In April, Massachusetts Gov. Deval Patrick filed legislation that would ban noncompete clauses in the state, saying that they inhibit innovation and make it difficult for employees in the tech, science, and business industries to move from job to job.
Here, David Phillips, a law professor whose expertise lies in business and commercial law, discusses the use of noncompete clauses and what banning them could mean for companies in a range of industries.
What is the purpose of a noncompete clause in today’s professional world?
More and more, companies’ valuable assets have gone from being physical to intangible. Intellectual property laws, such as those dealing with copyrights and patents, protect some of these assets. But many of your intangible assets, such as customer lists, are not protected, and protecting them is one primary use of a noncompete clause.
Noncompete clauses in any jurisdiction are only enforced if they are reasonable in terms of such factors as duration, the legitimate needs of the employer, the interests of the public, and the need of the employee to work. When you have a reasonable noncompete clause, it allows you to build trust within an organization and employees are not afraid to share concepts, customers, and other matters.
Will Gov. Patrick’s legislation help or hurt Massachusetts’ businesses?
In making his proposal, the governor expressed the need for Massachusetts to keep pace with California and Silicon Valley; because noncompete clauses are unlawful in California, we should also bar them. However, in Silicon Valley, reportedly there are unwritten restraints among the larger companies not to hire employees from competing firms. Essentially, what firms are doing in private serves much the same function as noncompete clauses in other jurisdictions.
While noncompete clauses are typically found in the business or technology sectors, what are some other industries they might be used in?
Let’s say you have a veterinarian leaving a practice. They will not uncommonly be asked to sign a noncompete clause that will not bar them from practicing, but will bar them from taking patient lists with them or even perhaps opening a nearby office for a short period of time. In contrast, a court will never enforce a noncompete clause against a lawyer who leaves a firm because it is considered fundamental that a client has the right to choose his or her legal representation.