In the culmination of a decade-long effort to enact comprehensive noncompete legislation, on August 10, 2018, Governor Baker signed an economic development bill into law that not only codifies Massachusetts noncompetition law for the first time, but also makes significant changes to noncompetition and trade secret law as it has existed until now. For example, as part of the new law, Massachusetts will join 48 other states in adopting a modified version of the Uniform Trade Secret Act.
The new legislation applies to agreements executed on or after October 1, 2018. This leaves employers only a few short months to review the changes explained below and implement revised agreements moving forward. The law covers noncompetition agreements with employees and independent contractors.
At the outset, the law 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.” It applies to most noncompete agreements, including forfeiture-for-competition agreements (agreements allowing an employee to compete on the condition that he or she forfeit some benefit to which he or she would otherwise be entitled). Significantly, it does not apply to all restrictive covenants agreements. For example, the law specifically excepts customer or employee nonsolicitation agreements, nondisclosure agreements, anti-raiding agreements, and noncompetition agreements resulting from the sale of a business.
Timing of the Agreement
The requirements for a valid and enforceable noncompetition agreement will depend on when the agreement is executed.
For agreements executed at the outset of employment, the agreement must:
- be in writing, signed by both the employer and employee;
- expressly state that the employee has the right to consult with an attorney before signing; and
- be presented to the employee either before a formal offer of employment or 10 business days before employment begins, whichever comes first.
For agreements executed after employment has begun, the agreement must also be supported by “fair and reasonable consideration independent from the continuation of employment.” Critically, continued employment alone is not sufficient consideration.
Universal Requirements for Noncompetition Agreements
All noncompetition agreements must:
- be “no broader than necessary” to protect a “legitimate business interest,” defined as an employer’s trade secrets, confidential information, or goodwill (an agreement will be presumed reasonably necessary where the legitimate business interests cannot be adequately protected by other restrictive covenants);
- not extend beyond 1 year unless the employee has breached the employee’s fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer (this is a significant departure from existing law—common law decisions have regularly upheld noncompetition agreements spanning 2 years or more in certain circumstances);
- be “reasonable in geographic reach in relation to the interests protected” (an agreement will be presumed reasonable in geographic reach if it is limited to areas where the employee, within the last two years of employment, provided services or had a material presence or influence);
- be “reasonable in the scope of proscribed activities in relation to the interests protected” (the agreement will be presumed reasonable in scope if it is limited to the types of services provided by the employee during the last two years of employment); and
- include “a garden leave clause or other mutually-agreed upon consideration between the employer and the employee.”
Garden Leave Requirement
Garden leave provisions generally require an employer to continue paying a former employee while the former employee is restricted for engaging in competitive activity. The primary purposes of these provisions are to support employee mobility by reducing enforcement of noncompetition agreements and to reduce financial strain on employees bound by such agreements.
Historically, garden leave provisions were a creature of contract—Massachusetts is the first state to mandate their inclusion. Under the law, an employer who chooses to enforce a post-employment noncompetition agreement must continue paying the former employee at least 50% of the employee’s annualized base salary to be paid on a pro rata basis during the restricted period. “Other mutually-agreed upon consideration” is not defined, but must be specified in the agreement. Because it is undefined, this is an area ripe for future litigation.
The long-standing requirement that noncompetition agreements be consonant with public policy remains. In addition, a court may still reform an overly-broad agreement to render it valid and enforceable to the extent necessary to protect any legitimate business interests. However, employers should be forewarned that courts in Massachusetts have been historically reluctant to do so. The best way to ensure enforceability is to adhere to the requirements of the statute and seek enforcement only where necessary to protect a legitimate business interest, which is narrowly defined therein.
Significantly, noncompetition agreements will not be enforceable against: nonexempt employees under the Fair Labor Standards Act; undergraduate and graduate students who are not working full time; employees who are terminated without cause or laid off; and employees that are 18 years old or younger. Further, choice of law provisions that would have the effect of avoiding these requirements will not be enforceable against employees residing or working in Massachusetts, and all civil actions relating to noncompetition agreements must be brought in either the county in which the employee resides or, if mutually agreed, Suffolk County in the Superior Court or the Business Litigation Session.
Suggestions for Employers
Businesses with employees or independent contractors in Massachusetts will need to carefully review their noncompetition agreements to ensure compliance with the new law. Additionally, while agreements entered into before October 1, 2018, will not be subject to this law, the law will undoubtedly inform the enforcement of agreements that predate it. Therefore, the prudent practice would be to review existing agreements for compliance and consider making changes to bring them into compliance.
If you have questions regarding the impact of this legislation on your organization or need assistance reviewing and revising your existing noncompetition agreements, please contact Nancy J. Puleo. Esq. or any other attorney in our Employment Law Group.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2018 Posternak Blankstein & Lund LLP. All rights reserved.