Despite Legislative Inaction, it May Be Time to Test the Fitness of Your Non-Competes

When the clock struck midnight on August 1^st, it brought the Massachusetts legislative session to a close.  It also brought to a close the latest efforts by the Great and General Court to change the landscape regarding non-compete law.  Although the proposed legislation failed due to the inability of the two houses of the legislature to agree on critical provisions, the closeness of the loss may portend that change is on the way.  In the meantime, life moves on – for employers who have employees currently signed to non-competes; and for employers who may want to have employees sign them between now and when (if?) the law does actually change.

If you are in either situation, what should you do in light of this near miss?  This post will hopefully offer some constructive advice.

First, The History.  Massachusetts has traditionally honored an employee’s right to bargain away his right to engage in certain future conduct, including conduct competitive with his present employer.  While courts have scrutinized such agreements closely, if the employer can show a protectable interest and the scope, time and geographic limits of the restrictions are reasonable, they will usually be enforced.

For nearly a decade, bills have been introduced to curtail or modify the use of non-competes.  These bills have precipitated a pitched battle between (a) the forces who sought to do away with them as a means of encouraging innovation and (b) the forces that fought to save them so that trade secrets and proprietary rights could be preserved.

Until recently, the proposed legislation gained little traction.  In this past session, however, the drive gained considerable steam and the Massachusetts House and Senate both passed separate bills that would significantly alter this landscape.  The differences between the bills proved to be too wide a gulf to be bridged in the current legislative session, but the common provisions found in both may mean change is not far off.

Horseshoes, Hand Grenades and Non-Compete Legislation?  There is a saying that “close” only counts with horseshoes, hand grenades and drive-in movies.  Despite the failure to bridge the gulf, the legislature’s near miss on non-competes may be added to that list.  Although such agreements remain valid and arguably enforceable, judges are not required to enforce them.  Judges have always had broad discretion to evaluate the equities of the specific situation (what is fair between this employee and this former employer under these circumstances?) and elect not to enforce on that basis.  Given how close passage came, some of the details of that legislative process are likely to be trotted out by an employee in the face of an employer’s effort at enforcement.

Both Houses Find a Pox (Actually Several of Them).  Both the House and Senate versions reflected a recognition that there were some common practices by employers in the use of non-competes that deserved correction.  In this regard, there was consensus in the competing bills on the following:

It was unfair for an employer to spring the requirement to sign a non-compete on an employee after she had already burned her bridge with her present employer.

1. Agreements longer than a year exceeded the legitimate time that an employer truly needed protection (with certain limited exceptions).
2. Too many employees were being asked to sign, including those who were paid on an hourly basis and posed no real threat to their employers.
3. It was unfair for employers to gain such valuable protection without providing meaningful consideration to the employee who was surrendering his valuable future right to work in his chosen field.
4. It was unfair to impose restrictions on future employment when the employer has terminated the employee without cause.

So What Should You Do?  If you have non-competes with your existing employees, you should compare them to this list to see if they run afoul of these concepts.  A simple checklist looks like this:

• When was the employee asked to sign? Did he have a meaningful ability to refuse to sign?
• Is the duration longer than a year? If so, why?
• Is the employee paid on an hourly basis?
• Was anything of value given to the employee at the time she signed? Will she be paid anything at the time she is expected to stay on the sidelines and not compete?
• How did the employment end? Was the employee terminated without cause?

If the answers to any of those questions run afoul of the concerns recognized by the two houses, you may not be able to convince a judge that the equities warrant enforcement.  You should therefore discuss with your attorney whether a plan to revise your current agreements may be in order.