Proposal to Eradicate Noncompetes in Massachusetts Creates Stir

The blogosphere has been abuzz during the past week with a discussion sparked by a Boston-based venture capitalist who thinks noncompetes are bad for business in Massachusetts, and now the Boston Globe has picked up on the buzz. Bijan Sabet, of Spark Capital, argued on his personal blog last Saturday that Massachusetts should follow the California model and eradicate noncompetition agreements. Sabet said that his firm would do away with noncompetes at its portfolio companies. Stated succinctly, his argument is that a “non-compete clause is a significant barrier to startups and innovation,” and he contrasts the Massachusetts economy with Silicon Valley, where it is easier for tech talent to move between companies and, therefore, for companies to innovate. Many other posts have echoed Mr. Sabet’s view. (See posts here and here.) The Globe reports that Sabet and his partners are urging Governor Patrick to push for legislative action to make noncompetes invalid in the Commonwealth.

It will be interesting to see how this plays out. Not everyone in the VC and technology communities in Massachusetts is antagonistic to noncompetes. For example, the Boston Globe quotes EMC’s General Counsel, Paul Dacier, who believes that noncompetes with key employees are essential to protecting the company’s intellectual property.

Restrictive covenants are the proverbial double-edged sword — employers often are frustrated about them when they are trying to recruit talent, but sometimes feel differently about them when that talent is walking out the door. Under current Massachusetts law, noncompetes are enforceable if they are necessary to protect a company’s confidential information or good will and reasonable in temporal and geographic scope. One oft-stated criticism of this legal standard — which is dependent on a single judge’s consideration and balancing of numerous factors and interests — is that it creates uncertainty about whether a particular clause will be enforced in a particular situation. It is said that this uncertainty in itself places an inappropriate drag on labor mobility and legitimate competition.

Another state grappling with these issues recently adopted a statutory middle-ground. The Oregon legislature has enacted (and its governor in August signed) a law that significantly restricts the instances in which noncompetes can be enforced but makes it easier for employers to enforce nonsolicitation agreements restricting employees from diverting customers and employees to a competitor when they leave. A summary of the Oregon law is available here. It remains to be seen whether Oregon’s approach will, as hoped, encourage economic growth in that state.

Stay tuned for further developments on this topic.