By: Kenney & Sams, P.C.
After years of fitful attempts, the Massachusetts Legislature finally passed a bill regulating non-compete agreements. Governor Baker signed the “Act relative to the judicial enforcement of noncompetition agreements” (MGL c. 149, §24L) on August 10, 2018, and it will take effect on October 1, 2018. The new law ushers in a new era in the enforcement of non-competes, and is likely to cause some misunderstandings (and a host of litigation) as employers and employees adjust to the new system. Here, I break down the new law into its most important parts.
“Noncompetition Agreement” Defined
The law defines a “noncompetition agreement” as:
[A]n agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended[.]
Even more importantly, perhaps, the Act identifies other, similar agreements that are not “noncompetition agreements,” and which will continue to be evaluated under Massachusetts common law:
Non-competes made in connection with the sale of a business;
Severance agreements (provided the employee is given seven business days to rescind acceptance);
Non-solicitation agreements; and
An “employee” is anyone performing any service. The Act also specifies that “employee” in this context, and unlike other employment laws, includes independent contractors. Importantly, employers cannot impose non-competes on any of the following categories of employees:
- Employees who are classified as non-exempt under the Fair Labor Standards Act (in other words, hourly employees);
- Undergraduate or graduate students who are engaged in short-term employment;
- Employees who have been terminated without cause or laid off; or
- Employees who are 18 years of age or younger.
The Garden Leave Requirement
The Act requires the payment of “garden leave pay” during the non-compete time period. See “Down the Garden Path,” in which I discuss the legislative proposals for garden leave.) The employer, during the restricted period, must continue paying the former employee an amount defined as “at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.”
However, garden leave is required unless the employer and employee agree to some “other mutually-agreed upon consideration.” This is an area where there is likely to be some confusion. Unlike the 2017 garden leave bills, the Act imposes no specific requirements on the value or timing of any “other mutually-agreed upon consideration” that could serve as an alternative to garden leave. In fact, one could argue that a hiring bonus could act as “other mutually-agreed upon consideration,” an interpretation which would render garden leave an optional contractual provision.
Any non-compete must be reasonable, meaning it must be:
- No broader than necessary to protect a legitimate business interest. “Legitimate business interests” are the employer’s trade secrets, other confidential information, and goodwill. Courts will presume that the non-compete is “reasonable” if the employer can show that no other type of restrictive covenant (such as a non-solicitation or non-disclosure agreement) would be enough to protect the employer’s legitimate business interest.
- No longer than 12 months. The only exception to the 12-month rule is if an employee is shown to have breached a fiduciary duty to the employer, or has unlawfully taken property belonging to the employer. In that case, the restricted period may be tolled for up to two years from the date the employment ended.
- Reasonable in geographic scope. If the noncompete is limited to the geographic “areas” in which the employee, “during any time within the last two years of employment, provided services or had a material presence or influence,” it will be considered “reasonable.” The word “areas” is not defined, and that ambiguity, along with the increasing use of telecommuting and remote work, likely will lead to litigation about this provision.
- Reasonable in scope of prohibited services. If the non-compete’s “proscription on activities … protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last two years of employment,” this limitation will be presumed reasonable. This is codification of the “janitor rule,” in which non-competes were often deemed unreasonable if they were so broad as to prevent a CEO from working as a janitor for a competitor.
Technical and Advance Notice Requirements
In addition to containing a written promise of garden leave or “other” consideration, all non-competes must:
- Be in writing;
- Be signed by both the employer and employee; and
- Expressly affirm the employee’s right to consult with an attorney prior to signing.
If the non-compete is presented to an employee when he or she starts work, the employer must present it to them at the time the offer of employment is made, or 10 days before the employment begins, whichever is earlier. If a non-compete is signed after the employment begins, however, it must be “supported by fair and reasonable consideration independent from the continuation of employment.” This appears to mean something more than the otherwise-required “garden leave” or “mutually agreed upon consideration.” The sufficiency of consideration is likely to be another point of confusion and contention.
The Act Permits Blue-Penciling and Severance
Under the new law, courts can “blue-pencil,” or edit, overly-broad non-competes, rather than requiring them to declare the non-competes null. Further, should a court declares the non-compete null rather than blue-penciling it, the Act provides that only the non-compete portion of the agreement will be severed, and the remainder of the agreement will remain in effect.
Venue and Choice of Law
Under the Act, parties must bring non-compete cases in the county where the employee resides or, if the parties mutually agree, in Suffolk County. Any actions in Suffolk County must be brought in the state-level “superior court or the business litigation session of the superior court.”
The Act gives the state superior court exclusive jurisdiction over any non-compete cases brought in Suffolk County only, and thus appears to prohibit parties from bringing such actions in, or removing them to, the federal court located in that county (though the Act imposes no similar restrictions on actions brought in Massachusetts’s 13 counties other than Suffolk). As a general rule, defendants may file in, or remove actions to, federal court where the action includes at least one federal claim or where there is diversity of parties and the amount in controversy exceeds $75,000. It is unclear whether courts will uphold the Act’s apparent restriction on this right to bring a case in federal court.
In addition, choice of law provisions designating another state will be ineffective if the employee is, and has been for the past 30 days, a resident of or employed in Massachusetts at the time of termination.
The goal of the new non-compete legislation was to reform the use of non-competes to apply only in those instances where a business interest could not be protected using less severe means, and where the employer was even willing to pay for the benefit of keeping the former employee away from competitors. In that regard, it has succeeded. However, another goal was to provide simplicity and clarity in the application and enforcement of non-competes. The ambiguity surrounding reasonable scope, reasonable consideration, and proper venue are likely to lead to more confusion, not less.