Senate Bill Would Expand R&D Credit; Restrict Non-Compete Agreements

Posted by Christopher Geehern on Jul 2, 2014 2:56:00 PM

The Massachusetts Senate approved an economic development bill yesterday that would restrict the use of non-compete agreements and broaden existing tax incentives for companies to conduct research and development.

IntellectualProspertyA legislative conference committee will now hammer out differences between the Senate bill and a similar measure passed several weeks ago by the House of Representatives. The House bill includes neither the non-compete nor the R&D tax provisions.

AIM supports the updated R&D tax credit. The association continues to study the Senate non-compete measure with an eye toward maintaining adequate protections for the intellectual property of employers.

The non-compete compromise would prohibit employers from using the agreements with hourly employees and limit the length of those agreements to six months.

Non-competes would have to be presented at least five business days before the employee starts work, or when any formal offer of employment is first made to the employee. If the agreement is entered into after the person is already employed, but not in connection with separation from employment, it must be supported by fair and reasonable consideration in addition to the continuation of employment, and notice of the agreement must be provided at least 10 business days before the agreement is to be effective.

The Patrick administration and a coalition of venture capitalists have been seeking to ban non-competes altogether, arguing that they inhibit the growth of new companies in the innovation economy. AIM has led the effort to preserve the current law governing the use of non-competes.

Brad MacDougall, Vice President of Government at AIM, says the non-compete issue is really about choice for both individuals and employers, who should be free to negotiate contracts of mutual benefit as long as the employee is a part of the process.

Employees already enjoy legal protection against overly restrictive non-compete agreements, according to MacDougall.  Case law dictates that enforcement of agreements occurs only when they:

  • are narrowly tailored to protect legitimate business interests;
  • are limited in time, geography, and scope;
  • are consonant with public policy; and
  • the harm to the employer from non-enforcement outweighs the harm to the employee.

The Senate bill seeks to reassure employers about protection of intellectual property by adopting a version of the federal Uniform Trade Secrets Act. But the Massachusetts version contains a major problem – it forbids court injunctions with respect to trade secrets “unless the trade secret is specified with sufficient particularity so as to reasonably enable the respondent to prepare a reasonable defense under the circumstances.” 

So an employer would have to specify with “particularity” the trade secrets at issue before obtaining an injunction.  It would be nearly impossible for a company to secure an injunction before a competitor or former employee carries away vital company information.

Massachusetts Secretary and Housing and Economic Development Gregory Bialecki signaled yesterday that the administration is open to compromise on non-competes.

Sen. Michael Rodrigues, a Westport Democrat, disagreed with the provision preventing hourly workers from being subjected to non-compete agreements. Rodrigues argued that in the building trades employers often pay for training and licensing for their workers, and need protection that non-compete agreements offer.

All four Republicans – Sens. Bruce Tarr, Robert Hedlund, Richard Ross, and Donald Humason - and Sens. Rodrigues, Harriette Chandler and Karen Spilka voted against the amendment. 

The R&D tax credit amendment filed by Rodrigues, Tarr and Senator Barry Feingold, would allow employers the option to claim a credit equal to 10 of any research expenses that exceed a base amount calculated over a period of three years. Current law allows credits only for incremental R&D spending over a set base period in the 1980s.

AIM believes the changes are necessary to reverse a troubling 19.3 percent decline in R&D spending among Massachusetts employers between 2007 and 2011. The vast majority of research and development in Massachusetts takes place not in urban innovation districts, but in advanced manufacturing, defense and biopharma companies salted throughout the commonwealth

“And we know that R&D credits work. Massachusetts enacted a set of research and development tax incentives in 1991 that were among the most advantageous in the nation. Over the next five years, R&D spending in the commonwealth increased by more than 50 percent,” said John Regan, Executive Vice President of Government Affairs for AIM.

A recent report from The Pioneer Institute found that overall R&D spending in Massachusetts fell 10.3 percent in the four years ending in 2011. Massachusetts fell further behind chief R&D rival California, which significantly increased its R&D market share on the strength of one of the strongest R&D credits in the nation – 15 percent.

Topics: Massachusetts senate, Non-Compete Agreements, Taxes

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