Proposal to Eliminate Noncompetes Is Not Warranted

Earlier this month Gov. Deval Patrick called for the elimination of noncompete agreements and formally proposed this as part of a bill called An Act to Promote Growth and Opportunity.  The Governor’s proposal, and the rallying cry of its various supporters, are firmly based on the premise that noncompete agreements have a negative impact on Massachusetts workers and the Commonwealth’s economy.  However, the notion that outlawing noncompete agreements is likely to have any appreciable, positive impact on the Massachusetts economy, as a whole, simply is not justified.  In fact, changing the law could well have a negative effect on the Commonwealth.

First, it is critical to understand that, at present, noncompete agreements only are enforceable under Massachusetts law if they are necessary to protect the employer’s confidential information, trade secrets or goodwill (“goodwill” includes things such as the company’s, as opposed to the employees’, relationships with customers).  Thus, while it might sound like an oxymoron, a noncompete agreement that merely seeks to limit competition (without protecting an employer’s confidential information, trade secrets or goodwill) will not be enforceable under Massachusetts law.

Second, a noncompete agreement only will be enforceable to the extent that it is determined to be reasonably necessary, in both geographic scope and duration, to protect the employer’s confidential information, trade secrets or goodwill.  If a noncompete is overly broad, it will be “reformed” so that it extends no farther in time or scope than is necessary to protect the legitimate interests of the employer.

Third, the employer will have to convince a judge that the noncompete agreement is legally enforceable before a former employee will be precluded from working for a competitor.  Further, the judge will consider the impact that enforcing the noncompete would have on the worker in reaching his decision. Accordingly, it is important to keep in mind that under Massachusetts law a noncompete will not be enforceable unless a court rules that it is fair and reasonable.

As for the notion that Massachusetts might be losing business to California because that state has made noncompetes illegal, such thinking is misguided, at best.  While California law does have a statute declaring that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” there are a number of exceptions to this law.  Indeed, the California Court of Appeals has made it clear that:

While it has been legally recognized that a former employee may use general knowledge, skill, and experience acquired in his or her former employment in competition with a former employer, the former employee may not use confidential information or trade secrets in doing so.”  Morlife, Inc. v. Perry.

In light of this ruling, the only real difference between Massachusetts and California law with respect to noncompetes is that an employer who seeks through the use of a noncompete to protect its goodwill (as opposed to confidential information or trade secrets) will be able to do so in Massachusetts, but will not be able to do so in California.  Does anyone really think that a worker is going to eschew a job in Massachusetts and take one 3,000 miles away simply to preserve her ability to appropriate her employer’s goodwill and use it to compete against that employer in connection with some hypothetical, future venture?

Not only does answering the prior question in the affirmative appear farfetched, but at least two articles indicate that a negative response is justified.  The first, by Jason S. Wood in the Fall 2000 Issue of the Virginia Journal of Law and Technology, discusses a study examining the impact that noncompetes had on four high technology regions (including Boston and Silicon Valley).  In that article, Wood wrote that there was no correlation between “California’s prohibition of noncompetition clauses… [and] the development of Silicon Valley culture and its associated success…”  The second, a 2009 paper by Joseph E. Coombs and Porcher Taylor, is even more interesting, as it concluded that “the legal structure in California that places no restrictions on post-employment activities hinders [biotech] firms’ research and development activities.”

While I have no doubt that there are instances in which noncompete agreements have worked unfairnesses on particular individuals, using such ad hoc examples does not justify outlawing all noncompetes.  Doing so would be throwing out the proverbial baby with the bath water.

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