AIM Business Insider

Bills Pose Threat to Employers as Lawmakers Wrap Up Formal Sessions

  

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A variety of troubling proposals that threaten to impede an already slow economic recovery remain up for debate as the Massachusetts Legislature prepares to end formal sessions on July 31.

AIM has consistently opposed proposals that would place costs, burdens and challenges on ability of employers to retain and grow jobs in the commonwealth. Cost burdens are especially dangerous at a time when confidence among Massachusetts employers took its second-largest one-month drop in history during June.

Three pending bills raise particular concern:

1. Mandatory paid sick days - A redrafted mandated sick-time bill would require companies with fewer than six employees to provide unpaid sick time, and all other employers to offer paid sick time. The bill comes with a host of new workplace regulations. (Read AIM’s blogs)
2. Workplace bullying – A bill that vaguely seeks to define “workplace bullying, mobbing and harassment” would stifle normal workplace coaching and critiques and invite frivolous litigation.
3. Weakening of non-competition agreements – Various bills would weaken an employer’s ability to protect business and trade secrets through private-party contracts such as non-compete agreements.  The current legal protections are particularly important here in Massachusetts, where technology and innovation fuel a significant share of economic growth. (Read AIM’s blogs)

Not exactly the sort of bills you would include as part of an effective strategy to encourage job creators to invest in Massachusetts.  These proposals would, in fact, cause just the sort of bureaucratic tangle that discourages employers from adding the jobs that thousands of unemployed residents of the commonwealth so desperately need.

Let’s not give Massachusetts employers and (companies seeking to locate and invest in here) a reason to leave or say “No thanks” to Massachusetts.  Our collective efforts must be focused on job creation public policy for the residents of the commonwealth.

To learn more about these and other HR-employment legislative proposals pending before the Legislature please contact Bradley A. MacDougall by email (bmacdougall@aimnet.org) or calling 617-262-1180.

Massachusetts Court Case Underscores Need for Non-Compete Agreements

  

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Editor's Note – Andrew Botti is an attorney with AIM Member law firm McLane Graf Raulerson & Middleton.  He specializes in business litigation related to labor and employment law, non-competes and trade secrets.  

A recent Superior Court case out of Suffolk County illustrates the need to preserve current Massachusetts law governing the enforceability of non-competition agreements.

Life Image was a relatively new start-up company that had developed a “dramatic, cost-cutting” shared-imaging product for radiologists that could be accessed over the Internet via so-called “cloud” technology. Before selling any products, Life Image hired a director of business development tasked with establishing sales avenues for the company. The individual who was hired eventually became vice president of business development. He was apparently involved in the many major strategic business development decisions being made by the start-up.

The vice president’s employment with Life Image was subject to written confidentiality and non-competition covenants. The non-compete language provided that for a period of 12 months following a termination the vice president would not “engaged directly or indirectly and any business presently engaged in by life Image or in which Life Image engaged during the term of his employment."

Approximately two years later, after Life Image had gone to market and caught the attention of a major competitor, the V.P. resigned and went to work for that competing company. The Superior Court found the competitor was well aware that “Life Image was developing and marketing a powerful Internet tool that was ground breaking,” and that it had “no equivalent product.” In fact, the competing company had reached out to the vice president prior to his resignation from Life Image. The court found that the competitor had targeted the vice president for recruitment because of his position with Life Image.

Prior to his departure from the start-up, the V.P. apparently copied the contents of his Life Image laptop computer onto a brand-new Macbook and returned the Life Image computer on the final day of his employment.

The court found that the V.P. carried the complete Life Image product with him on his computer when he left his employer. Forensic evidence also showed that a large amount of Life Image’s files were exported from the V.P.’s company laptop onto an external hard drive prior to his departure.

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Massachusetts Lacks Foundation to Eliminate Non-Compete Agreements

  

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People who support banning non-compete agreements in Massachusetts often point to California as a state that has unleashed a flood of entrepreneurial energy by doing away with non-competes.

But it turns out that California could afford to eliminate non-competes because the state is far better equipped than Massachusetts to protect the intellectual property of employers. The land of sunshine on the left coast is one of 46 states to have adopted a Uniform Trade Secrets Act to help employers protect their technology and ideas from walking out the door with employees, while Massachusetts is one of the four that have not.

How important is the Uniform Trade Secrets Act to employers? Two lawyers at AIM member Holland & Knight - Paul Lannon, partner and chair of the Non-Competition, Trade Secrets and Employee Defection Team and Senior Counsel James Michalski – argue that such laws are essential:

The July 2011 ruling of Richmond Technologies, Inc. v. Aumtech Business Solutions affirms the right of employers to protect their trade secrets under the California Uniform Trade Secrets Act as a means of preventing unfair competition by a departing employee.  The ruling also provides the following:

• Proof positive that an employer can enforce restrictive covenants in California provided that the enforcement results from the need to protect its “trade secrets.”
• Demonstrates the importance for California employers to write employment contracts that link limits on competition by departing employers to the protection of the employer’s “trade secrets.”
• Highlights how a strong trade secrets law in California can protect intellectual property rights in a way that Massachusetts law does not currently provide.

The Richmond Technologies decision demonstrates the critical use of “trade secret” protections for employers.  The egregious facts of that case detail how an employee stole trade secrets from his employer and then leveraged that information to obtain a new job with a direct competitor.  The employee and the direct competitor even schemed to steal the trade secrets. 

Richmond Technologies ultimately prevailed against the rogue employee because the court construed the employment agreement as being consistent with the California Uniform Trade Secrets Act, which defines “trade secret” to include programs, methods, and techniques that derive independent economic value from not being generally known to the public, provided they are subject to reasonable efforts to maintain their secrecy.

AIM believes that protecting the intellectual property of employers is critical to the knowledge-based Massachusetts economy with its heavy concentration of technology, biosciences and manufacturing companies. The association recently testified against legislation that would significantly alter the commonwealth’s non-compete laws and backs a second bill that would establish a Uniform Trade Secrets Law.

Massachusetts must join the large majority of states that have Uniform Trade Secrets laws before even considering changes to non-competes.  The intellectual vibrancy of the Massachusetts economy is at stake.

Non-Compete Agreements Protect Innovation Economy

  

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On a day when a Devens company disclosed that a former employee provided proprietary wind turbine technology to a Chinese competitor, Associated Industries of Massachusetts told state lawmakers that eliminating or changing the commonwealth’s non-compete law will erode protections for intellectual property.

AIM said in testimony to the Legislature’s Joint Committee on Labor and Workforce Development that three proposals to weaken or ban non-compete agreements represent a troubling shift in business practice and raise concerns regarding the appropriate protection of trade secrets.   Those protections are particularly important in Massachusetts, where technology and innovation fuel a significant share of economic growth.

The Patrick administration, which for years expressed concern about changing the current law governing non-competes, changed its position in remarks before the committee today. Secretary of Housing and Economic Development Gregory Bialecki said that a “growing body of study and analysis” suggests that non-compete agreements adversely affect an innovation economy.

Bialecki said that if people on both sides of the issue are unable to find a compromise, the administration supports elimination of the enforceability of non-compete agreements.

Non-compete agreements allow employees to agree that they will not take trade secrets and proprietary information from one company to a competing company. AIM believes that the current law of restrictive covenants is already well developed in Massachusetts and strikes an appropriate balance between protecting employers' interests and allowing employee mobility.

AIM was the only employer association to oppose changing the non-compete laws during today’s hearing.

Massachusetts firms already face concerns that their trade secrets are not adequately protected.  Bay State law does not provide the basic trade secret protections provided by the U.S. Uniform Commercial Code.  In fact, Massachusetts is one of only four states that have not adopted this standard trade secret protection provision of the UCC. 

The Legislative hearing took place in the shadow of a developing case of a Massachusetts company accusing a foreign competitor of trade-secret theft. American Superconductor said in a regulatory filing that it intends to file civil and criminal actions against a Chinese company, formerly a customer now a competitor, for contracting with a former American Superconductor employee to obtain parts of the company's wind turbine control software source code.

Bialecki’s testimony stood in stark contrast to his comments in 2009 in a blog posting about non-compete agreements:

“On balance,” he wrote at the time, “we don't yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem.”

David C. Henderson, a member of the Labor, Employment and Benefits practice group at Nutter McClennen & Fish LLP, and an AIM member, highlights some of the many issues that Massachusetts employers should be aware of regarding the pending legislation:

1. Would weaken employer’s ability to protect core trade secrets:  Although non-competition agreements, like non-disclosure and non-solicitation agreements, protect core business interests such as trade secrets, confidential information, and goodwill, non-disclosure and non-solicitation agreements cannot be adequate substitutes for non-competition agreements.  Non-competition agreements protect core business interests better than non-disclosure and non-solicitation agreements standing alone, by reducing both the opportunity and the motivation a former employee might have for doing harm to his former employer.
2. Would make a substantial change in current law:  Laws relating to non-competes generally attempt to balance employees’ freedom of mobility with employers’ interests in protecting trade secrets, other confidential information, and goodwill. The legislation proposes to shift this balance decidedly against employers.  The legislation creates new and significant burdens for employers to prove that a non-compete should be enforced.
3. Would limit the duration of non-competes to periods shorter than those frequently being found necessary at present: Some employers need non-competes that are effective for far more than a year after cessation of employment. Judges frequently agree with employers on those assessments. The legislation would place several restrictions and limitations on employers on the duration of a non-compete agreement.
4. Would create bias: A judge deciding whether to enforce a non-compete already has wide discretion to consider all factors, including those relating either to the employee or to the employer. The legislation nevertheless singles out the “economic circumstances” of the employee and the “economic impact” on the employee as factors that courts “shall” consider. By selectively emphasizing those factors, the legislation would encourage a biased analysis and elevate the employee’s considerations above the reasonable business needs of the employer.
5. Would force employers to pay attorney’s fees: Under current law, each party generally pays its own attorney’s fees. The legislation would lower the bar for awarding attorney’s fees to employees. Indeed, an employer could prevail at the injunction level, thus establishing the reasonableness of preventing employment with a competitor, but still have to pay the restricted employee’s attorney’s fees.

Please contact me at bmacdougall@aimnet.org if you would like to receive updates on this issue.