreaching occurs. I think that this would be an interesting approach and one that potentially could be more palatable to the business community.
In response to a statement I made in my initial remarks suggesting that perhaps this is an issue best left to the market (companies can decide whether or not to impose noncompetes and employees can decide whether or not to sign them), Bijan Sabet of Spark Capital stated that he believed the market had already spoken and that investor money has been flowing away from Massachusetts. Obviously, that is a very significant concern and should be taken seriously in this debate. The difficulty that everyone is having in this discussion is in attempting to understand whether there is a causal connection between negative economic performance in Mass. and the availability of noncompete enforcement. (Also, Amrith Kumar suggests that the numbers are actually flat and not decreasing.) In any event, if venture capitalists and other investors are not investing in Massachusetts companies at the same level they previously did because of noncompetes (or if fewer investment opportunities exist in the first place because of noncompetes), I would like to think that it could be demonstrated more definitively than it has been so far. I think such evidence would push the debate in the direction proposed by Mr. Sabet and others.
One audience member who described himself as a senior manager in a number of companies expressed his view that noncompetes are necessary to protect what he called "intellectual capital," which he then described as something along the lines of reciprocal loyalty: that if a company invests in an individual, it has a right to expect some reciprocal loyalty from the individual for some period of time after he or she leaves. That is an understandable viewpoint, but I believe not helpful in advancing the case for continued enforcement of noncompetes. In fact, as a result of the at-will employment doctrine, companies generally do not owe an obligation to employees to employ them for any period of time, and employees have no obligation to remain employed for any period of time. If there is any duty of loyalty owed by employees to their employers (Mass. law recognizes this duty at least for more senior, responsible employees), that duty is tied to the employment relationship and ends when employment ends. A noncompete, if it is going to be enforceable, must be shown to be necessary to protect the company’s intellectual property and customer relationships. Loyalty is not part of the equation.
The discussion ended with Rep. Brownsberger indicating that he expects hearings to be held on the proposed legislation this fall. It appears that there is little or no activity on this subject in the Senate at present. As we know from Scott Kirsner’s reporting, Governor Patrick has not yet taken a position on the subject.

Stay tuned.

Bill to Abolish Noncompetes in Massachusetts Appears Dead

blogs@foleyhoag.com (Michael Rosen) — Tue, 21 Jul 2009 17:37:45 -0500

As reported in Xconomy, the effort to abolish noncompetes in Massachusetts except in sale of business situations has had a significant setback. Rep. William Brownsberger, who introduced a bill to accomplish that goal earlier this year, has now combined forces with Rep. Lori Ehrlich (who had proposed a milder limitation on noncompetes) to introduce a compromise bill that would permit continued enforcement of noncompetes, but with several restrictions. I won't catalog all of them now, but one interesting feature of the compromise legislation would be to create a "presumption of enforceability" in instances where the employer limits the duration of the agreement to six months and observes certain other limitations.

My initial reaction to this feature is that it might have the opposite effect of that intended by those who are seeking to limit abuses which they believe are inherent in the current common law-based approach. As described in previous posts, the current debate about noncompetes has been spurred by those who believe that enforcement of noncompetes in Massachusetts stifles employee mobility and technological innovation, resulting in a competitive disadvantage versus California, which prohibits noncompetes. However, based on my initial reading of the compromise bill, employers would be provided with an incentive to actually increase the number of situations in which noncompetes are enforceable (or at least presumptively enforceable). This could be more deleterious to employee mobility and innovation than the status quo.

Playing With Fire: Employers Waiving Noncompetes

blogs@foleyhoag.com (Michael Rosen) — Fri, 10 Jul 2009 11:19:29 -0500

In a recent post at Innovation Economy, Scott Kirsner describes a discussion he had with an attorney who has been involved with negotiating severance deals for several employees. The attorney has sought to avoid future noncompete complications for his clients by essentially trading severance pay for noncompete relief. The attorney told Kirsner that “employees can often get released from the non-competes by giving up about 25% of their severance payment.” This may be a desirable outcome for departing executives, but employers that regularly engage in this practice are playing with fire.

There is no doubt that waiving or scaling back non-competition or non-solicitation restrictions for departing employees may be an effective tool to reduce the cost of severance. However, doing so may have an unintended result: in a future case in which the company is seeking to enforce a restrictive covenant, its earlier waivers may come back to haunt it. A practice of releasing employees from noncompetes will expose the company to what I refer to as the “selective enforcement” problem. That is, the attorney for the defendant (i.e. breaching) employee will argue that the company has not sought to enforce the provision at issue against similarly-situated employees who have departed for competitors. Thus, the argument goes, the employer is not really seeking to protect its legitimate interests – confidential information, trade secrets and/or good will – but rather is trying to stop ordinary competition (which is not a permissible basis for enforcing a noncompete). When I am involved on the defense side of these cases, I often will try to develop evidence of selective enforcement. In my experience, judges will be quite interested to learn that a company that is seeking to enforce a noncompete against, say, the director of product development, actually allowed another senior employee (say, the head of engineering) out of his or her noncompete. Such waiver practices suggest that the company is picking and choosing whom it wants to restrain from competition. Doing so undercuts the company’s argument that it is consistent and vigilant about protecting its legitimate interests. Thus, a company that lets people out of restrictive covenants in exchange for cost savings ultimately may find itself penny-wise, but pound-foolish.

Upcoming Event on Noncompete Debate

blogs@foleyhoag.com (Michael Rosen) — Thu, 09 Jul 2009 10:56:49 -0500

The Boston Bar Association has organized an event -- open to the public (and free) -- on the various bills that would significantly alter the law governing non-competition agreements in Massachusetts. The panel of speakers will include yours truly (speaking in this setting for the "status quo") as well as the following:

State Rep. William N. Brownsberger, Esq., Sponsor of H. 1794 (bill to eliminate non-competes)

Russell Beck, Esq. Foley & Lardner, LLP, Drafter of H. 1799 (bill to restrict non-competes)

Stephen Y. Chow, Burns & Levinson LLP, Massachusetts Uniform Law Commission, Drafter of H. 87, Symposium organizer

Gordon L. Doerfer, a retired Massachusetts judge and mediator, who will moderate

Dr. Matthew Marx, MIT Sloan School, who has studied the economic effects of noncompetes

Scott Kirsner, Boston Globe columnist, author of the Innovation Economy Blog, and noncompete skeptic

More information about the event and a link for registration are here.

Kirsner Adds to No-Noncompete Debate

blogs@foleyhoag.com (Michael Rosen) — Mon, 22 Jun 2009 09:38:49 -0500

Scott Kirsner, business writer for the Boston Globe, has been perhaps the most active follower of the Massachusetts noncompete debate during the past couple of years. Last week, he posted on his blog, Innovation Economy , about a recent chat with Gov. Deval Patrick on the issue, including the pending legislation to prohibit or scale back noncompetes. The bottom line, it seems, is that Gov. Patrick continues to hedge his bets. Kirsner quotes him as saying, "If there's a consensus in the industry [as to whether they're a good or bad thing], I'm happy to support that." Well, at the moment there is far from a consensus on the issue. While some in the emerging-company world are increasingly vocal about their desire to outlaw noncompetes in Massachusetts, many others continue to support them. Kirsner describes Paul Sagan of Akamai Technologies -- obviously an influential voice in the technology space -- to be in the pro-noncompete camp.

In a column in yesterday's Globe, Kirsner describes at length his view that non-competition agreements stifle innovation, particularly because they discourage talented workers with new ideas from forming or joining start-ups out of fear of being embroiled in costly and distracting litigation. He points to the statutory exceptions that already exist for certain occupations -- doctors, social workers and broadcasters -- and questions why, if a TV anchor can move from one station to another, an engineer at a tech company can't. One answer to that question is that the movement of a TV anchor to a competitor does not threaten any legitimate business interest of his former employer. There is no confidential information at stake. The anchor succeeds or fails based mainly on his or her skill at conveying news to an audience. An engineer joining a competitor, on the other hand, arguably comes with not only her general skills and experience (which she can take with her), but also with detailed knowledge of the former employer's confidential information, and she can't simply forget that information while developing a product for a competitor. Thus, in moving to the competitor, the engineer places at risk the very confidential information that the former employer spent much time, money and other resources developing and protecting. That, at least, is the principal argument in favor of enforcing noncompetes in certain instances.

Upcoming Event on Noncompetes in Massachusetts

blogs@foleyhoag.com (Michael Rosen) — Wed, 15 Apr 2009 11:28:45 -0500

The Rappaport Institute for Greater Boston at Harvard's Kennedy School next week is holding what promises to be an interesting event on the continuing debate about noncompete agreements and economic development in Massachusetts. The event, part of an ongoing lecture series, is entitled “Using Non-Compete Laws to Spur Economic Development in Massachusetts.” The panelists include Prof. Lee Fleming and Matt Marx, academics who have focused on attempting to quantify the effect of noncompetes on business innovation; State Representative William Brownsberger, who has sponsored legislation which would prohibits noncompetes in Massachusetts in most instances; Bijan Sabet, a venture capitalist at Spark Capital who has spearheaded recent efforts to limit non-competition covenants; and my partner, Robert Fisher, who has a great deal of experience litigating these issues on all sides. (Unfortunately, yours truly will be out of town for this event.) The event will be at the Kennedy School Campus on April 21 at 5:30. More information can be found here.

Report: Employee Theft of Information is Pervasive

blogs@foleyhoag.com (Michael Rosen) — Thu, 05 Mar 2009 15:30:33 -0500

Multiple media outlets (see here and here, for example) have been covering an alarming report jointly issued recently by the Ponemon Institute, an Arizona-based research group, and Symantec Corp., that data theft is common among departing employees. As reported in the Washington Post, the most significant finding of a joint survey of employees who left a job in 2008 was that almost 60% of ex-employees admitted to taking company data of one sort or another. The most commonly identified kinds of records taken were “email lists,” personnel records, customer information (including contact lists), and “non-financial business information” (which presumably can encompass technical information, strategic information etc.).

Approximately two-thirds of those who admitted taking company information said they did so in order assist with a new job. The report indicates that employees are stealing data in multiple ways. Most common (61%) is old-fashioned theft of paper documents or hard files, followed by downloading information onto a disc (53%), onto a USB memory stick (42%), and sending documents as attachments to personal emails (38%). Interestingly, comparatively few employees ]were taking information by stealing BlackBerrys and laptops. Another quite alarming finding is that approximately 25% of the employees indicated that they were able to access data on a company’s network even after they had departed.

If these findings are an accurate gauge of employees across a range of industries, they have far-reaching implications. I will put aside the obvious privacy and identify theft issues raised by such security lapses. (See this new blog for a comprehensive discussion of information security issues.) Companies are losing important, competitive information to employees who are taking such information because it may be valuable to a competitor. Yet, it is precisely in order to protect against such unfair competition that states have developed laws prohibiting theft of trade secrets and confidential information. For the same reason, most states permit enforcement of contractual covenants restricting certain post-employment conduct by departed employees.

So, what’s going on? As is surmised in the Washington Post article -- and I can confirm seeing this repeatedly in my own practice -- employees increasingly have a sense of personal “ownership” in the information they work with while employed. Many feel entitled to keep that information -- particularly if it involves their own work product -- after they leave. Coupled with the rapid evolution of technology in the workplace and employee mobility, the taking of valuable information as employees depart has become increasingly prevalent.

The response from employers worried about these trends should be better planning and increased vigilance. Many companies have a haphazard approach to protecting their IP, particularly as employees depart. They may do a good job of requiring new hires to sign standard agreements, but then fail to remind employees of their obligations as they leave or even to recover company data and equipment. And many companies fail to take even rudimentary steps to protect against theft of information by departing (and often disgruntled employees). An employer that wishes to protect against the phenomena described in the Ponemon report would do well to develop an approach to protecting information and an exit process that lays the groundwork for the possibility of later enforcement of existing agreements and policies. If the company has suspicions about the outgoing employee’s conduct or intentions, immediate consideration should be given to investigating the employee’s computer-related activities prior to his or her departure. The fact is that most of the conduct described in the Ponemon report would have been detected by an employer that actually was looking for it.

Information on Noncompete Debate

blogs@foleyhoag.com (Michael Rosen) — Fri, 20 Feb 2009 10:10:07 -0500

For those who have been following this blog’s discussion of the ongoing debate about noncompetes in Massachusetts and recently introduced legislation seeking to prohibit such restrictions, this site is a useful resource on the subject. Thanks to Caroline Huang for bringing it to my attention. It contains the text of proposed legislation and background information on noncompetition agreements in Massachusetts. The site was created by Ms. Huang in consultation with Rep. Will Brownsberger, who is sponsoring one of the bills. The name of the site, “Prohibit RestrictiveEmploymentCovenants.net,” certainly conveys the authors' views on the subject.

Interestingly, the contrary viewpoint favoring the status quo -- i.e. that noncompetition agreements truly are necessary to protect the legitimate interests of Massachusetts businesses -- has not generated similar buzz. Perhaps that will change if the proposed legislation has legs.

Can a Noncompete be Unwritten?

blogs@foleyhoag.com (Michael Rosen) — Thu, 19 Feb 2009 10:26:12 -0500

It is possible -- at least theoretically -- to have a purely oral noncompete agreement. A covenant not to compete is, most fundamentally, a contract, and a valid and legally enforceable contract can be formed through purely verbal communications (with some exceptions not relevant here). Nevertheless, given the heightened scrutiny that noncompetes are subjected to under Massachusetts law, any employer wishing to be able to enforce a non-competition restriction in court would want the agreement to be in writing.

This point is driven home by a decision recently issued by Judge Richard T. Tucker of the Massachusetts Superior Court. At least from a reading of the decision, one is forced to wonder why the case was brought at all. The plaintiff, Steelcraft, sought a preliminary injunction to stop its former employee, Hensel, from competing through his new company, Mobi Medical. It did so despite the facts that Hensel did not sign a written covenant not to compete and that there was a dispute regarding the existence of an oral noncompete. Judge Tucker observed that even if Steelcraft could show that there was in fact an oral noncompete, that the noncompete protected a legitimate business interest, and that it was supported by consideration (such as Hensel’s hiring), Steelcraft still could not show that the noncompete was enforceable, because it did not allege that the covenant contained any time limit or was limited to a reasonable geographic area. The court next disposed of Steelcraft’s claim that Hensel had used trade secrets and confidential information to advance his own business, by finding that Steelcraft had not shown that the information was in fact confidential. Judge Tucker noted that if trade secrets and confidential business information were truly at stake, Steelcraft would have taken measures to safeguard it, such as by requiring Hensel to execute a written confidentiality or noncompete agreement. The court disposed of Steelcraft’s claim that it would be irreparably harmed absent an injunction by contrasting Steelcraft’s fear of losing business -- which could be compensated by money damages at the end of the case -- with the fact that Hensel had taken out a loan to start up his new business and without the income of his continued work, would face a sever hardship in repaying the loan. Finally, although the court did not focus on this issue, Steelcraft’s cause could not have been aided by the fact that it brought the case more than a year after Hensel left and started competing.

The lesson is a basic one: noncompetition agreements are difficult to enforce. Any business wishing to be able to restrain an employee from engaging in competitive activity after the employment relationship ends should do so through a written document that is drafted with careful consideration of the limitations imposed by applicable law.

Bill to Abolish Non-Competes in Massachusetts is Filed

blogs@foleyhoag.com (Michael Rosen) — Tue, 13 Jan 2009 08:31:22 -0500

As expected (and first discussed here), Massachusetts Rep. Will Brownsberger has introduced a bill that would abolish the use of noncompete agreements in Massachusetts, at least in the employment and independent contractor contexts. Here is the text of the proposed law:

"AN ACT TO PROHIBIT RESTRICTIVE EMPLOYMENT COVENANTS

Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment 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, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

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.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear."

As drafted, the bill would prohibit all noncompetes generated in the employment context after its effective date, presumably leaving enforceable those agreements previously executed. It also appears to be intended to leave unchanged the common law principles applicable to noncompetes in the sale of business context.

The sentence stating that the law would not "render void or unenforceable the remainder of the contract or agreement" may be intended to allow for continued enforcement of non-disclosure and non-solicitation covenants, but if that is the intent it is not entirely clear. Many of the vocal opponents of noncompetes have indicated they would favor continued enforcement of employee and customer non-solicitation restrictions. However, the legislation, as drafted, could be read to encompass at least customer non-solicitation clauses, as it might be argued that such clauses impair the employment relationship. In any event, some clarification might be necessary on this point.

Any employer that violates the new law -- presumably by either requiring an employee to sign a prohibited noncompete or attempting to enforce such an agreement -- would be liable for the employee's attorneys' fees incurred in litigating the issue. And the law specifically opens the door to other actions -- such as unfair business claims under Chapter 93A -- that could provide for multiple damages based on an employer's violation.

As reported in Xconomy, Senator Patricia Jehlen will sponsor a Senate version of the bill. The House version is expected to be referred to the House Committee on Labor and Workforce Development, which likely will hold a hearing on the subject this spring. It will be interesting to see how the Massachusetts business community reacts to this proposal.

Bill to Abolish MA Noncompetes Imminent

blogs@foleyhoag.com (Michael Rosen) — Wed, 17 Dec 2008 10:00:00 -0500

Thanks to Wade Roush for bringing to my attention his article posted yesterday in Xconomy, a very informative web publication focused on the tech sectors in Boston and on the west coast. As with this blog, Xconomy has been closely following what I have described as the Massachusetts noncompete "debate" over the past year or so. (Scroll down to see earlier posts on this subject.) Wade reports that a Massachusetts legislator, Rep. Will Brownsberger of the 24the Middlesex district, is about to introduce a bill that would abolish or significantly curtail the use of noncompete agreements in Massachusetts. The article reports that noncompetes would be outlawed in new employment contracts entered into in Massachusetts, except in the sale of business context. As described, it would be similar to current California law.

I have not yet seen the bill, which apparently is still in the drafting stage. This blog will provide further updates as more information becomes available.

Layoffs and Noncompetes

blogs@foleyhoag.com (Michael Rosen) — Mon, 24 Nov 2008 14:20:43 -0500

I recently authored an article on planning reductions-in-force, a topic unfortunately on the minds of many businesses in these difficult economic times. (The article is available here.)The last of my “tips” urges companies to remind employees affected by layoffs of the continued applicability of nondisclosure obligations and other restrictive covenants. This raises a question: will a noncompete or other restrictive covenant be enforceable against employees who are let go as part of a layoff? As is often the case in this area, the short answer is: maybe.

As drafted, noncompetition and nonsolicitation restrictions typically will apply for a specified duration following a termination for any reason, including an involuntary termination such as a layoff. Generally, under Massachusetts law, the fact that an employee was terminated in a layoff (as opposed to leaving voluntarily or being terminated for cause) is not by itself a basis for refusing to enforce a noncompete. (Note that some other states’ laws are different. For example, in New York, while the issue is not entirely settled, most courts will not enforce an otherwise valid noncompete if the employee has been involuntarily terminated without cause.)

Nevertheless, a Massachusetts judge is less likely to enforce a noncompete where the employee was laid off. In considering requests for temporary restraining orders and preliminary injunctions to enforce noncompetes, judges are required to engage in a balancing of the equities, which involves consideration of basic fairness: would it be fair to enjoin the individual from competing with a former employer under the particular circumstances of the case? In a difficult economic environment, with companies laying off workers and unemployment rising, many Massachusetts judges will not want to enforce a noncompete against a laid off worker and will look for ways to avoid or scale back enforcement.

So, an employer seeking to enforce a noncompete following a lay off needs to stack the deck as much as possible with factors that would favor enforcement. As a starting point, noncompetes should be clear, understandable to employees, and narrowly drafted to protect the company’s legitimate interests in confidential information and/or good will. If the relevant document is vague or overbroad, employers should consider correcting those defects as part of the employee’s departure (for example, in a separation agreement). Relatedly, laid off employees should be reminded of continuing post-termination obligations and should be provided copies of the relevant agreements. Perhaps most importantly, employers should consider paying the laid off employee for some or all of the noncompete period. All other things being equal, Massachusetts judges will be more willing to enforce a noncompete against an individual who has been provided a generous severance package than against an employee who desperately is trying to provide for his or her family.

Finally, employers that wish to be able to enforce a noncompete following a layoff should gather and preserve any evidence of “bad acts” by the former employee. An injunction will be more likely where the employer isn't merely worried about future harm but can point to evidence of, for example, inappropriate transmission, downloading or retention of confidential information; solicitation of customers or employees; or refusal to return company property. Companies that are consistently vigilant about discovering misuse of their information will improve their chances of stopping inappropriate competition.

Federal or State Court: Which is Better for Noncompetes?

blogs@foleyhoag.com (Michael Rosen) — Tue, 18 Nov 2008 14:55:09 -0500

Many litigators of non-competition agreement cases in Massachusetts would reflexively answer “state court” to the above question. That is, given the choice (if jurisdictional principles permit) of bringing an action to enforce a non-compete or non-solicitation provision in state or federal court in Massachusetts, the conventional wisdom would be to avoid what has been perceived as the more exacting scrutiny of the judges in the U.S. District Court in Boston.

But some recent trends might suggest otherwise. Many state court non-compete cases are now heard in the Business Litigation Session (BLS) of Suffolk Superior Court, which although located in Boston, is authorized to hear cases brought in other counties. That court has developed a body of non-compete jurisprudence that includes a healthy degree of skepticism about enforcement of traditional non-competes (as opposed to customer non-solicitation agreement, which are more easily enforced). At the same time, the federal court in Boston periodically will issue a preliminary injunction decision that would suggest a greater willingness to enforce restrictive covenants than has been expressed in the BLS. One example is the recent decision by U.S. District Judge Nathaniel M. Gorton in Bio-Imaging Technologies, Inc. v. Marchant and M2S, Inc., in which Judge Gorton preliminarily enjoined an individual, Marchant, from assuming a position as director of business development with M2S, a competitor of Marchant’s former employer, Bio-Imaging. The decision is notable in that Judge Gorton somewhat summarily dismissed a number of potentially viable defenses to enforcement of the non-compete and non-solicitation clauses at issue.

For example, the court gave short shrift to the defendants’ argument that enforcement of the restrictive covenants at issue (one-year non-compete and non-solicitation provisions) was not necessary to protect Bio-Imaging’s confidential information. Judge Gorton found that Marchant had access to and knowledge of pricing, sales strategies and customer relationships, presentations and proposals, and found that the fact that some such information was available from public sources did not undermine enforceability of the restrictive covenants.

Perhaps most notably, the court rejected a “change of circumstances” defense. Marchant had argued that the restrictive covenants, signed at hire, were no longer enforceable because both Marchant’s position at Bio-Imaging, as well as the company’s business in the medical imaging industry itself, had changed dramatically since he was hired. The “changed circumstances” defense has received a fair amount of attention in recent years as a result of several Massachusetts Superior Court decisions in which judges found their way out of enforcement of restrictive covenants based on the concept that material changes in an employee’s job following the execution of the non-compete might undermine the legal “consideration” that is necessary to enforce a restrictive covenant. (See this article for a description of those cases.) Judge Gorton spent no time on the legal backdrop to this argument and rejected the defense on the facts, finding that Marchant’s role at Bio-Imaging had not undergone any “dramatic” change despite the change in his title from Manager of Clinical Trial Services to Director of Business Development. But he also suggested that a more dramatic change might not have mattered, because the restrictive covenants were not limited to a specific job title but rather applied during and after the employee’s “period of employment with the company” in any capacity. It is unclear whether Judge Gorton had in front of him the recent Massachusetts cases, but his decision suggests that he would give them little weight.

Welcome to the Massachusetts Noncompete Law Blog

blogs@foleyhoag.com (Michael Rosen) — Tue, 18 Nov 2008 14:07:49 -0500

Foley Hoag’s Massachusetts Noncompete Law Blog focuses on developments in Massachusetts in the areas of covenants not to compete, non-solicitation and non-disclosure agreements, trade secrets and the many related issues that arise when employees move between employers. As court decisions and other legal developments arise, this blog will describe them and discuss their implications for the businesses and individuals affected by them.

In several of the industries that are significant drivers of the Massachusetts economy—including high technology, life sciences and financial services—employers routinely require employees to sign various types of agreements restricting their activities during and after their employment. As a company’s intellectual property is placed at risk every time a valued employee walks out the door, the movement of talent between companies—particularly competitors—begets litigation. We hope to promote a working dialogue on these developments—post your thoughts and join the discussion.

We look forward to the conversation.

Massachusetts Legislature Adds to Short List of Prohibited Non-competes

blogs@foleyhoag.com (Michael Rosen) — Thu, 02 Oct 2008 15:52:57 -0500

I would not be the first to observe that the Massachusetts legislature sometimes acts in strange and mysterious ways. It has been known to surprise even those of us who think we are paying attention to such things with unexpected employment-related legislation. The very significant amendment in 2004 to the Massachusetts Independent Contractor Law (.pdf) is a good example of this phenomenon: although it has wide-ranging application and has vexed employment lawyers and the business community since its passage, it was attached to a bill focused on the construction industry and was largely unknown to the outside world for weeks after its enactment, until the Attorney General’s office issued an advisory interpreting it.

A recent -- but fortunately less momentous -- example concerns non-competition agreements. Six weeks ago, on August 23, Governor Patrick signed a new law prohibiting non-competition agreements for social workers in Massachusetts. The text of the law is available here (.pdf). It states that any contract with a social worker licensed under Chapter 112 of Massachusetts General Laws that includes a “restriction of the right of the social worker to practice in any geographic area for any period of time after termination” is void and unenforceable with respect to that restriction. The law does not invalidate or render unenforceable the remainder of a contract or agreement containing such a restriction.

This law adds to a very short list of professions as to which there is a statutory prohibition on post-employment non-competition agreements: physicians, nurses, broadcasters, and now social workers. In addition, non-competes are invalid as to lawyers pursuant to the Rules of Professional Responsibility adopted by the Massachusetts Supreme Judicial Court.

I have been digging -- to no avail -- for some information that might shed light on the source or necessity of this new law. Certainly there has been nothing like the very public debate in the tech and VC community (detailed in this blog) over the past year about the effect of non-competes on the Massachusetts economy. And an Internet search on the subject of Massachusetts-based social workers and non-competes turns up nothing. As far as I know, mine is the very first voice in the electronic universe to mention this new law! (Thanks to my partner, Rob Fisher, for bringing this law to my attention.)