Massachusetts’ New Noncompete Laws: Critical Compliance Requirements Starting October 1, 2018
By Michael Radin, Esq.
Tarlow Breed Hart & Rodgers, P.C.
On August 10, 2018 Governor Charlie Baker signed into law Massachusetts Noncompetition Agreement Act of 2018 (G.L. ch. 149, s. 24L) which limits the use of noncompetition agreements in Massachusetts. The new law applies to all post-termination noncompetition agreements between employers and certain employees and independent contractors entered into on or after October 1, 2018. Existing agreements are not directly affected – but the new law could be a basis against which pre-existing non-compete agreements will be measured in court. The Noncompetition Agreement Act is a mixed bag in that it brings clarity in some areas but leaves open significant areas that will have to be clarified in the future.
Who is affected?
Employers cannot use non-compete agreements with all employees and contractors. Non-compete agreements are not allowed with the following: (i) employees who are classified as nonexempt under federal overtime law, (ii) employees who have been laid off or whose employment is terminated without cause (unless at the time of termination a separation agreement is entered into), (iii) students participating in internships or other short-term employment relationships, and (iv) employees age 18 or younger. The law does not define what constitutes termination for “cause”, an omission that leaves open exactly what actions may – or may not – qualify. For example, while termination for misconduct seems to be “cause,” termination for poor performance or an internal progressive discipline policy might not qualify.
What types of agreements are not affected?
Several types of arrangements are not affected by the new law. First and foremost, the new law does not apply to restrictions on competition during employment. Second, there are several types of arrangements that are expressly excluded from the new restrictions:
(1) covenants not to solicit or hire employees;
(2) covenants not to solicit or transact business with customers, clients or vendors;
(3) noncompetition agreements made in connection with the sale of a business or substantially all of its operating assets, “or otherwise disposing of the ownership interest” of a business, division or subsidiary, for “significant” owners who will receive “significant” consideration or benefit from the sale or disposal (the statue does not define “significant”);
(4) noncompetition agreements outside of an employment relationship;
(5) forfeiture agreements (defined as agreements with adverse financial consequences on a former employee as a result of termination of employment regardless of whether the employee competes – but forfeiture agreements with adverse financial consequences for competing are not allowed);
(6) nondisclosure/confidentiality agreements;
(7) invention assignment agreements;
(8) garden leave clauses;
(9) separation agreements if the employee is expressly given seven (7) business days to rescind acceptance; or
(10) agreements by which an employee agrees not to reapply in a job with the same employer after termination.
The Noncompetition Agreement Act codifies common law principles which provide that to be enforceable, a noncompetition agreement must be no broader than necessary to protect the “legitimate business interests” of the employer (defined to include the employer’s trade secrets, confidential information, and/or goodwill). The new law deems presumptively reasonable (1) a geographic scope that is limited to the areas in which the employee provided services or had a “material presence or influence” within the last two years of employment, and (2) the scope of prohibited activities is limited to only the specific types of services provided by the employee at any time during the last two years of employment.
How to comply with the new law
1. Process - Noncompetition agreements entered into at the start of employment must (i) be in writing signed by both the employer and employee; (ii) be provided before the earlier of the formal offer of employment or ten (10) business days before start of employment; and (iii) state that the employee has a right to consult with counsel prior to signing.
If entered into after employment started (and not in connection with separation), then a noncompetition agreement (i) must be in writing signed by both employee and employer; (ii) the employer must provide notice at least ten (10) days prior to the effective date; (iii) there must be “fair and reasonable consideration” (separate from continuing employment); and (iv) state that the employee has the right to consult with counsel before signing.
The statute does not define “fair and reasonable consideration” and it is possible that the garden leave provision could be looked at by a court as providing a standard to meet.
2. Garden Leave or other “Consideration” - Under the new law, post-employment noncompetition agreements must be supported by a “garden leave” clause or “other mutually agreed upon consideration” specified in the agreement. This applies even if the employee resigns or is terminated for cause.
The garden leave requirement only applies if the employer choses to enforce the restrictions and so long as the employee complies with the restrictions. The “garden leave” approach requires payment on a prorated basis during the entire restricted period of at least 50% of the employee’s highest annualized base salary within the two years preceding the employee’s termination. The duration of the non-compete is limited to up to 1 year – or up to 2 years where the employee breached a fiduciary duty or took the employer’s property.
Unfortunately, the new law does not define what is “other agreed upon consideration” instead of garden leave. For example, it is not clear whether the initial offer of employment constitutes adequate consideration or whether something else like a signing bonus, equity options, or something else is needed (or whether the value of that needs to match the 50% garden leave rate).
In the context of entering a non-compete agreement after employment starts, the statute provides that a noncompetition agreement entered into during employment requires “fair and reasonable consideration” and that continued employment is not sufficient consideration. Once again, courts may look to garden leave as the standard for “fair and reasonable consideration.”
3. Duration - The new law limits noncompetition agreements to no more than 12 months post-termination, or 24 months if the employee breaches his or her fiduciary duty to the former employer or takes the former employer’s property (physically or electronically).
4. Court Power to Modify - The new law states that a court may, if an agreement is in violation of the new law, either declare the entire agreement void or reform an overbroad noncompetition agreement to render it enforceable to the extent necessary to protect the employer’s legitimate business interests.
5. Applicable Law and Proper Court - Employers cannot avoid these restrictions by selecting another state’s law in a noncompetition agreement. The new law applies if the employee has been a resident of, or employed in, Massachusetts.
Employers seeking to enforce noncompetition agreements now have to bring enforcement actions in the specific county where the employee lives, or if mutually agreed upon by both parties, in Suffolk County’s superior court or its business litigation session.
The new law sets some clear rules while leaving some important questions to be defined over time. Employers now should not reflexively use non-compete clauses for all employees in Massachusetts. Employers should now consider their approach to non-competes as part of their broader policies for protecting valuable assets (like trade secrets) and have policies and documentation that provides for layered protection against damage from former employees (such as well-tailored non-disclosure agreements).