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Non-Compete Agreements Protect Innovation Economy

Posted on September 15, 2011

On a day when a Devens company disclosed that a former employee provided proprietary wind turbine technology to a Chinese competitor, Associated Industries of Massachusetts told state lawmakers that eliminating or changing the commonwealth’s non-compete law will erode protections for intellectual property.

Non-Compete AgreementsAIM said in testimony to the Legislature’s Joint Committee on Labor and Workforce Development that three proposals to weaken or ban non-compete agreements represent a troubling shift in business practice and raise concerns regarding the appropriate protection of trade secrets.   Those protections are particularly important in Massachusetts, where technology and innovation fuel a significant share of economic growth.

The Patrick administration, which for years expressed concern about changing the current law governing non-competes, changed its position in remarks before the committee today. Secretary of Housing and Economic Development Gregory Bialecki said that a “growing body of study and analysis” suggests that non-compete agreements adversely affect an innovation economy.

Bialecki said that if people on both sides of the issue are unable to find a compromise, the administration supports elimination of the enforceability of non-compete agreements.

Non-compete agreements allow employees to agree that they will not take trade secrets and proprietary information from one company to a competing company. AIM believes that the current law of restrictive covenants is already well developed in Massachusetts and strikes an appropriate balance between protecting employers’ interests and allowing employee mobility.

AIM was the only employer association to oppose changing the non-compete laws during today’s hearing.

Massachusetts firms already face concerns that their trade secrets are not adequately protected.  Bay State law does not provide the basic trade secret protections provided by the U.S. Uniform Commercial Code.  In fact, Massachusetts is one of only four states that have not adopted this standard trade secret protection provision of the UCC. 

The Legislative hearing took place in the shadow of a developing case of a Massachusetts company accusing a foreign competitor of trade-secret theft. American Superconductor said in a regulatory filing that it intends to file civil and criminal actions against a Chinese company, formerly a customer now a competitor, for contracting with a former American Superconductor employee to obtain parts of the company’s wind turbine control software source code.

Bialecki’s testimony stood in stark contrast to his comments in 2009 in a blog posting about non-compete agreements:

“On balance,” he wrote at the time, “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.”

David C. Henderson, a member of the Labor, Employment and Benefits practice group at Nutter McClennen & Fish LLP, and an AIM member, highlights some of the many issues that Massachusetts employers should be aware of regarding the pending legislation:

  1. Would weaken employer’s ability to protect core trade secrets:  Although non-competition agreements, like non-disclosure and non-solicitation agreements, protect core business interests such as trade secrets, confidential information, and goodwill, non-disclosure and non-solicitation agreements cannot be adequate substitutes for non-competition agreements.  Non-competition agreements protect core business interests better than non-disclosure and non-solicitation agreements standing alone, by reducing both the opportunity and the motivation a former employee might have for doing harm to his former employer.
  2. Would make a substantial change in current law:  Laws relating to non-competes generally attempt to balance employees’ freedom of mobility with employers’ interests in protecting trade secrets, other confidential information, and goodwill. The legislation proposes to shift this balance decidedly against employers.  The legislation creates new and significant burdens for employers to prove that a non-compete should be enforced.
  3. Would limit the duration of non-competes to periods shorter than those frequently being found necessary at present: Some employers need non-competes that are effective for far more than a year after cessation of employment. Judges frequently agree with employers on those assessments. The legislation would place several restrictions and limitations on employers on the duration of a non-compete agreement.
  4. Would create bias: A judge deciding whether to enforce a non-compete already has wide discretion to consider all factors, including those relating either to the employee or to the employer. The legislation nevertheless singles out the “economic circumstances” of the employee and the “economic impact” on the employee as factors that courts “shall” consider. By selectively emphasizing those factors, the legislation would encourage a biased analysis and elevate the employee’s considerations above the reasonable business needs of the employer.
  5. Would force employers to pay attorney’s fees: Under current law, each party generally pays its own attorney’s fees. The legislation would lower the bar for awarding attorney’s fees to employees. Indeed, an employer could prevail at the injunction level, thus establishing the reasonableness of preventing employment with a competitor, but still have to pay the restricted employee’s attorney’s fees.

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