Recent News on the Abuse of Noncompetes

extras_03Noncompetes are intended to protect legitimate business interests in appropriate circumstances, including when necessary for the protection of a company’s trade secrets, confidential information, or customer relationships (and sometimes other less-common legitimate interests as well).

However, as the White House noncompete working group and many others have recognized, noncompetes are also oftentimes used in inappropriate circumstances, including for example when used as a tool to retain low-wage workers, who have no access to and pose no threat to the company’s trade secrets, confidential information, or customer relationships.

I was recently interviewed for two stories on this topic:  A New York Times article by Conor Dougherty and an On Point radio show with guest host Jessica Yellin on NPR (WBUR).

I encourage a read of the former and a listen to the latter.

As those of you who read this blog – in particular the Changing Trade Secrets | Noncompete Laws page – know, many states have considered changing (or have changed) their noncompete (and trade secrets) laws over the past few years.

Although many states have recently considered banning noncompetes (to join the ranks of California, North Dakota, and Oklahoma), none have gone that far. Other than bans in the medical industry, where patient interests were considered paramount, only Hawaii has imposed any type of commercial ban, though it was for the tech industry.  In fact, contrary to the implicit tone of many discussions about these issues, some states have in fact made it easier to enforce noncompetes.

Where many states seem to be landing, and where I suspect Massachusetts will land as well, is to make changes to address issues of perceived fairness – for example, requiring advance notice to employees that they will be required to sign a noncompete and precluding the use of noncompetes for employees who are lower wage earners who pose no threat to the company’s trade secrets, confidential information, or customer relationships. Other areas of focus for changes are requiring consideration (beyond continued employment) when a noncompete is required mid-employment and the red pencil or “purple pencil” approach to dealing with overly-broad noncompetes.

The purple pencil approach (given its name by former Massachusetts Senator Dan Wolf) is a combination of the red pencil approach and reformation (oftentimes mistakenly called “blue pencil”) approach to dealing with overly broad restrictive covenants.

It is proposed as part of the Massachusetts noncompete reform bills that I have been working on and would work like this:  An overly-broad noncompete is subject to invalidation under the red pencil approach (which would simply invalidate an overly broad noncompete). However, if the company made a good faith effort to draft a proper agreement, a court could reform the agreement. The concept is to force companies to draft noncompetes narrowly or lose the protections altogether (the red pencil approach), while not imposing the same harsh penalty on a company that attempted to draft narrowly.

Stay tuned as legislation in Massachusetts and around the country moves forward and be sure to check the Changing Trade Secrets | Noncompete Laws page regularly.