Debating noncompetes

Whether a noncompete is enforceable depends on what state you're in. In California, as most of you know, employment noncompetes are completely illegal. At the other end of the spectrum is Florida, where noncompetes are presumptively enforceable — the employee has to prove that the restriction is unreasonable, instead of the usual requirement that the employer prove its reasonableness. The other 48 states fall in between to different degrees. My state, the Commonwealth of Massachusetts (we call our state a "commonwealth" because we're, you know, special; can you name the other three?) will enforce noncompetes, but only when they're necessary to protect a company's secrets or customer relationships.

But now some people want to change that.

The Massachusetts House of Representatives (you know, the august body whose previous three speakers were indicted) is currently entertaining two bills to radically cut back the power of employers to use noncompetes. One bill, House No. 1799, places huge restrictions on noncompetes: they can only be enforced on employees earning $100,000 a year, they can only last two years, and the employer has to pay a ransom of half the employee's salary (up to $100,000) during the enforcement period. The other, House No. 1794, stands Massachusetts with California in completely banning noncompetes.

It's as yet unclear how much support these bills have or will get. In a recent column in The Boston Globe ("Start-ups stifled by noncompetes"), Scott Kirsner suggests that startups and their backers (unsurprisingly) are against noncompetes, while established companies (unsurprisingly) favor them. (Full disclosure: Scott's piece mentions two of my noncompete clients, although I didn't hear from him.) In the same piece, Governor Deval Patrick gives his principled take on noncompetes. Scott writes:

Governor Deval Patrick hasn’t taken a position on noncompetes. When I spoke with him earlier this month, he said, “I don’t have a stake in the status quo’’ but added that he hadn’t heard a consensus view from people in the innovation economy as to whether they’re a positive or a negative for businesses: “If there’s consensus in the industry, I’m happy to support that.’’

But the governor could end up with his finger in the wind for a while looking for that consensus. You see, in every noncompete lawsuit, there are two companies: the old, or enforcing, company; and the new, or hiring, company. (Usually, the new company is an interested third party rather than an actual defendant in the lawsuit.) And over time, companies may find themselves on both sides of the issue. Lawyers, too. Most noncompete cases are litigated by management-side lawyers (like me) rather than employee-side lawyers.

The Globe ran a nice editorial framing the issue in yesterday's paper: "Clause for concern." When I spoke with deputy editorial-page editor Dante Ramos last week, I was a bit apprehensive about criticizing these legislative bids to gut or kill noncompetes. I didn't want to be seen as self-interested; companies around the country pay us a lot of money to litigate noncompete cases. To be sure, the death of noncompetes in Massachusetts will mean a long-term loss of that type of business. (It will also mean a short-term jump.)

But the bills are bad policy. Massachusetts has a 300-year-old tradition of protecting the freedom to contract; California doesn't have a 300-year-old tradition of anything. While many companies try to enforce noncompetes for the wrong reasons (spite, vindictiveness, anger, desire to stifle competition), Massachusetts judges usually see through this and deny enforcement. And in some circumstances, enforcing a noncompete is the only way to prevent unfair competition. Throwing noncompetes out like H. 1794 would do is the whole baby-and-bathwater thing. And H. 1799's mishmash of arbitrary restrictions on noncompetes lacks principle — it's neither for noncompetes nor against them. (That said, the drafter is a fine lawyer and experienced noncompete litgator.) At least the outright ban of 1794 stands for something, which I can respect if not agree with.

Companies shouldn't use noncompetes to try to make employees stay. That's what management is for. But used sparingly and wisely, noncompetes can be an important tool for protecting companies' secrets and customer relationships.

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The other three "commonwealths" are Pennsylvania, Virginia, and Kentucky. Puerto Rico is a commonwealth, too, but not in the same way. Go figure.