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A Statesmanlike Approach to Non-Competes

Posted by Rick Lord on Jul 25, 2016 7:54:02 AM

The 19th-century British Prime Minister Benjamin Disraeli defined a statesman as “essentially a practical character” who works “to ascertain the needful, and the beneficial, and the most feasible manner in which affairs are to be carried on. 

DeLeo2016.jpgMassachusetts House Speaker Robert DeLeo displayed admirable statesmanship and determination in forging a consensus wage-equity bill under which workers will be fairly compensated regardless of gender while employers retain the ability to design competitive pay plans to attract and retain skilled employees. The bill won unanimous approval Saturday and is now on Governor Charlie Baker's desk.

Now, the speaker is putting his statesman’s hat back on in an effort to pass a compromise bill governing the use of non-compete agreements in Massachusetts. His efforts deserve the full-throated support of the employer community.

You know the non-compete issue by now. AIM has fought relentlessly for several years on behalf the vast majority of Massachusetts employers who wish to preserve the use of non-compete agreements to protect intellectual property. Efforts to ban the use of non-competes have been driven by a small group of well-heeled venture capitalists who cannot seem to master the idea that if you don’t like non-competes, just don’t use them.

Speaker DeLeo, as he did with wage equity, reached out to AIM and other business organizations to understand the concerns that employers had with a possible ban on non-competes. He wanted to limit the use of non-competes with low-income workers, teen-agers, interns and other categories of workers without harming companies seeking to prevent the loss of trade secrets worth millions of dollars.

The result was a compromise bill endorsed by the employer community that would limit non-competes to one year and give employees the opportunity to consult a lawyer when signing a non-compete, but not require companies that compensate employees at the time they sign non-competes to pay them again during the restricted period. The bill passed 149-0.

But the state Senate ignored the speaker’s carefully crafted compromise and passed its own bill with Draconian restrictions that would effectively end of the use of the documents in the Bay State. The Senate measure would limit non-compete agreements to three months and require employers to pay the full salary of the former employee during the restricted period. The bill would exempt anyone earning $130,000 or less from non-competes.

The issue now rests with a conference committee that will attempt to hammer out the differences between the two versions.

But the compromise and statesmanship on non-competes has already taken place. We urge the Senate to recognize the balanced compromise woven by Speaker DeLeo and to adopt the House version of the non-compete bill.

And we're not alone. Baker on Saturday announced that he supports the House bill "because he believes it better balances workers' abilities to seek new employment while ensuring cutting edge businesses can protect essential intellectual property."

AIM urges all its members to contact the conference committee and urge them to adopt the House version.

 Contact the Conference Commiittee

Topics: Employment Law, Non-Compete Agreements, Intellectual Property

Compromise Bill Preserves Non-Compete Agreements

Posted by John Regan on Jul 31, 2014 10:13:00 AM

Massachusetts employers would retain the ability to protect their intellectual property through the use of non-compete agreements and would gain access to an expanded research and development tax credit under an economic development bill approved by the Legislature early today.

intellectualpropertysmallLawmakers approved the measure on the final day of formal sessions for the 2013-2014 legislative session. Associated Industries of Massachusetts called upon Governor Deval Patrick to sign the bill.

The Senate bill had included restrictions on the use of non-competes in an earlier versio nof the bill, but a conference committee ultimately adopted the approach of the House and made no changes in the law governing the agreements.

Legislators also declined to adopt a Senate version of the Uniform Trade Secrets Act that would make defense of intellectual property and trade secrets nearly impossible.

The bill would expand research and development tax credit by allowing employers the option to claim a credit equal to 10 percent of any research expenses that exceed a base amount calculated over a period of three years. Associated Industries of Massachusetts continues to study the specifics of the proposal in advance of today’s debate.

“Speaker DeLeo, Senate President Murray and the Legislature deserve tremendous credit for recognizing that the current law governing non-compete agreements in Massachusetts is working just fine,” said Richard C. Lord, President and Chief Executive Officer of AIM.

“The 4,500 member employers of AIM urge Governor Patrick to sign this prudent approach.”

The decision to maintain the current non-compete law came after hundreds of AIM member employers contacted members of the Legislature to underscore the importance of protecting the innovations that drive the Massachusetts economy. AIM members from every sector of the economy, from technology to manufacturing, expressed overwhelming support for keeping the law as is.

The Patrick administration and a coalition of venture capitalists have sought for more than a year to ban non-competes altogether, arguing that they inhibit the growth of new companies in the innovation economy. The Senate economic development bill that passed on July 1 contained a provision that would have prohibited employers from using non-compete agreements with hourly employees and limited the length of non-competes to six months.

The compromise economic development bill also includes a $15 million middle skills jobs training grant fund, $10 million for brownfields redevelopment, efforts to boost jobs in so-called Gateway Cities and a Big Data Innovation and Workforce Fund. A sales tax holiday is authorized for August 16 and 17.

Topics: Massachusetts Legislature, Non-Compete Agreements, Intellectual Property

Non-Compete Agreements Protect Innovation

Posted by John Regan on May 13, 2014 10:08:00 AM

The largest business association in Massachusetts announced today that it opposes efforts to ban or limit the use of non-compete agreements because the action would threaten hundreds of small companies that depend upon the agreements to protect their intellectual property.

Non-Compete AgreementsIn a letter to members of the Legislature, Associated Industries of Massachusetts (AIM) said a survey of its 4,500 members shows that non-competes are used widely in every segment of the Massachusetts economy, including manufacturing, life sciences, medical devices, finance, retail, marketing, publishing, construction, energy, professional services, transportation, food and beverage distribution, insurance and health care.

“Our business would be compromised by allowing employees and former employees to share trade secrets that have been crucial to continuing business,” said the president of a small engineering firm.

Language eliminating non-compete contracts is found in a jobs bill filed recently by Governor Deval Patrick and in a bill recently reported out of the Legislature’s Joint Committee on Labor and Workforce Development. No date has been set for a debate on either bill.

Brad MacDougall, Vice President of Government Affairs at AIM, said  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.

“Non-compete agreements may not be used to curtail ordinary, fair competition or to prevent employees from using their general skills. Massachusetts has a long history of case law that strikes the right balance between employee freedom of mobility and financial incentives with employer interests in protecting intellectual property (IP), trade secrets, confidential information, and goodwill,” he said.

AIM maintains that proponents of doing away with non-competes have inappropriately characterized the issue as a battle between innovative technology startups and large, established companies trying to prevent key people from moving to smaller competitors. In fact, the AIM survey finds that most companies that depend on non-competes to protect intellectual property are small firms outside the technology sector.

“We believe that intellectual property created by us could be transferred to our competition and lessen that value of the IP, which required significant investment,” says a small publishing company.

A manufacturing company with fewer than 50 employees adds that eliminating non-competes “could put us out of business.”

AIM also takes issue with the argument by proponents that Massachusetts must eliminate non-competes to keep pace with innovation competitor California, which for years has limited use of such agreements.

But California does allow non-competes in certain business circumstances and many California-based companies use them in those circumstances. California companies use non-compete agreements in other states where they operate, including Massachusetts.

California’s restrictions have existed for years, but other states have not followed suit. Covenants not to compete are recognized and honored in 48 states.  Several of those states are in fact looking to strengthen their public policy protections for IP.  In 2010 for example, Georgia passed a law and then an amendment to its constitution to allow for broader enforcement and court discretion to uphold legal protections, moving towards the current Massachusetts legal model.

New York has a growing start-up community, yet enforces non-compete contracts; the law has not dissuaded the growth of a tech economy there.  Indeed, reports suggest that the investment market there for start-ups now surpasses Massachusetts.  Non-competes cannot be the reason. 

“Massachusetts ranks among the highest in the U.S. for patent creation and venture capital investment.  National surveys rank Massachusetts ahead, or competitive with, other states in the very metrics cited by proponents as the reason to ban non-competes,” MacDougall said.

“The commonwealth is often ranked higher than California on the Kaufman Foundation’s “economic dynamism” measure, and also holds its own in the areas of fastest growing firms and initial public offerings. Non-compete agreements protect that culture of innovation.” 

Topics: Non-Compete Agreements, Intellectual Property, Innovation

Patently Serious - The New Rules for Protecting Your Ideas

Posted by Christopher Geehern on Apr 25, 2012 2:45:00 PM

The landscape for protecting your valuable products and trade secrets has changed.

Ron Cahill, Esq., Partner in the Intellectual Property Department of Nutter, McClennen and Fish speaks in a new video blog about the rules that will determine the profitability of your company's innovations.

There will be much more detail when Ron leads a complimentary AIM seminar on May 15 entitled Patently Serious - New Rules for Protecting Your Ideas. The session will take place from 3:30- 5 p.m. at Lytron Inc. in Woburn.

There is no charge to attend, but pre-registration is required. To register, contact Justine Hughes (jhughes@aimnet.org) or 617-262-1180 Ext. 320.

Topics: Events, Business Center, Intellectual Property

Massachusetts Lacks Foundation to Eliminate Non-Compete Agreements

Posted by Brad MacDougall on Oct 17, 2011 10:26:00 AM

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.

Non-Compete AgreementsBut 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.

 

Topics: Non-Compete Agreements, Intellectual Property

Non-Compete Agreements Protect Innovation Economy

Posted by Brad MacDougall on Sep 15, 2011 12:35:00 PM

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.

Non-Compete AgreementsAIM 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.

Topics: Massachusetts Legislature, Associated Industries of Massachusetts, Employment Law, Non-Compete Agreements, Intellectual Property

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