Many Massachusetts employers use noncompete agreements to protect their business interests, including confidential information, trade secrets, and good will. Due to recent developments regarding the use of these agreements on both the state and local level, employers should revisit their noncompetition agreements to ensure they comply with Massachusetts law and to evaluate whether other methods or strategies to protect those business interests may be appropriate in light of President Biden’s recent executive order seeking limitation of or prohibition on the use of noncompetition agreements.
A. Employment Alone is Insufficient to Support a Noncompetition Agreement Under Massachusetts Law
In a decision issued on July 15, 2021, Judge Hillman of the United States District Court for the District of Massachusetts issued one of the first written opinions concerning the enforceability of noncompetition agreements under the Massachusetts Noncompetition Agreement Act, M.G.L. c. 149, § 124L (“MNAA”), which was effective as of October 1, 2018.
In KPM Analytics North America Corporation v. Blue Sun Scientific, LLC, the Court held that the noncompete at issue violated the MNAA because it failed to comply with two of the eight requirements established by the MNAA for a noncompete to be legally binding. First, the noncompete failed to expressly state that the employee had the right to consult with counsel prior to signing the agreement. Second, the noncompete did not contain either a garden leave clause (i.e., continued payment of wages during the period covered by the noncompete) or “other mutually agreed upon form of consideration.” Without one of these two requirements – garden leave or “other mutually-agreed upon consideration” – a noncompete agreement is unenforceable under the MNAA. The Court accordingly declined to enforce the noncompete agreement and dismissed the breach of contract claim.
This decision is most notable, however, because it provides some long-awaited guidance concerning what may constitute “other mutually-agreed upon consideration,” a term that was left undefined in the MNAA. The consideration recited in the noncompete at issue in this case was “employment by the Company.” Given the Court’s determination that there was no “other mutually agreed upon form of consideration,” it is clear that “employment by the Company” does not satisfy the consideration requirement of the MNAA.
In view of this decision, it is crucial that employers ensure that all noncompete agreements entered into after October 1, 2018 satisfy all the requirements of the MNAA and that, to the extent an employer elects to rely on “other mutually-agreed upon consideration” in lieu of garden leave to support the noncompete agreement, it offers something more than the employment relationship alone.
B. President Biden Has Asked the FTC to Rein in the Use of Noncompetition Agreements
On July 9, 2021, President Biden signed an Executive Order on Promotion Competition in the American Economy, which according to its accompanying Fact Sheet, “includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.” Included among those initiatives is a request to the Federal Trade Commission (“FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The Fact Sheet, however, goes a step further and describes the Order as encouraging the FTC to “ban or limit non-compete agreements.”
Whether the FTC has this authority and, if it does, to what extent it will choose to exercise that authority are unclear at this point. However, the Executive Order and the Fact Sheet certainly signal that the Biden Administration is scrutinizing the use of noncompetition agreements. Due to the possibility that the FTC may ban or restrict noncompete agreements in the future, employers should consider other methods to protect their business interests, including confidentiality, nondisclosure, and nonsolicitation agreements.
With the changing landscape regarding the use of enforceability of noncompetition agreements, Kenney & Sams will continue to keep employers informed about developments on both the state and local level and we are prepared to assist any employer who would like to review and reevaluate its use of noncompetition and other restrictive covenant agreements.