by Lee Gesmer | Jun 29, 2016 | Noncompete Agreements
Laws are like sausages, it is better not to see them being made. Otto von Bismarck
Update: A new noncompete law was finally enacted in 2018. For a detailed discussion of the law see: A New Era In Massachusetts Noncompete Law
You could go to sleep for years, Rip van Winkle-like, and not miss much when it comes to keeping up with Massachusetts noncompetition legislation. Bills have been filed every year since 2009 and failed to be enacted into law. These bills have displayed all kinds of restrictions on non-competes, ranging from an outright ban (California-style), to a minimum salary requirement.
However, it’s worth taking an occasional peak at what the drafters of this legislation are up to, and the proposed 2016 law is worth waking up for, particularly since it passed the Massachusetts House and is headed for the Senate and possible delivery to Governor Baker for signature by the end of July.
Unsuprisingly, watching the sausage factory (the legislature) at work is not a pretty sight. At the same time, it’s difficult to avert your eyes.
The bill, now H. 4434, contains a lot of what you might expect based on past bills: a 12 month restriction on non-competes (expanded to two years if the employee has breached her fiduciary duty to the employer or unlawfully taken, physically or electronically, property belonging to the employer), and requirements that noncompete agreements be in writing and be provided to employees in advance of the commencement of employment.
However, the proposed law also contains a controversial so-called “garden leave” requirement. The expression “garden leave” — which is common in Britain but infrequently used in the U.S. — describes the situation where an employee leaving a job is told to stay away from work for a certain period, while remaining on payroll. The idea is that a few weeks or months hanging out in the “garden” (or pub!) will prevent the employee from learning confidential information she might take to a new employer.
The proposed Massachusetts law requires that noncompete agreements include a “garden leave clause,” although what this describes is a variation on the British version. It would require an employer to pay an employee subject to a non-compete, post-termination, “at least 50 percent of the employee’s highest annualized base salary” during the two years before the termination. This amount would be paid pro-rata over the duration of the noncompete period (presumably no more than 12 months).
An earlier version of the bill made garden leave mandatory with no loopholes. If the bill had remained in this form it would have greatly complicated employers’ decisions on whether or not to impose noncompetes, since the cost to employers if they chose to enforce a noncompete would have gone from free (today) to six months’ salary.
However, at the last minute the bill was amended to allow employers and employees to agree on, as an alternative to garden leave, some “other mutually-agreed upon consideration.” Translation: employer to employee – “if you want this job you need to agree to a two week garden leave provision. Take it or leave it.” This loophole has been described elsewhere as a “giant, EMC-sized hole“.
Whether the garden leave provision remains in its now-weakened form in the Senate, or whether it will be restored to its original, noncompete-disincentivizing form, remains a key consideration as to whether this bill will have a major impact on noncompete law in Massachusetts.
A few other aspects of this legislation are also worth mentioning. First, and most importantly, a noncompete would not be enforceable against an employee terminated without cause or laid off. This would be a significant limitation on noncompetes in Massachusetts. Employees are often aghast to discover that a noncompete may be enforced against them even though they were terminated from their employment. The bill would leave noncompetes enforceable only against employees terminated with cause (a relatively infrequent occurrence) and employees who terminate their employment voluntarily.
Second, noncompetes would not be enforceable against non-exempt (overtime eligible) employees, students and employees 18 years or younger.
Third, if the employee has been a resident of Massachusetts or employed in Massachusetts for 30 days before termination of employment the employer won’t be able to avoid complying with the law by designating the controlling law to be that of another (more noncompete-friendly) state.
Whether this bill will be passed into law and, if so, what form it will take is is anyone’s guess. However, one thing it clear: only if the garden leave provision is restored without the current loophole will the culture of noncompetes in Massachusetts truly be transformed.
by Lee Gesmer | May 10, 2016 | Noncompete Agreements
Early this month the White House issued a report titled, Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses. The conclusion of this 16 page report is as follows:
In some cases, non-compete agreements can play an important role in protecting businesses and promoting innovation. They can also encourage employers to invest in training for their employees. However, as detailed in this report, non-competes can impose substantial costs on workers, consumers, and the economy more generally. This report informs future discussions and potential recommendations for reform by providing an overview of the research on the prevalence of noncompetes, evidence of their effects, and examples of actions states are taking to limit the use and enforcement of unnecessary non-competes. There is more work to be done. The Administration will identify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform. Researchers must continue to assess and identify promising policy reforms and the potential impact of those reforms including unintended consequences. Ultimately, most of the power is in the hands of State legislators and policymakers in their ability to adopt institutional reforms that promote the use and enforcement of non-competes in instances that appropriately weigh their costs and benefits and in ways that provide workers appropriate levels of transparency about their rights.
Among many interesting points made are the following:
- Almost 1/6 of of workers earning less than $40,000/year are bound by noncompetes.
- An estimated 37% of employees subject to noncompetes are asked to sign noncompete agreements only after accepting a job offer.
- There is a correlation between noncompetes and lower wages.
- Many workers who sign noncompetes do not understand the legal implications of these agreements.
. . . and much more. Read the full report here.
The White House report comes on the heels of a March 2016 report by the U.S. Treasury titled Non-compete Contracts: Economic Effects and Policy Implications. The Treasury report makes many of the same points, concluding:
Though non-compete contracts can have important social benefits, principally related to the protection of trade secrets, a growing body of evidence suggests that they are frequently used in ways that are inimical to the interests of workers and the broader economy. Enhancing the transparency of non-competes, better aligning them with legitimate social purposes like protection of trade secrets, and instituting minimal worker protections can all help to ensure that non-compete contracts contribute to economic growth without unduly burdening workers.
Legislation regulating noncompetes has been filed with the Massachusetts legislature every year since 2008, and is likely to be filed again this year. Hopefully, the state lawmakers will take the findings of these reports into consideration and, at the very least, take steps that will curb some of the more egregious abuses associated with noncompete agreements.
by Lee Gesmer | Apr 7, 2016 | Copyright
A quick update on Capitol Records v. Redigi.
The SDNY federal court entered summary judgment against Redigi on liability in March 2013.
The last two years have been spent preparing for trial on damages.
However, on Monday of this week, on the eve of trial, the parties reported the case settled. Very likely, this settlement (which is confidential), was engineered to allow the decision on liability to be appealed to the Second Circuit. The way this works is that if the appeal is unsuccessful, the defendants will owe a certain amount of money (stipulated in the settlement agreement, which is confidential/non-public). If Redigi wins on appeal, it will not owe that money (and, presumably, it will be able to resume offering its service, which appears to be inactive at present). The settlement agreement likely provides for either outcome.
It has always been the expectation that Redigi wanted to get this case to the Second Circuit, so I believe this is likely to be the scenario that is in progress, particularly since there is no permanent injunction issued pursuant to the settlement. However, without seeing the settlement agreement (or seeing a Notice of Appeal filed by Redigi), we can’t be 100% certain that the case will go to the Second Circuit.
Stay tuned ….
Update: The trial court decision was affirmed by the Second Circuit in 2018. See Redigi – World’s First Used Digital Marketplace – Fails “First Sale” at Second Circuit
by Lee Gesmer | Feb 25, 2016 | Copyright
Several of the CopyrightX teaching fellows used the 1990s Lotus v. Borland copyright case in their classes last week. In an excellent Case Study, Professor Fisher and TF/Berkman Center intern Ben Sobel dissected the background and holdings in this complex case.
An interesting aspect of the case study was the use of documents that came to light during Elena Kagan’s Supreme Court nomination process. In 1995 now-Justice Kagan was Associate White House Counsel, and was involved in the administration’s debate of whether to support Lotus (which had prevailed before Massachusetts U.S. District Court Judge Robert Keeton), or Borland (which won before the First Circuit). Judge Keeton had held the Lotus 1-2-3 menu hierarchy copyrightable, and the First Circuit had reversed, holding it to be an uncopyrightable method of operation under 17 U.S.C. sec. 102(b).
Lotus appealed to the Supreme Court, which granted cert. The question the Solicitor General’s office faced in December 1995 was whether to support Borland or Lotus, and on what grounds. The policy issues were impacted by the fact that by 1995 Microsoft’s Excel spreadsheet program had an 80% market share, leaving Borland’s Quattro Pro and Lotus 1-2-3 in the dust.
Kagan’s files show the extent to which the administration was internally divided over this issue.
The DOJ Antitrust Division (headed by Joel Klein, who led the DOJ’s antitrust suit against Microsoft a few years later), supported Borland, and wanted to argue for affirmance. However, it disagreed with the First Circuit’s holding that the Lotus 1-2-3 commands were a method of operation, arguing instead that the First Circuit should be upheld on the ground that the commands were an uncopyrightable computer language. In fact, it appears that all of the agencies, even those that sided with Borland and wanted the First Circuit upheld, believed the First Circuit’s reasoning to have been flawed.
The Department of Commerce and the Copyright Office argued that the administration should take no position either way on the appeal, stating: ”
We all agree that the First Circuit’s reasoning was contrary to the copyright law, and that the Supreme Court should be apprised of the First Circuit’s legal errors. Professional organizations representing intellectual property experts, such as the American Intellectual Property Law Association, have already well-briefed the Supreme Court on these legal errors. . . . Thus, the Supreme Court should be fully informed on all issues in the case, obviating the filing of
a government brief.
We vehemently oppose the filing of this or any amicus brief on behalf of Borland. The filing of such a brief would seriously jeopardize copyright protection for computer programs.
Commerce’s position ruled the day, and the government took no position on the case. The Supreme Court heard argument in early 1996 and tied 4-4 (Justice Stevens did not vote), affirming the First Circuit decision, but limiting it’s holding to that circuit. Since then no other circuit has adopted Lotus, and the First Circuit has not had occasion to revisit the case.
While the internal government memos and correspondence are fascinating, Kegan’s files also contain draft briefs that reflect the “computer language” argument that the DOJ was urging the SG to adopt. Here is the argument, asserting that the result is correct, but on different grounds than those relied on by the First Circuit:
Although the court of appeals’ reading did not lead it to an erroneous result in this case, we believe that, if left uncorrected, the court of appeals’ interpretation could effectively nullify Congress’ decision to treat computer programs as literary works eligible for protection under the Act. …
We agree with the court of appeals’ conclusion that the command hierarchy used by Lotus 1-2-3 is not subject to copyright protection. The command hierarchy is not, itself, a computer program; rather, it is a type of programming language, analogous to the rules of a game. It constitutes an abstract system of rules that defines permissible sequences of symbols, expressed as keystrokes or otherwise, and assigns meaning to those sequence. The hierarchy itself does not instruct the computer to carry out any function; it is the structure of a language that allows the user and Lotus 1-2-3 to communicate. As such, it facilitates, but is not itself, expression. Therefore, it cannot be afforded copyright protection by Section l02(a) which protects only original expression. …
The court of appeals misconstrued Section l02(b) by failing to interpret that provision in the context of the long-established idea/expression dichotomy that determines what is subject to copyright protection. The court appeared to interpret Section l02(b) as a bar to copyright protection for an expressive work of authorship if the work expresses a method operation. Thus, the court erred in that it interpreted “method of operation” as used in Section 102(b) to reach both idea and expression. But, as demonstrated above, Congress intended through Section l02(b) to exclude from copyright protection ideas and similarly abstract concepts such as methods and processes, but not to preclude copyright for the original expression in which such an idea is presented. …
To the extent the court of appeals’ analysis can be read to be inconsistent with’ the idea/expression dichotomy, it should be rejected. By failing to give effect to Congress’s intent to protect expression while leaving idea [sic] unprotected, it raised unjustified doubts about the copyright status of any work of authorship that could be characterized as “procedure, process, system, [or] method of operation.” …
So understood, the command hierarchy constitutes the structure of a language. The keystroke commands form the language’s vocabulary and the hierarchy defines its syntax and semantics. …
The command hierarchy is not a computer program because the hierarchy, i.e. the rules, do not instruct the computer to perform any operation or “bring about a certain result.” 17 U.S.C. 101. Rather, statements that users write in the language according to those rules i.e., macros — constitute such instructions. …
In sum, the rules that allow communication with a computer in the Lotus 1-2-3 language, like the rules that allow the playing of a particular game or the practice of a particular accounting system, are abstract ideas that may be expressed in copyrightable form, but are not themselves copyrightable expression under Section 102(a). This analysis preserves the public’s right freely to use the rules to create original expression and serves the fundamental policy considerations of the Copyright Act.
