Pierce Atwood Business Counselor Q2 2014

On April 10, Governor Deval Patrick proposed to the Massachusetts legislature to ban the enforceability of non-compete provisions in employment contracts in Massachusetts.  This conversation has been brewing for years within the entrepreneurship and greater business community in Massachusetts, but the spotlight has shifted now to Beacon Hill where it has become a central topic in the conversation regarding the future of economic development policy.  In order to fully understand the conversation, however, it is important to understanding the role, both positive and negative, that non-competes play in the Commonwealth’s larger goals of economic development and retention of highly skilled employees.

Why are non-competes used?

Traditionally, non-competes are tools championed by companies with leverage in the hiring process looking to lock up critical talent and prevent the transfer of proprietary intellectual property (or IP) developed by their employees.  In one regard, this argument is reasonable: employers make big financial investments in critical employees, paying big salaries and investing time and research resources into their work product.  To have an employee with access to sensitive IP leave for a competitor, or, in some cases start a competitor, can be economically damaging.

But, as has been well documented in the weeks since Gov. Patrick’s proposal, many in the tech community view non-competes as a deterrent for highly trained individuals to enter the workforce here and, if they have entered the workforce here, from staying here to subsequently start their own business. 

How else can intellectual property be protected?

If companies want to prevent the flow of IP, there are several other legal mechanisms for protecting IP and other confidential information.  Short of requiring full-fledge non-competes, the following critical agreements should be used by all IP-based ventures, whether startups or established business, in order to protect proprietary IP:

• Assignment of Inventions Agreement: An employee or consultant assigns to the venture the ownership of all IP that he/she develops during (and in some instances before) working for the venture.
• Non-Disclosure Agreement: An employee or consultant agrees not to disclose confidential information regarding the venture’s products or processes.
• Non-Solicitation Agreement: An employee or consultant agrees not to solicit the employees or customers (or both) of the venture for a certain term of years and in a certain geography after leaving the venture.

Often a single agreement can contain all of these provisions, which, under the current regime, could also include a Non-Competition Agreement. 

Are non-competes necessary?

Supporters of the use of non-competes argue that no amount of statutory or contractual protection against disclosure short of a non-compete can prevent the inevitable disclosure that occurs when a former employee uses their experience at a former company in the development of IP at a new company.  Many view non-competes as the only tool for preventing these types of losses. 

The Governor’s parallel proposal to adopt the Uniform Trade Secrets Act, which provides a statutory prohibition on the “misappropriation” or improper acquisition of trade secrets, is an attempt to quell some of the opposition from claiming that an employment environment without non-competes will lead to IP exploitation. 

In the end, the legislature must strike a balance between the interests of two important competing economic forces: an oft-touted innovation industry stifled by employment immobility and the economic drivers that have been built on their ability to retain and protect their IP.  California, Massachusetts' perceived biggest competitor in the recruitment of innovative companies and talent, has elected to strike that balance with a statutory ban on non-competes (with specific exceptions).  With the attention garnered by Gov. Patrick’s proposal and the rhetoric used by the competing factions, there is considerable pressure on the legislature to strike that balance going forward.

The Pierce Atwood Business Counselor covers current developments and issues of interest in the business community. For more information about the topics covered in this edition of the Pierce Atwood Business Counselor, please contact the article’s author or a member of our Business Practice Group.