Governor Patrick has filed legislation to make the majority of most non-competition agreements illegal in the Commonwealth. As part of the same bill, the Governor is also asking the Legislature to join the 47 other states that have adopted the Uniform Trade Secrets Act. Only Massachusetts, New Jersey, and New York have failed to ratify this uniform law to codify trade secret law.
The Governor included these two provisions on non-competition and trade secrets in his larger “Growth and Opportunity Act of 2014” (See pages 50-56) that seeks to stimulate economic growth, particularly within the Bay State’s technology sector through legislative initiatives.
Governor claims non-compete agreements harm state’s economy
The initiative to ban non-competition agreements in Massachusetts may result from the competition between California and Massachusetts for high growth tech industries.
California’s Silicon Valley provides entrepreneurs an unparalleled opportunity to develop new high tech and Internet companies that have supported the California economy with remarkable employment opportunities and economics benefits. Some economists attribute this state’s success in incubating new business and companies to its free market in employment.
Except for non-competition agreements involving a sale of a business, California law voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind…”
Silicon Valley has been one of the fastest growing industrial centers in history. Some economists have attributed Silicon Valley’s remarkable growth to the absence of non-compete agreements thus creating an open marketplace that prohibits employers from restricting the movement of skilled employees to most innovative and fastest growing companies.
Rationale for non-compete agreements
In Massachusetts, employers can use non-compete agreements to deny access to competitors to their valued employees that they bore the cost to train and develop. Even more importantly, employers can use a non-compete agreement to restrict their employees from marketing themselves to their employers’ competitors because of their specialized knowledge or relationships with their employers’ customers.
In a bold move, the Governor now has come down strongly on the side of the venture capitalist community who argue that a free market for employees would serve the Commonwealth much better than what the present market offers.
Interestingly, Massachusetts has had a free market for employees in several professions, including doctors and lawyers, without any seemingly adverse effect on hospitals or law firms. For example, Massachusetts General Laws c. 112, § 12X prohibits non-competition agreements for physicians. Similar statutes apply to other healthcare professionals such as social workers (G.L. c. 112, § 135C), psychologists (G.L. c. 112, §129B) and registered or practical nurses (G.L. c. 112, §74D). Likewise, the Massachusetts Supreme Judicial Court has long banned all agreements by law firms or clients that would restrict a lawyer’s right to practice law.
The proposed statute broadly defines “employee” but exempts non-solicitation agreements and business sales
The Governor’s proposed law would make void and unenforceable:
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, for any period of time after an employment or independent contractor relationship has ended …
The proposed statute would prohibit all contracts restricting an independent contractor or employee from other work during the term of the contract with the employer.
Also, the proposed statute uses the broad definitions of “employee” and “independent contractor” employed in the Massachusetts independent contractor law. G.L. c. 149, § 148B. See Agency Checklists’ article: Looking at the Massachusetts Independent Contractor Law (by Garrett Harris).
If the Governor’s requested ban on non-compete agreements becomes law, agencies and insurance companies that had used these agreements will have to revamp their employment agreements.
The proposed law does exempt a number of effective practices, that when coupled with the terms of the Uniform Trade Secrets Act, if passed, should allow for expirations and customer relations, as well as marketing processes protection. These exemptions are:
- 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;
- Non-disclosure agreements;
- Non-competition agreements made in connection with the sale of a business or substantially all of the assets of a business, …
- Non-competition agreements outside of an employment relationship;
- Forfeiture agreements; or
- Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.
For agents or companies buying agency or company assets, the retention of this right to contract as part of the sale for the sellers’ non-competition is critical. The important exceptions would be in order of importance: (ii) the retention of anti-piracy agreements as a valid covenant with an employee or contractor; (iii) nondisclosure agreements, (vi) forfeiture agreements; and, (i) no raiding of employee agreements.
- The Uniform Trade Secrets Act
Presently, 47 states have adopted the Uniform Trade Secrets Act (UTSA). Massachusetts is one of the three non-adopting states along with New Jersey and New York. Governor Patrick’s Bill, along with banning non-competition agreements, would bring Massachusetts’ trade secret law in line with almost every other state in the Union.
Under the UTSA, a trade secret only has to satisfy three conditions. Those are:
- Information, including a formula, pattern, compilation, program, device, method, technique, or process,
- That derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use; and
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Once those conditions apply, the UTSA prohibits the misappropriation of the trade secret by improper means or by a breach of confidence.
The UTSA allows for damages and injunctive relief by way of both restraint and by ordering affirmative acts. The UTSA also allows punitive damages for willful and malicious misappropriation as well as attorney fees if the claim of misappropriation is either made or defended in bad faith.
Agents and companies should monitor this legislation since it seeks to make existing non-competition agreements become void.
Ordinarily statutes that change existing contract law provide language that states more or less that the new law will only apply to contracts or agreements entered into after the effective date of the act. The Governor’s Bill is quite unusual in that it contains a specific provision that states:
This section shall apply to all contracts and agreements, including those executed before the effective date of this chapter. (Emphasis added).
The application of this law to existing contracts, as proposed by the Governor, may raise Constitutional questions under the United States Constitution’s Contract Clause. This clause states that “no state shall …pass any….law impairing the Obligations of Contract.”
Agencies and companies that have direct sale forces or captive agents would be wise to check their existing agreements to determine, if some version of the Governor’s bill passes, what effect the invalidation of parts of their agreement will have on their business plans and business value.
