Massachusetts Enacts Law on Noncompete Agreements

by Holland & Knight LLP
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HIGHLIGHTS:

  • Massachusetts Gov. Charlie Baker recently signed into law the Massachusetts Noncompetition Agreement Act (Act), governing noncompetition agreements signed on or after Oct. 1, 2018, by employees and independent contractors who work or reside in Massachusetts.
  • The Act excludes from its coverage other specific types of employer-employee agreements, including nonsolicitation and nondisclosure agreements.
  • The Act imposes new requirements affecting the enforceability of noncompete agreements in Massachusetts. Employers should review their noncompete agreements and their practices for implementing these agreements.

Massachusetts Gov. Charlie Baker on Aug. 10, 2018, signed into law the Massachusetts Noncompetition Agreement Act (Act) governing noncompetition agreements signed by employees who work or reside in Massachusetts. The Act applies to noncompete agreements signed on or after Oct. 1, 2018. This client alert provides a summary of key details of the Act.

Agreements Covered by the Act

The Act applies to noncompetition agreements signed by employees and independent contractors who work or reside in Massachusetts. The Act excludes specific types of employer-employee agreements, including agreements not to solicit or hire employees and agreements not to solicit or transact business with an employer's clients.

The Act defines "noncompetition agreement" as "an 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 he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended." The Act also specifically includes "forfeiture for competition agreements," which is "an agreement that by its terms or through the manner in which it is enforced imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities."

The Act excludes from its coverage the following:

  • agreements "not to solicit or hire employees of the employer"
  • agreements "not to solicit or transact business with customers, clients, or vendors of the employer"
  • noncompetition agreements "made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal"
  • noncompetition agreements "outside of an employment relationship"
  • "forfeiture agreements," which is defined as "an agreement that imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engages in competitive activities following cessation of the employment"
  • nondisclosure or confidentiality agreements
  • invention assignment agreements
  • noncompetition agreements "made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind" (e.g., a noncompete entered into as part of a severance agreement)
  • agreements "by which an employee agrees to not reapply for employment to the same employer after termination of the employee" (e.g., a "no rehire" provision sometimes included in separation or settlement agreements).

Massachusetts common law will continue to govern those types of agreements that are excluded from the Act.

Requirements for a Valid Noncompete

The Act requires that a noncompete agreement be in writing, signed by the employer and employee, and "expressly state that the employee has the right to consult with counsel prior to signing."

An employer cannot avoid application of the Act through use of a choice-of-law provision if the employee is living or working in Massachusetts (or had been for at least 30 days preceding termination of employment).

Timing of Signing

A noncompete agreement provided to an employee at the start of employment must be provided to the employee at the time of the offer of employment or 10 business days prior to starting employment, whichever is earlier.

A noncompete agreement presented to an employee during employment must be provided to the employee 10 business days prior to taking effect and must be supported by "fair and reasonable consideration independent from the continuation of employment."

No Broader Than Necessary to Protect Employer's Legitimate Business Interests

The Act provides that the agreement "must be no broader than necessary to protect one or more . . . legitimate business interests of the employer." Legitimate business interests include the employer's trade secrets, the employer's confidential information and the employer's goodwill.

The Act further provides that "[a] noncompetition agreement may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant, including but not limited to a non-solicitation agreement or a non-disclosure or confidentiality agreement."

Scope: Time, Type of Services and Geography

A noncompete agreement may not exceed 12 months in duration from the termination of employment, unless the employee has breached fiduciary duties or has taken property belonging to the employer, in which case the agreement may extend to 24 months.

The restriction on the employee's activities must be reasonable. The Act states that "[a] restriction on activities that 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 2 years of employment is presumptively reasonable."

The agreement must also be reasonable in geographic scope. The Act states that "[a] geographic reach that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable."

Garden Leave or Other Consideration Required to Support Noncompete

A unique requirement of the Act is that a noncompete agreement must include a "garden leave" clause or "other mutually agreed-upon consideration."

Garden leave is a payment of at least 50 percent of the employee's highest base salary during the preceding two years for the duration of the restricted period. The employer may avoid paying the garden leave only if the employee breaches the noncompete, or if the noncompete is extended beyond 12 months because the employee took the employer's property. The Act does not provide guidance on what constitutes "other mutually agreed-upon consideration."

Consistent with Public Policy

The Act provides that the noncompete agreement must be consistent with public policy.

Reason for Termination Affects Enforceability of Noncompete

An employer cannot enforce a noncompete agreement against an employee who is terminated without cause or laid off. The Act does not define "cause."

Noncompetes Prohibited for Certain Classification of Workers

The Act prohibits an employer from entering into a noncompete agreement with employees:

  • who are nonexempt under the Fair Labor Standards Act
  • undergraduate or graduate students who are in an internship program or other 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
  • employees under age 18

Jurisdiction and Judicial Reformation

The Act states that "[a]ll civil actions relating to employee noncompetition agreements subject to this section shall be brought in the county where the employee resides or, if mutually agreed upon by the employer and employee, in Suffolk county; provided that, in any such action brought in Suffolk county, the superior court or the business litigation session of the superior court shall have exclusive jurisdiction."

The Act provides that a court, in its discretion, may "reform or otherwise revise" an overbroad noncompete to protect the employer's legitimate business interests. A court may also strike entirely the noncompete provision without affecting the validity of other provisions in the agreement (e.g., nonsolicit agreements).

Conclusion

The Act significantly alters noncompete law in Massachusetts. In the upcoming months and years, Massachusetts courts will address numerous questions of interpretation of the Act, including issues related to the first-in-the-nation "garden leave" requirement. In the meantime, employers should immediately address their noncompete agreements and their practices for implementing these agreements. In doing so, employers should also evaluate their other forms of restrictive covenants – such as agreements not to solicit employees or clients, and agreements to not use or disclose confidential information – to ensure that they are properly protecting company assets.

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