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?