A new proposed trade secrets bill in Massachusetts

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cropped-cimg27721.jpgIt’s that time of year again. With the elections behind us and the next legislative session coming soon, a new version of a proposed Uniform Trade Secrets Act has been filed in Massachusetts. (This version, filed on November 5, 2014, is available here.)

This one, like the earlier versions, was filed by Stephen Chow on behalf of the Massachusetts Board of Commissioners on Uniform State Laws. (Steve has worked tirelessly on this project for many years.)

In my opinion, if adopted, this version would strengthen Massachusetts trade secrets law.

By way of background, in the last legislative session, I was asked by Senator Will Brownsberger, Representative Lori Ehrlich, and Jennifer Lawrence (not that one! – the Jennifer Lawrence who was spearheading Governor Patrick’s noncompete/trade secrets reform efforts) to review and comment on the then-pending bill. In the course of doing so, I identified and raised three primary concerns:

  • It protected only trade secret owners (not others with rights in the secrets such as licensees).
  • It required the trade secret owner to continue to protect the secrecy of the information even after the secret was stolen and regardless of whether the person/company that stole it had publicly disclosed it.
  • It potentially raised the pleading standards for filing a trade secrets claim.

(Additional explanations of these concerns are here.)

I expressed those same concerns during my testimony at the May 9, 2014 hearing before the Joint Committee on Economic Development and Emerging Technologies.

Following that hearing and in anticipation of filing the current bill, Stephen Chow approached me to discuss my concerns (those above, as well as several other less-important “tweaks”). After numerous discussions and drafts, we agreed on the language that Steve filed on November 5.

I am now quite comfortable that Steve’s current version will improve Massachusetts trade secrets law. Among other things, if adopted, it would allow treble damages and attorneys’ fees without the need to resort to G.L. c. 93A; it would expand the definition of what constitutes a trade secret under Massachusetts law; and it would reach an appropriate balance between the need to identify the purported trade secrets sought to be protected and the need to act quickly and limit disclosure (both in terms of what must be disclosed and the timing of that disclosure).

 

 

 

 

 

“I’m not dead yet,” says Massachusetts Noncompete and UTSA Reform

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cropped-cimg27721.jpgIn a surprising turn of events last week, Massachusetts Governor Deval Patrick announced that he was reintroducing legislation to modify Masschusetts noncompete law and to adopt a version of the Uniform Trade Secrets Act.

The noncompete bill (H. 4401) is the noncompete language that I had drafted for Senator Will Brownsberger and Representative Lori Ehrlich described here (which the Senate passed, but which ultimately died (see here)), together with the same version of the UTSA that has been kicking around for a while.

Governor Patrick’s introduction of the bill is outside of formal session (which ended July 31), so it is unclear what progress will be made at this point.

Massachusetts Noncompete and UTSA Bills Are Dead

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cropped-cimg27721.jpgWhile it was close this year, in the end, there was no legislative reform of either Massachusetts noncompete law or Massachusetts trade secrets law. I expect, however, that Senator Will Brownsberger and Representative Lori Ehrlich, among others, will likely file new legislation in the next session. Stay tuned.

Update on Massachusetts Noncompete and Trade Secrets Bills

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cropped-cimg27721.jpgProgress in the Massachusetts State House:

On Tuesday, July 1, the latest version of the Massachusetts Noncompete Bill (the latest version of the bill that I had drafted for Senator Will Brownsberger and Representative Lori Ehrlich) has passed the Massachusetts Senate by a vote of 32 to 7.

The bill codifies existing noncompete law with several significant changes:

(1) it bans the use of noncompetes for workers classified as nonexempt under the Fair Labor Standards Act;

(2) it requires advance notice of any required noncompete – as well as consideration (beyond continued employment) for any noncompete required after commencement of employment;

(3) it establishes presumptions of reasonableness with respect to duration (6 months), geographic scope, and scope of restricted activities; and

(4) it precludes the court from reforming (i.e., narrowing) overly broad noncompetes, unless the aspect to be revised fits within the reasonableness presumptions (or objectively reasonable efforts were made to fit within the relevant presumption).

Simultaneously with the Senate’s action, the Joint Committee on Economic Development and Emerging Technologies held a hearing on proposed changes (up to and including a ban on noncompetes) to Massachusetts noncompete law. Many people testified about their experiences, predominately individuals testifying about their experiences with noncompetes, though also testimony from business owners and some venture capitalists also favoring a ban. Of course, Matt Marx also testified about his research suggesting that noncompetes are bad for the economy. I testified as well, though, as in the past, not as an advocate of any position, but rather, to explain the rationale for and impact of the various proposed changes. My testimony covered the changes in the latest version of the noncompete bill as well as suggested changes to the draft UTSA.

The deadline for the resolution of this issue is July 31.

Stay tuned!

 

Hearing on Governor Patrick’s Economic Development Bill (including MA UTSA and Noncompete Ban)

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cropped-cimg27721.jpgTomorrow – Thursday, May 29 at 1:00 PM in room A-1 – the Joint Committee on Economic Development and Emerging Technologies will be holding a public hearing on Governor Patrick’s economic development bill (H.4045). For those of you following this, that is the bill that would adopt a version of the Uniform Trade Secrets Act and ban noncompetes in Massachusetts. See here.

I will be there to testify about, among other things, the language of the bill and its potential ramifications.

Hope to see you there. But, for those who don’t attend, I will be let you know what happens.

Massachusetts Noncompete Ban and Modified Version of the Uniform Trade Secrets Act Reported Out of Committee

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cropped-cimg27721.jpgOn April 29, the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development favorably reported out a bill (available here) very close to Governor Patrick’s proposed adoption of a version of the Uniform Trade Secrets Act (“UTSA”) coupled with a ban on noncompetes in Massachusetts. Governor Patrick’s bill is available in whole here or relevant part here. (See What to do if noncompetes are eliminated in Massachusetts.)

Putting aside where you come out on the advisability of eliminating noncompetes (a political and economic decision that has staunch advocates on both sides), the proposed Massachusetts Trade Secrets Act (“MUTA”) is intended to enhance available trade secrets protections, given that they will be weakened by the elimination of noncompetes (one of the main tools currently used to protect them). (Note that it expressly leaves unaffected other restrictive covenants, including nonsolicitation agreements, no-raid/anti-piracy agreements, and nondisclosure agreements.)

The MTSA changes the UTSA in several respects, and, contrary to its intended purpose, may in fact create some additional hurdles to protecting trade secrets.

For example, the UTSA requires that reasonable measures to be taken to protect a trade secret; that makes sense given that the sine qua non of a trade secret is secrecy. However, as currently drafted, MTSA section 1(4)(ii) requires that reasonable measures be maintained even after the secret has been stolen. The result – in some cases – is that a person who steals a trade secret can potentially escape liability if the trade secret owner decides that it is no longer worth spending the money to protect a secret that the misappropriator has publicly disclosed (or even just stolen). In short, it potentially encourages very bad behavior and exposes trade secret owners to increased risk of harm.

Similarly, the same section (MTSA section 1(4)(ii)) permits only the “owners” of a trade secret to protect the secret. While that may seem innocuous, it’s not; it arguably means that licensees and other people who have purchased or otherwise acquired rights to use/protect the trade secrets would be left with nothing; it will kill the value of many trade secrets.

Section 5(b) requires that “averments of trade secrets and misappropriation thereof shall be stated with reasonable particularity in light of the circumstances of the case.” That language, like some other changes in the MTSA, is intended to address an issue that courts wrestle with (with increasing frequency) under the existing language of the UTSA, specifically, how clearly and how early someone claiming misappropriation must identify the trade secrets alleged to have been misappropriated. The problem with section 5(b) in particular is that it may be read to elevate the pleading standard to the point of making it impossible for some companies to protect their secrets.

With regard to the language of the noncompete ban (section 11), while section 2(a) (like the UTSA) permits injunctions, the bill leaves unaddressed whether it permits or precludes a court from issuing injunctive relief essentially in the nature of a noncompete as a remedy in the event of a breach of the other restrictive covenants. In other words, may a court issue an injunction prohibiting someone from continuing to work at a competitor when they have demonstrated themselves untrustworthy, by, for example, breaching a nonsolicitation covenant?

The Governor’s version of the bill is in a separate committee and it remains to be seen how that will be handled. Afterward, whatever bills survive will still need to pass the house and the senate before heading to the Governor.

The deadline is July 31. Stay tuned!

What to do if noncompetes are eliminated in Massachusetts

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cropped-cimg27721.jpgAs you likely have seen (here for example), the Patrick Administration has spent a great deal of time putting together comprehensive proposed legislation designed to promote growth and opportunity in Massachusetts. Of particular note has been the Administration’s proposal of the adoption of a version of the Uniform Trade Secrets Act (the “UTSA”) coupled with a California-like ban of employee noncompetes.

A copy of the entire bill is available here. (Section 53, the relevant section, is here.)

If it passes, noncompetes will be banned in Massachusetts, while Massachusetts simultaneously becomes the 49th state to adopt some version of the Uniform Trade Secrets Act, leaving just New York as the last remaining holdout.

The upshot is that noncompetes will be banned, but other restrictive covenants – e.g., nonsolicitation agreements, nondisclosure agreements, no-raid/anti-piracy agreements, no hire agreements, and others – will remain intact. Also, while the change to the UTSA will have minimal practical implications, it will permit the recovery of attorneys’ fees, which current law does not (unless the claim falls within the Massachusetts unfair competition statute, G.L. c. 93A).

In the interest of full disclosure, I pause here to note that I have been working with, and continue to work with, the Administration (in particular, Jennifer Lawrence, in the Executive Office of Housing and Development, who is spearheading the Administration’s effort), on the language of Section 53. There are a number of differences between the Patrick Administration’s bill on the one hand and the UTSA and California’s statute on the other hand, but more on that in a later post.

As regular readers of this blog know, I view my role as only advisor on the drafting to accomplish the particular policy and the likely impact of the changes – not on what the policy should be. It is in that capacity that I have been advising not only the Patrick Administration, but key legislators (including Senator Will Brownsberger and Representative Lori Ehrlich) on each of the several other approaches under consideration at this time. This is a complex area of law, involving many competing policies and potential implications.

To be clear, while I take no position on whether the benefits of eliminating noncompetes outweigh the detriments, I do believe that it is important to be cognizant of the potential practical consequences (at least from a litigation standpoint).

Specifically, while the result will likely be less overall litigation and more employee mobility, the risk to trade secrets will increase and litigation that is commenced to protect them will tend to be more costly and last longer. Litigators will shift from a focus on noncompete enforcement to cases involving the enforcement of other restrictive covenants and the even-more-costly trade secrets litigation. Noncompete litigation generally involves a several-week process in which the parties spar over the appropriateness of an injunction to prevent the employee from working for a particular competitor. In contrast, trade secrets litigation generally involves a more involved, several-month discovery process on top of the injunction motions.

Given this, the obvious question is: What should companies do to protect their legitimate business interests if the bill becomes law (which can be anytime up to July 31 – mark your calendars)?

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 top five key steps.

First and foremost is to review all existing restrictive covenant, employee, and independent contractor agreements. If the bill is adopted in its current form, the language says 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 nonsoliciation (of customers), no-raid (of employees), and confidentiality provisions, it may be that they can be left in tact, recognizing that the noncompete 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, you will need to consider the best timing and method to go about doing so to avoid running afoul of arguments concerning notice, equity/fairness, and consideration (the exchange of something of value).

Second and equally important, proper safeguards must be in place to protect company trade secrets (which will include what we traditionally considered “confidential information” in Massachusetts, and can include 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 even more important now than ever before. Key elements are steps to lock down information and education of your employees and others with access to trade secrets.

This does not mean that your information will never be misappropriated or that you cannot still sue if it is. It will and you can. (75 percent of employees admit to taking company information. See also here (59 percent in 2009 Ponemon study).) But, a proper trade secrets protection plan should help to limit the number of times you need to resort to litigation, while simultaneously increasing your likelihood of obtaining injunctive relief through litigation.

Note that trade secrets litigation is more costly than noncompete litigation, because there is not a bright line to rely on for purposes of getting quick injunctive relief. With noncompete litigation (assuming the agreement is enforceable), you know 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 you will need discovery to know whether your information is in fact being used and how.

Third, like the prophylactic protections for trade secrets, safeguards should also be put in place to protect your company’s customer goodwill from the risk of misappropriation. The most obvious is nonsolicitation agreements. But other steps should be taken as well. Those include (among other steps) 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.

Fourth, the protections available for retaining talent should not be forgotten. If you want to limit departing employees from poaching the remaining employees, you must have proper no-raid/anti-piracy (or no-hire) agreements (sometimes called nonsolicitation agreements or no-poach agreements) in place. In addition, you should take steps to give employees reason to stay – and, separately, not to leave. Forfeiture agreements (agreements that require the forfeiture of certain benefits or payments if the employee leaves) are one tool that should be considered in this regard.

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

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