Protecting Your Confidential Business Information While the Noncompete Debate Continues

08 September 2009 Publication

Legal News Alert: Private Equity & Venture Capital

Certain recognized voices in the venture capital (VC) community have become increasingly vocal in their call for the abandonment of noncompete agreements in Massachusetts. Noncompetes are agreements that impose post-employment restrictions on a former employee’s ability to compete with its prior employer. These VCs believe that noncompete agreements stifle an employee’s mobility and innovation and, therefore, VC interest and investment. In support of their position, they point to the relative success of Silicon Valley’s tech industry as compared with Boston’s 128 high-tech corridor. They believe that Silicon Valley’s comparative success is directly related to the fact that California prohibits noncompete agreements, while Massachusetts permits them. They contend, therefore, that by banning noncompetes, Massachusetts could reinvigorate VC investment and resultant innovation.

Right or wrong, the VCs were able to garner support in a variety of sectors, including within the Massachusetts Legislature. In the past few months, however, the legislative approach has shifted direction. A new bill, which we at Foley were asked to write, would make the following changes to the law:

  • Noncompete agreements would be required to be in writing and provided to the employee two weeks in advance (if possible) of employment or its effective date. 
  • A noncompete entered into during the term of employment would require reasonably adequate consideration (value) beyond simply being permitted to continue to work for the company.
  • Noncompete agreements would be limited to a term of one year, except for garden leave clauses (i.e., noncompete agreements for which the employer pays the employee during the post-employment restricted period), which can last for up to two years.
  • Presumptions of reasonableness and enforceability arise for noncompete agreements that are limited in certain specified respects such as durations of no more than six months.
  • Employees earning less than $50,000 would be exempt from noncompetes. Employees earning between $50,000 and $100,000 would be exempt, unless the noncompete is designed to protect trade secrets and/or confidential information.
  • Employees would be entitled to their legal fees in certain instances.

Recognizing the employer’s legitimate interests (i.e., the need to protect its trade secrets, confidential information, and customer goodwill), the legislators behind the bill rejected the approach of banning noncompetes altogether. Instead, the legislators designed a framework that offers protections and incentives to employers and employees, and makes it easier for both sides to predict the outcome of any potential dispute, thereby reducing the need to resort to the courts for resolution of such disputes.

Although the bill has not yet been passed and, indeed, is only very early in the process, the debate rages on. Moreover, Massachusetts is not the only state that has seen its noncompete laws revisited. Oregon, for example, recently changed its laws in a framework similar to that being considered by Massachusetts. In contrast, Georgia is in the process of strengthening its noncompete laws to permit greater enforcement of noncompetes.

What does this mean for you? It means two things:

First, all noncompete agreements should be reviewed for likely enforceability — within Massachusetts and in other states where its enforcement might be important. The legal framework varies by state, and each case turns on the specific facts and equities at hand, much more so than almost any other type of litigation. As a starting point, noncompetes should be required only of those employees who pose a threat to the company’s trade secrets, confidential business information, or goodwill. They should be narrowly tailored to meet the company’s legitimate business objectives. If they do not meet these basic requirements, they likely should be updated. Any changes, however, must be made carefully; any mid-employment change to a noncompete risks invalidating the agreement in its entirety.

Second, alternatives to noncompetes should be considered as well — especially where noncompetes are unlawful or heavily restricted, or in jurisdictions in which they are facing challenges to their continued viability. These agreements include nondisclosure agreements, agreements not to solicit customers, agreements not to solicit employees, invention assignment agreements, and others. Such agreements can supplement or supplant noncompete agreements, but each will be subject to scrutiny by a court. Therefore, they must be prepared properly.

Given the complexity of the law in this area and the highly factual nature of the inquiry undertaken by the courts, care should be taken to draft and execute these agreements.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individual:

Russell Beck
Boston, Massachusetts

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