A recent blog post argued that Governor Deval Patrick’s proposal to eliminate non-competes will not have the positive impact on the Massachusetts economy promised by the bill’s name, “An Act to Promote Growth and Opportunity”, and in fact may end up having a negative impact on the Commonwealth. The article points out that non-compete agreements are only enforceable in Massachusetts where they are necessary to protect the employer’s confidential information, trade secrets, or goodwill — non-competes that solely seek to prevent employees from becoming competition are not enforceable under Massachusetts law. The article compares this with California law, famous for refusing to enforce agreements “by which anyone is restraining from engaging in a lawful profession, trade, or business”. However, California law does enforce agreements intended to restrict employees from utilizing their employer’s confidential information or trade secrets in competition with the employer. Therefore, the article concludes, the only primary distinction between California and Massachusetts law with respect to non-competes is that Massachusetts also enforces non-compete agreements that seek to restrain a competing employee’s use of his or her former employer’s goodwill. However, I believe that this is an important distinction. Whereas California does restrict employee’s use of confidential information or trade secrets, this is perhaps more appropriately considered protection of intellectual property. What non-compete agreements primarily seek to do is to restrict employees from leaving with client relationships they have cultivated in the course of their employment and with the resources of the company — goodwill. The article cites two studies that refute the popular notion that California’s prohibition on non-competes was responsible for the growth of Silicon Valley or that there was some correlation between the prohibition and the success of the California technology industry, one even going so far as to conclude that California’s prohibition on non-competes actually hinders biotech R&D. However, in my experience I’ve met potential entrepreneurs here in Massachusetts who have been close to dissuaded from launching their own venture because they were subject to non-compete agreements, and did not want to risk either professional relationships with their employers, or subject themselves to possible legal action. The elimination of non-compete agreements will hopefully remove that hurdle for some future startup founders — perhaps not many, but hopefully enough to generate enough innovation to outweigh any possible negative effect on Massachusetts businesses.
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