The Use of Non-Competition Agreements
- Edwin Pease
On October 1, 2018, significant changes to the law governing non-competition agreements in Massachusetts became effective. If you are considering such an agreement, please consult with an attorney. For a summary of the new law, see this WilmerHale Client Alert.
As a company on the East Coast, why require all employees to sign non-competition agreements, given that the practice places our company at a competitive disadvantage to companies located on the West Coast that do not use non-competes?
Whether or not a company should require its employees to sign a non-competition agreement as a condition to employment, and the duration of these agreements if they are to be used, are important decisions that should not be made without carefully considering their implications. A company must balance its desire to protect its business interests with the desire of its employees to freely earn a living.
East Coast v. West Coast
In my experience, the vast majority of technology companies located in Massachusetts and New York require some if not all of their employees to sign non-competition that generally last at least one year, and in some cases even longer. In fact, if a company receives venture capital financing, the VC investors will most likely insist on including a in their investment documents that require the portfolio company to maintain non-compete agreements with their employees.
The scope of these non-competition agreements vary widely from company to company and may even vary within an organization based on the type of employee subject to the agreement. For example, C-level executives may have two-year non-competition periods while less senior personnel may only be asked to agree to a one-year non-competition period, and administrative personnel may have no non-competition agreements at all. Key considerations in structuring any non-competition are how to define what the employee can and cannot do during the non-competition period and the geographic reach of any restriction. Is the employee restricted from working for any company in a similar industry anywhere in the United States, or is the employee only restricted from working for a direct competitor within New England?
Savvy employees will, if they see an opportunity to do so, attempt to negotiate the scope of a non-competition if it is perceived as being too broad or overly limiting. The scope and duration of any non-competition period must be carefully considered, as a non-competition that is too broad or lasts for too long carries the risk that if challenged, a court may find the restriction unenforceable. While the idea of enacting legislation to deem non-competition agreements generally unenforceable in Massachusetts (as they are in California) has gained some momentum in the state in recent years, non-competition agreements are still widely used among companies based in Massachusetts.
As a result, companies that do not require their employees to sign non-competition agreements may be gaining an initial recruiting edge over their peer group companies that require non-competition agreements, but they may also be putting themselves at a competitive disadvantage, as these same competitors are able to freely recruit the company's employees without having to consider non-competition restrictions.
How Free Should Employees Be?
While companies located in Massachusetts and New York need to consider the non-competition practices of their locally based competitors, they must also consider the impact of their non-competition agreement policies as they compete with Silicon Valley based companies for talent. Non-compete agreements have, except in certain limited instances, been deemed against public policy and non-enforceable in California and are therefore not used by California companies. California-based employees can move freely between employers without have to worry about the impact of a non-competition agreement. This can be an important distinction for an employee considering whether to work on the East Coast or take their talents to Silicon Valley.
There is no question that from an employee's point of view, it is better not to be restricted in what you can do as you leave a company and pursue your next opportunity. In comparing two positions, one of which requires employees to agree to a one-year post-employment non-competition period and one of which does not, clearly the position that does not require the employee to limit his or her future employment by signing a non-competition agreement requirement would be more attractive.
The Competitive Edge
East Coast companies that require non-competition agreements are almost certainly at some competitive disadvantage to their Silicon Valley counterparts as a result of California's policy against non-competition . But, until Massachusetts and New York take a legislative stance similar to California's, East Coast companies need to consider whether there is enough tangible benefit to be derived by going against local practice and refusing to insist on non-compete agreements.
Any decision to require employees to be bound by a post-employment non-competition must carefully weigh the pros and cons of doing so and must take into account the practice of its closest competitors, both locally and nationally, and the viewpoint of the company's investors.