Massachusetts Noncompete Bill Status Update

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As those of you following the Massachusetts noncompete bill will recall, a modified version of the bill was refiled in January. (See Massachusetts Noncompete Bill Refiled.)

Although the refiled bill reflects significant changes based on input received previously, Representative Lori EhrlichRepresentative Will Brownsberger, and Representative Alice Peisch continue to solicit input on the bill. If you have any suggestions (or questions), you can reach out to any of them or to me (Russell Beck), or add your comments directly at a website set up to facilitate discussion about the bill: OpenMassHouse.com.

Please note that the bill has been assigned to the Joint Committee on Labor and Workforce Development, which will hold a hearing on the bill on September 15, 2011.

BRR’s 50 State Noncompete Survey Updated – Colorado & Texas

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The BRR 50 State Noncompete Chart has been updated today (June 26, 2011) to reflect an update to Colorado and Texas laws.

Both changes reflect significant developments in the respective state’s laws regarding the consideration necessary to support a noncompete.

In Colorado, mid-employment noncompetes can now be supported by continued employment. In Texas, a noncompete can now be supported by money. See Texas Overhauls Noncompete Law.

Texas Overhauls Noncompete Law

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The central component of Texas noncompete law that separated it from the pack is that the consideration needed to support a noncompete had to be related to the legitimate business interest sought to be protected by the noncompete. As stated by the Texas Supreme Court in 1994, in Light v. Centel Cellular Co. of Texas, 883 S.W.2d 643, 647 (Tex. 1994), “the consideration given by the employer . . . must give rise to the employer’s interest in restraining the employee from competing . . . .” For example, access to trade secrets could be consideration for a noncompete designed to protect those trade secrets.

Money was not enough. And, the so-called “give rise” requirement narrowed an employer’s ability to protect goodwill, which could not necessarily be given in exchange for the noncompete.

On June 24, 2011, the Texas Supreme Court changed all of that. In Marsh v. Cook, the court considered the history of the “give rise” requirement established by Light v. Centel Cellular Co. of Texas and determined that it contravened Texas’s noncompete statute. The court explained as follows:

[T]he Legislature did not include a requirement in the Act that the consideration for the noncompete must give rise to the interest in restraining competition with the employer. Instead, the Legislature required a nexus—that the noncompete be “ancillary to” or “part of” the otherwise enforceable agreement between the parties. Tex. Bus. & Com. Code §15.50(a). There is nothing in the statute indicating that “ancillary” or “part” should mean anything other than their common definitions. “[A]ncillary means ‘supplementary’ and part means ‘one of several . . . units of which something is composed.’”

Accordingly, the court overturned Light and eliminated the “give rise” requirement from Texas law.

Consistent with the court’s elimination of the “give rise” requirement, the court also retreated from another significant restriction imposed by Light. Specifically, the other aspect of Texas law that distinguishes it from other states’ noncompete laws is that in Texas “the covenant [must] be designed to enforce the employee’s promise . . . .” As to this, the court stated, “we re-emphasize that the [Texas noncompete statute] provides for the enforcement of reasonable covenants not to compete.” Such “re-emphasis” is code for “we won’t enforce the requirement when it comes before this court.”

Instructively, in describing current Texas noncompete law, the court quoted extensively to its watershed 2006 decision in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006), which, in hindsight, seems to have presaged the court’s Marsh v. Cook decision (citations omitted):

The hallmark of enforcement is whether or not the covenant is reasonable. The enforceability of the covenant should not be decided on “overly technical disputes” of defining whether the covenant is ancillary to an agreement. “Rather, the statute’s core inquiry is whether the covenant ‘contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.’”

The upshot? Texas has just become much more favorable to employers than it has been in the last two decades.

Massachusetts Trade Secrets Statute Still Uncertain

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Trade secret law in Massachusetts is governed by common law (generally following the Restatement (First) of Torts, § 757) and statute (General Laws chapter 93, §§ 42 and 42A).  While section 42 addresses the existence and general requirements of the cause of action as well as the availability of money damages (including multiple damages), section 42A addresses under what circumstances injunctive relief will be appropriate.

Section 42A provides as follows:

Any aggrieved person may file a petition in equity in the supreme judicial court or in the superior court for the county in which either the petitioner or the respondent resides or transacts business, or in Suffolk county, to obtain appropriate injunctive relief including orders or decrees restraining and enjoining the respondent from taking, receiving, concealing, assigning, transferring, leasing, pledging, copying or otherwise using or disposing of a trade secret, regardless of value. The term “trade secret” as used in this section shall have the same meaning as set forth in section thirty of chapter two hundred and sixty-six.

In an action by an employer against a former employee under the provisions of this section for the conversion of a trade secret and where such conversion is in violation of the terms of a written employment agreement between said employer and employee, said employer shall, upon petition, be granted a preliminary injunction if it is shown that said employee is working in a directly competitive capacity with his former employer in violation of the terms of such agreement and that in violation of the terms of such agreement said employee has used such trade secret in such competition.

The most interesting aspect of section 42A is that its two short paragraphs create significant ambiguity as to whether a restrictive covenant (presumably a noncompete) is necessary in order to obtain injunctive relief against a former employee under the statute. Specifically, while the first paragraph addresses the rights of “[a]ny aggrieved person” to seek injunctive relief in order to protect trade secrets, the second, more specific, paragraph is specifically tailored to actions arising in the employment context.

The interaction between these two paragraphs has never been directly addressed.

The case that has come closest is Lantor Inc. v. Ellis, 98-01064, 1998 WL 726502 (Mass. Super. Oct. 2, 1998) (Gants, J.). In that case, the court found that there was no enforceable written employment agreement between the plaintiff-employer and its former employee, the defendant.  Because “there was no enforceable written employment agreement between [employer and employee] at the time of [employee’s] separation,” the court denied the employer’s request for a preliminary injunction under M.G.L. c. 93, § 42A, stating that the employer “cannot meet the requirements of this statute.”  Id. at 12.

Recently, we had the opportunity to raise this issue in a case we were handling. However, because the motion was resolved without the need to reach this specific issue, we will all continue to wait for a direct and authoritative ruling.

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