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Non-Competes: Will the Challenging Economy Lead to Change in the Law?

By  Lisa J. Avery-Peck and C. Forbes Sargent, Sherin and Lodgen LLP

Among other changes, the challenging economy may be triggering a subtle shift in the Massachusetts business community’s standard of what is fair and reasonable insofar as non-competes are concerned vis-à-vis employees.  It is a shift that may offer less protection to existing businesses even while it benefits employees, start-ups and companies seeking to hire new employees. 

 

The recent filing in Massachusetts of two bills seeking to prohibit or dramatically limit non-competition (or non-compete) agreements in the employment context suggests that our legislature is increasingly concerned about these issues.  This may signal a change in community norms and expectations about the protections an employer reasonably can expect in a challenging economy.  In all events, these bills call into question the future utility of non-competition agreements to employers, and merit review.  

 

In the past, non-compete agreements have been used by employers in Massachusetts to prevent (or at least deter) departing employees from working for, or starting, a competing company.  Currently, non-compete agreements are enforceable under Massachusetts law, provided they protect a legitimate business interest and they are reasonable in geographic scope and duration. 

 

One bill, which was filed by Rep. William N. Brownsberger (D-Belmont), would ban non-compete agreements in Massachusetts altogether.  Rep. Brownsberger’s bill follows the approach taken by California, the only state that currently prohibits, by statute, non-competition agreements in the employment context altogether.

 

Proponents of the bill filed by Rep. Brownsberger assert that non-competition agreements in the employment context unfairly hamper a person who has lost his or her job from finding gainful employment and may also discourage creative talent from developing start-ups.  They point out that banning non-competition agreements has not hampered business in California, which boasts a thriving high-tech industry. 

 

Critics of the bill suggest that local businesses, already suffering in the current economic climate, should not be further handicapped by additional restraints on their ability to remain competitive.  It is noteworthy, however, that Massachusetts law already prohibits non-competition agreements in the context of certain professional employment contexts, such as in physician, nurse, social worker and broadcaster employment contracts. 

 

A bill filed by Rep. Lori A. Ehrlich (D-Marblehead) takes a less comprehensive (and from the employer’s perspective, a somewhat less draconian) approach.  This bill would not ban non-competition agreements in the employment context altogether.  Rather, it would prohibit non-compete agreements in Massachusetts in the employment context in three circumstances: (1)  if the annual gross salary and commissions of the employee at the time of the employee’s termination is less than $100,000, or (2) if the non-compete agreement goes beyond what is necessary to protect the employer’s legitimate business interests, or (3) if the duration of the non-compete exceeds two years from the date of the employee’s termination (though that period may be extended by a court if the employee’s breach of the non-compete was neither known nor reasonably discoverable by the employer).

 

In addition to limiting non-competes to the circumstances just described, Representative Ehrlich’s bill also requires that the employer provide the employee with a minimum of the greater of (a) $100,000, or (b) one-half the employee’s gross base salary and commissions at the time of termination of the employee, for the duration of the non-compete period.  Notably, this amount is not offset by any income earned by the employee from non-competitive activities during the non-compete period.  This bill would certainly make employers think twice about using non-competes.

 

We may not know for some time whether either of these bills will be enacted into law.  Even if neither becomes law, their introduction suggests that the community’s sensibilities about non-compete agreements is changing.  This change may be driven, in part, by devastating changes to the Massachusetts economy.

 

Speculation abounds that even if neither of these bills becomes law, judges confronted with whether or not to enforce non-competition agreements may be more likely to balance the competing interests of the employer and the employee and the relative harm that each will suffer by enforcing or refusing to enforce a particular non-competition agreement.  Judges may find it difficult to ignore the tremendous burden that enforcement of a non-competition agreement imposes on an employee who has lost his or her job and faces a shrinking job market. 

 

In view of the shifting attitudes, employers may want to take a fresh look at their employment agreements to re-assess whether the non-competition provisions in them are genuinely necessary and reasonable under the circumstances, whether they in fact achieve a business objective that is worth protecting, and whether there are better alternatives that are less punitive to employees and that create a “win-win” situation for the employer and the employee.  One such alternative is to use a non-solicitation clause.  Such a clause prohibits an employee from soliciting customers of the company he or she left.  A non-solicitation clause can also prohibit a former employee from selling products or services which compete with the products or services offered by the company the employee left. 

 

In all events, since the enforceability of non-competes appears to be an issue that is on the minds of our legislators, this is an ideal time for companies and entrepreneurs in Massachusetts to convey their views to, and make certain that their voices are heard by, our legislature.

 

Lisa J. Avery-Peck is of counsel at Sherin and Lodgen LLP and C. Forbes Sargent is chair of the firm’s Corporate Department.