For years, noncompete agreements were a powerful tool used by local companies to ensure former employees wouldn’t jump ship for their competitors, taking valuable knowledge and connections with them. In 2018, after a decade of negotiations, they were restricted in Massachusetts amid reports that lower-wage workers at summer camps and sandwich shops were being subjected to them.
Now, they could go away altogether under a proposal put forth by the Federal Trade Commission that would essentially ban the practice nationwide.
Eliminating noncompetes would have broad implications in Massachusetts, where the flow, and protection, of employee knowledge is vital to its vast innovation economy. The intellectual property at stake is invaluable, said Boston intellectual property law attorney Peter Lando: “It’s today’s currency.”
Proponents of the FTC’s measure say it would be a boon for innovation, making it easier for employers to hire top talent and for employees to start their own companies. Banning noncompetes could also help increase people’s wages — by almost $300 billion nationwide, according to the FTC — by allowing them to change jobs more easily.
Critics, however, say noncompetes are necessary to help safeguard proprietary information that could be taken to a competitor. The FTC ban could even apply to nondisclosure and nonsolicitation clauses that limit future employment by restricting knowledge an employee can share. The Trade Secrets Act would still provide protection, but critics note that violations of this law are more difficult and expensive to prove than a breach of contract, such as violating a noncompete clause.
Nationwide, noncompete agreements are estimated to affect around one in five workers, from fast-food cooks to tech executives, restricting future employment for a period of time or in certain geographic areas. The FTC ban may be modified, and will surely face legal challenges; the US Chamber of Commerce has already said it plans to sue if it’s put in place.
In Massachusetts, noncompetes signed since 2018 apply only to salaried employees and are limited to a year, during which time former employers must provide compensation equal to roughly half a departing worker’s salary. The FTC ban would nullify all existing noncompetes, in addition to any going forward, which could create confusion among local employers. Some employment lawyers advise sticking to the state law for now, while others advocate dropping noncompetes altogether in anticipation of the new federal rule taking effect.
In a state with so many biotechs and tech companies, having some control over the knowledge in employees’ heads is vital for maintaining a strong economy, said Lando, the intellectual property law attorney, noting that current and former employees are responsible for most of the misappropriation of trade secrets.
Small startups especially could suffer if they lose a key employee to an established competitor that could take a product to market more quickly, Lando said. The absence of noncompetes could even restrict the flow of information inside companies.
“If it’s making people cautious to share, then it’s hurting innovation,” he said.
Last year, Lando represented a company that lost a scientist to an employer that soon started filing patent applications in that scientist’s field of expertise, putting the new employer in direct competition with his former company. The scientist didn’t have an explicit noncompete agreement, but sharing this knowledge may have violated nondisclosure terms in his contract, Lando said.
The threat of a lawsuit has apparently halted the new employer’s pursuits, but if the FTC ban were in place, the former company would have had to pursue a claim for trade secrets misappropriation. “That’s going nuclear,” Lando said.
A compromise in line with the Massachusetts law would appease some critics of the FTC ban. Brooke Thomson, executive vice president at Associated Industries of Massachusetts, said the 2018 law struck the right balance between giving workers freedom and allowing employers to protect their investments in personnel, clients, and trade secrets.
But the New England Venture Capital Association is celebrating the proposed ban. The association had originally pushed for essentially ending all noncompetes in Massachusetts, much like the law in California.
“The free flow of talent is an incredible catalyst for innovation,” said Ari Glantz, executive director for the group. “Noncompetes are a blunt instrument. There are other appropriate instruments – nonsolicitation, nondisclosure [agreements] – that can control for the bad actors.”
The New Jersey data protection software company Commvault, which has about 150 employees in Massachusetts, is also not opposed to the ban, said chief legal officer Danielle Sheer. Many of the company’s 3,000 global employees have noncompete agreements, she said, although not in California or among many of its Massachusetts workers. And as more employees work remotely, it’s increasingly difficult to keep pace with state-by-state regulations, Sheer said.
“It feels like this FTC proposal is catching up to the times,” she said.
Commvault has other clauses in its employee agreements that give the company the right to take action if proprietary information surfaces at a competitor that hires a former employee, she said. And if the ban is enacted, the company may consider paying key employees to “sit on the bench” for a while after leaving, as it does in Massachusetts.
Tom Evans at Conforto Law Group in Boston has seen the damage noncompetes can do, especially before the state law limited their scope. In 2019, several clients who had part-time jobs coaching a girls’ club soccer team were sued when they went to another organization and players went with them. A judge rejected the company’s argument, leading it to drop the case, and noted that “this is exactly the kind of noncompete that will no longer be enforced in Massachusetts.”
The state law doesn’t help veteran employees hired before it was enacted, making it somewhat discriminatory toward older workers, Evans noted. Many employees also “self-enforce” noncompetes by assuming they can’t take certain jobs and may agree to accept less money from an employer they think won’t violate an agreement.
Another one of Evans’s clients, Jack Murphy, who had agreed to a noncompete clause when he was hired by a Needham IT consulting firm in 2017, was then sued by the company when he went to work for a Boston competitor. The former employer claimed Murphy used his inside knowledge to woo two clients to the new company, but a judge rejected this argument, leading the Needham firm to withdraw the claim.
Murphy’s former company had threatened legal action when it found out he was leaving for a competitor, Murphy said, and he might not have gone if his new employer hadn’t offered to pay his legal fees. If he’d stayed, as some of his coworkers have done, Murphy said, he wouldn’t have been able to more than double his earnings within three years.
“Think of all the people being held back,” he said. “If you think handcuffing employees to their desks is the only way to keep the lights on ... then you need to reassess your business.”