What if noncompete agreements are eliminated in Massachusetts?

Russell BeckThe current issue of Massachusetts Lawyers Weekly features Russell Beck’s article about potential changes to the landscape of noncompete agreements in Massachusetts. The article is called “What to do if non-competes are eliminated in Massachusetts.” Russell Beck’s articlMassachusetts Lawyers Weeklye, which appears below, can also be found on Russell’s blog, Fair Competition Law.

 

The Patrick administration has spent a great deal of time putting together comprehensive legislation designed to promote growth and opportunity in Massachusetts. Of particular note is the proposal to adopt a version of the Uniform Trade Secrets Act coupled with a California-like ban of employee non-competes.

In the interest of full disclosure, I have been working with the administration (in particular, the Office of Housing and Economic Development) on the language of Section 53, the relevant section of the bill, and with other lawmakers at the State House on other versions as well. However, I view my role purely as an advisor on the drafting to accomplish the particular policy, not on what that policy should be.

If the Patrick administration’s version is the one that succeeds, the obvious question is: What should companies do to protect their legitimate business interests without non-competes?

There are a number of steps that should be taken, many of which companies have been taking all along, though perhaps not as vigilantly as they will need to going forward.

Here are the five key steps:

FIRSTand foremost is to review all existing restrictive covenant, employee and independent contractor agreements. If the bill is adopted in its current form, the language states that it will apply to existing agreements — and not just agreements with employees, but with independent contractors as well.

That means that existing agreements are not immune and may need to be changed. If they include well-drafted non-solicitation State house strt(of customers), no-raid (of employees), and confidentiality provisions, it is possible they can be left intact, recognizing that the non-compete provision will simply be unenforceable.

However, if those other protections are missing, too limited or simply not well-drafted, they will need to be revised. If they need to be revised, the employer should consider the best timing and method to do so in order to avoid running afoul of arguments concerning notice, equity/fairness and consideration.

SECONDand equally important, proper safeguards must be in place to protect company trade secrets (which in Massachusetts include confidential information and can cover anything from the secret formula to Coke to customer lists) from the risk of misappropriation in the first place.

Accordingly, a trade secrets protection plan (sometimes called a “trade secrets audit”) will be more important now than ever before. Key elements are steps to lock down information, education of employees and others with access to trade secrets, and plans for responding to a possible misappropriation.

Instituting a proper trade secrets protection plan does not guarantee confidential information will never be misappropriated or that the employer cannot still sue if it is. (Seventy-five percent of employees admit to taking company information.) But, a proper trade secrets protection plan should help limit the number of times an employer will need to resort to litigation, while simultaneously increasing the likelihood of obtaining injunctive relief through litigation.

Note that trade secrets litigation is more costly than non-compete litigation, because there is no bright line to rely on for purposes of getting quick injunctive relief. With non-compete litigation (assuming the agreement is enforceable), it is generally clear whether the obligation has been breached or not: Either the employee is at the competitor or he is not. With trade secrets litigation, the odds are much greater that discovery will be necessary to determine whether the employer’s information is, in fact, being used and how.

THIRDLike the prophylactic protections for trade secrets, safeguards should also be put in place to protect the company’s customer goodwill from the risk of misappropriation. The most obvious is non-solicitation agreements.But other steps should be taken as well. Those include having multiple points of contact with each customer when feasible, plans for securing the relationships upon an employee’s departure, and proper mechanisms for managing social media accounts and contacts.

Screen Shot 2014-04-22 at 4.06.01 PMThe protections available for retaining talent should not be forgotten. If an employer wants to limit departing employees from poaching the remaining employees, it must have proper no-raid (or no-hire) agreements (sometimes called non-solicitation agreements or no-poach agreements) in place.In addition, the employer should take steps to give employees reason to stay — and, separately, disincentives to leave. For example, forfeiture agreements (agreements that require the forfeiture of certain benefits or payments if the employee leaves) are one tool that should be considered.

FIFTHIf litigation is necessary, move quickly. Delay can be the biggest problem for companies in these cases. And, without the protections of non-compete agreements, delay can create even greater risks of loss of trade secrets, relationships or employees.

 

Beck Reed Riden LLP is among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law and business litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience. The Wall Street Journal recently featured Beck Reed Riden LLP’s noncompete agreement experience.

Russell Beck’s work in this area is well recognized; it includes:

  • Over sixteen years of working on trade secret, noncompete, and unfair competition matters
  • Authoring the book Negotiating, Drafting, and Enforcing Noncompetition Agreements and Related Restrictive Covenants (4th ed., MCLE, Inc. 2010), used by other lawyers to help them with their noncompete cases
  • Drafting and advising on the current bill pending before the Massachusetts Legislature to define, codify, and improve noncompetition law
  • Teaching Trade Secrets and Restrictive Covenants at Boston University School of Law
  • Founding and administrating the award-winning blog, Fair Competition Law
  • Establishing and administrating the Noncompete Lawyers and Trade Secret Protection groups on LinkedIn, with over 750 members around the world
  • Founded and chaired the Trade Secret / Noncompete Practice for an AmLaw 100 firm

In addition, Russell was honored for his work in this area of law in the 2013 Chambers USA Guide, which included Russell in its “Notable Practitioners” section, adding that “Russell Beck of Beck Reed Riden LLP is respected by commentators for his skills as a litigator. His areas of specialty include noncompete and trade secrets matters.”

Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

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