By: Scott Bleier
Along with a technology company’s proprietary intellectual property, its core team of employees serves as a critical driver of the company’s revenues, growth and valuation. As I’ve written previously in my article about the recent Acqui-Hire Trend, in many instances buyers have come to view a target company’s engineering team as the company’s most valuable “asset” in the context of an acquisition.
In an effort to protect this value, companies often require select employees to enter into non-competition and/or non-solicitation agreements in order to deter workforce departures and restrict the behavior of former employees. The enforceability of these types of restrictive employment agreements is a matter of state law. Whereas Massachusetts courts have historically enforced non-competition agreements (provided that they are narrowly drafted and serve to protect a company’s legitimate business interests), other states (most notably, California) view them as unlawful restraints of trade and refuse to enforce them as a matter of public policy.
Separate and distinct from the legality of these types of agreements is whether they make sense from a business perspective and from the standpoint of economic development. On this point, intelligent minds differ. Whereas some influential industry groups and companies view non-competition agreements as an indispensable way to protect business value, other parties (including some prominent venture capital investors) argue that they stifle innovation and the emergence of promising new companies.
The state of play for non-competition agreements in Massachusetts could be changing. Earlier this month, the Patrick administration proposed legislation that would render “void and unenforceable” any non-competition agreement with an employee or independent contractor. Click here to learn more about the proposal.