Massachusetts Passes Noncompete Reform Legislation

The Massachusetts Legislature has passed legislation governing the use of noncompetition agreements in Massachusetts. Governor Charlie Baker is expected to sign the legislation into law by August 10, 2018.  Assuming that occurs, the law will codify existing Massachusetts case law to some degree, and it also will go much further in regulating the enforceability of noncompetition agreements, including limiting who may be subject to such agreements.      

The law applies to noncompetition agreements entered into after October 1, 2018. All noncompetition agreements entered into before October 1, 2018, will continue to be examined under existing common law. 

Enforceable Noncompetition Agreements

The law, which amends Chapter 149 of the Massachusetts General Laws, defines a “noncompetition agreement” as an agreement in which an employee agrees not to “engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” The law includes independent contractors within its definition of an “employee.”

Significantly, the law’s definition of “noncompetition agreement” excludes a number of agreements, such as:

• covenants not to solicit or hire the employer’s employees;
• covenants not to solicit or transact business with the employer’s customers, clients, or vendors;
• agreements made in connection with the sale of a business entity when the party restricted by the noncompetition restrictions is a significant owner of, or member or partner in, the business entity and will receive significant consideration or benefit from the sale; and
• agreements made at employment separation (if the employee is given seven business days to rescind acceptance).

To be valid and enforceable, a noncompetition agreement entered into at the commencement of employment must be in writing and signed by both the employer and employee; expressly state that the employee has the right to consult with counsel prior to signing the agreement; and be delivered to the employee before a formal offer of employment is made or 10 business days before the commencement of the employee’s employment, whichever comes first.”

To be valid and enforceable, a noncompetition agreement entered into after the commencement of employment must be “supported by fair and reasonable consideration independent from the continuation of employment”; be delivered to the employee at least 10 business days before the effective date of the agreement; be in writing and signed by both the employer and employee; and expressly state that the employee has the right to consult with counsel prior to signing the agreement.

To be valid and enforceable, a noncompetition agreement must also fulfill the following requirements:

• It may be “no broader than necessary” to protect one or more of the following legitimate business interests: the employer’s trade secrets, as defined in section one of chapter 93L; the employer’s confidential information that otherwise would not qualify as a trade secret; or the employer’s goodwill.
• It may not extend further than a year from the date of cessation of employment (or no further two years if the employee breached its fiduciary duty to the employer or unlawfully took, physically or electronically, property belonging to the employer).
• It must be “reasonable in geographic reach in relation to the interests protected.”
• It must be “reasonable in the scope of proscribed activities in relation to the interests protected.”
• It must include “a garden leave clause or other mutually-agreed upon consideration” between the parties.
• It must be consistent with public policy.

A noncompetition agreement will be presumed reasonably necessary when the business interests at issue cannot be adequately protected through other restrictive covenants (e.g., nonsolicitation agreements, nondisclosure agreements). A noncompetition agreement will be presumed reasonable in geographic reach where it is limited to areas where the employee provided services or had a material presence or influence within the last two years of employment. A noncompetition agreement will be presumed reasonable in scope where it is limited to the types of services provided by the employee during the last two years of employment.

Garden Leave Clauses

The law defines a “garden leave clause” as “a provision within a noncompetition agreement by which an employer agrees to pay the employee during the restricted period.” Under a garden leave clause, an employee retains a fiduciary duty of loyalty to the employer for the agreed-upon period. In exchange, the employer must pay the employee “on a pro-rata basis during the entirety of the restricted period of at least 50 per cent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.” 

Forfeiture Agreements

The law does not forbid forfeiture agreements, also known as “employee choice” agreements.  Rather than prohibiting an employee from competing, forfeiture agreements merely make it economically costly for the employee who decides to compete against his or her former employer. In that case, the employee has to pay an agreed-upon sum to the former employer.  Massachusetts courts have sanctioned the use of forfeiture agreements and examine their enforceability under the traditional reasonableness standards.

Excluded Employees

The law makes noncompetition agreements unenforceable against certain categories of employees. Specifically, the law provides that “[a] noncompetition agreement shall not be enforceable against: (i) an employee who is classified as nonexempt under the Fair Labor Standards Act . . . ; (ii) an undergraduate or graduate student that partakes in an internship or otherwise enters a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution; (iii) an employee that has been terminated without cause or laid off; or (iv) an employee that is 18 years old or younger.”

Significantly, the law does not define the terms “without cause” or “laid off,” and these terms are subject to varying interpretations. It is unclear how courts will interpret these terms under this law. Employers may want to consider how the manner in which an employee is separated from employment will affect enforceability of the employee’s noncompetition agreement. An employer also may consider defining “without cause” and “laid off” in its noncompetition agreements, although it is not clear what weight courts will give such definitions.

Judicial Enforcement Rules

The law expressly provides that it does not render void or unenforceable “the remainder of a contract or agreement containing an unenforceable noncompetition agreement or preclude the imposition of an noncompetition restriction by a court . . . as a remedy for a breach of another agreement or a statutory or common law duty.” The law also provides that a court “may, in its discretion, reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests.”

The law restricts the use of choice of law provisions, making unenforceable any choice of law provision that would have the effect of “avoiding the [law’s] requirements . . . if the employee is, and has been for at least 30 days immediately preceding the employee’s cessation of employment, a resident of or employed in [Massachusetts].”

The law requires that all civil actions relating to noncompetition agreements be brought in the county in which the employee resides or, if agreed to by the employer and the employee, in Suffolk County. In any action brought in Suffolk County, “the superior court or the business litigation session of the superior court shall have exclusive jurisdiction.” Presumably, however, this does not preclude an employer or employee from bringing a civil action relating to a noncompetition agreement in, or removing a civil action to, federal court in Boston (which is in Suffolk County).

Employer Takeaways

Assuming the law is enacted, employers using noncompetition agreements for employees in Massachusetts may want to review their restrictive covenant agreements and practices, both to modify their agreements and to realign their practices consistent with the law’s requirements. The law does not affect the enforceability of nonsolicitation, nondisclosure, or forfeiture agreements, so employers may want to evaluate their overall approach to protecting their trade secrets, other confidential information, and goodwill through other forms of restrictive covenants. 

The new law is likely to require changes in current forms of noncompetition agreements used by employers for those forms to be enforceable (when executed on or after October 1, 2018). Employers may want to review noncompetition agreements executed prior to October 1, 2018, as part of their evaluation of their restrictive covenant practices. Employers may choose to replace existing agreements with new ones for the purpose of ensuring consistent treatment of employees, and potentially also to gain greater confidence that the agreements are enforceable (because they meet the specific requirements contained in the new law). Finally, employers may need to modify their practices concerning the amount of prior notice given to prospective and current employees asked to execute noncompetition agreements.