Should Massachusetts non-competes be voided?

Non-compete agreements are getting more attention, this time from Scott Kirsner in The Boston Globe today who urges for more common sense:

On a weekend when we celebrate American independence - and all of the blood and sweat that gave us the right to life, liberty, and the pursuit of happiness - I think it’s time for a declaration of a different sort. It is talented, smart, and driven people who make Massachusetts one of the most innovative places on earth. Our residents ought to be able to take their skills where they want and start companies when they want.

I agree with Scott that non-competes can hamper innovation, and have written about their effect. What is telling in Kirsner's article is a quote from an industry trade group about non-competes:

But most business groups oppose significant changes to the status quo. "Our members strongly feel that when they make an investment in an employee, it needs to be protected as it is under current law," says Brad MacDougall, at Associated Industries of Massachusetts, a trade group.

Companies should be more concerned about protecting their own intellectual property than preventing a former employee from taking another job, particularly when that employee gets laid off and is struggling to find work in this economy.  Because at the end of the day, the companies that win should be the ones that innovate better, not the ones who lock up the most people.

Are Noncompetes Enforceable in Massachusetts?

I am often asked about noncompetition agreements and I have been thinking quite a bit about them recently, partly because of the continuing on-again-off-again talk in Massachusetts about changing the law regarding noncompetes, but also because of a recent issue that arose when one of my clients was threatened with a lawsuit over her new company by a competitor. Noncompetes are used by businesses in a variety of situations in order to protect a company's intellectual property or business interests and are entered into with employees, contractors, investors, vendors, and any other person or group who may have access to business secrets.  For example, as I described in a previous post:

In many states, parties can agree to restrict a former employee from working for certain competitors in a limited geographic area (for example, a baker who can’t work for any other bakeries within 20 miles for one year after termination).  Such non-compete agreements are generally enforceable if the duration and geographic limitation are reasonable.  The court aims to strike a balance between protecting legitimate business interests of the company with the ability of the employee to earn a living.

Regardless of the intent of the company, noncompetes face varying enforceability standards around the country.  California, for example, makes it simple:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Among the very limited exceptions is in the context of a sale of a business.  But otherwise, California allows any employee to leave employment to work for any other company or start a competing business of their own, provided they do not steal company trade secrets. Massachusetts on the other hand currently follows the reasonableness standard described above for determining enforceability, and is it ultimately in the hands of the court to determine what is reasonable based on the circumstances.  When used properly, noncompetes can be a very powerful and effective tool for businesses in protecting their competitive position.

Enter my client.  She did some limited freelance work for a company but was never hired as an employee.  She never signed an employment agreement, nor did she sign a noncompete, a non-disclosure, a non-solicitation, or any other type of agreement.  Therefore, she is not restricted from working for a competitor or establishing a competing business (despite the protestations of the company) because there was never an agreement to prevent her from doing so and Massachusetts will not infer an agreement where one did not exist.  Plus, even if there were an agreement, the non-compete must protect a legitimate business interest in order to be enforceable.  Ordinary competition is not considered a legitimate business interest in Massachusetts. While her competing business (and the numerous other similar businesses) may ultimately take away business from the company, she did not use any of the company's intellectual property or nonpublic information to establish the competitor, so the noncompete laws protect her right to start her own business.

I am curious to hear if you have run into a situation like this.  Is a noncompete currently holding you back from taking a new job?

Can a Confidentiality Agreement Trump a Non-Compete Law? HP Thinks So.

Some very interesting legal news sparked up in the tech world this week, as recently-fired HP CEO, Mark Hurd, on Monday became the newly-hired president of Oracle, a major HP competitor.  HP almost immediately filed a suit in California to prevent that from happening.  The issue raised is whether HP can stop Mr. Hurd from working at a competitor based on his confidentiality agreements with the company. In many states, parties can agree to restrict a former employee from working for certain competitors in a limited geographic area (for example, a baker who can't work for any other bakeries within 20 miles for one year after termination).  Such non-compete agreements are generally enforceable if the duration and geographic limitation are reasonable.  The court aims to strike a balance between protecting legitimate business interests of the company with the ability of the employee to earn a living.

But California is one state that automatically voids the enforcement of non-competes (outside of certain transactions like the sale of a business) in order to promote open competition and support the employee's freedom of contract.  Other states have adopted similar laws, and even Massachusetts is considering changing its laws to be closer to California's.

In its complaint, HP is seeking what is called "injunctive relief" (in non-legal speak, they want the court to block his hiring at Oracle).  HP's complaint centers around the succinctly-named "Agreement Regarding Confidential Information and Proprietary Developments With Protective Covenants Relating to Post-Employment Activity for Incumbent Employee Working in California", and the later and much more appropriately titled "HP Agreement Regarding Confidential Information and Proprietary Developments", which Mr. Hurd signed on three different occasions.  The agreements restrict Mr. Hurd from performing job duties that are the same or similar to the job duties he had at HP only if that results in the unauthorized use or disclosure of HP's confidential information.  HP claims that Mr. Hurd simply can't do that at Oracle.

So the question for the court to decide is whether HP's confidentiality agreement is an appropriate restriction and not just a backdoor subversion of California's non-compete restriction, or whether Mr. Hurd can perform his duties at Oracle or anywhere else without using or divulging HP's confidential information.  The answer set an important example for how companies should handle agreements with their employees, particularly if they live in California.