On July 31st, the Massachusetts legislature passed a bill codifying many aspects of non-compete law which will change how non-compete agreements are enforced throughout the state. The statute, entitled “The Act Relative to the Judicial Enforcement of Noncompetition Agreements” (the “Act”) is expected to be signed by the Governor and take effect on October 1, 2018. Its final version was a compromise balancing many competing interests, including those of employers who want to protect their competitive positions and employees who want the freedom to find better employment as opportunities arise. Although the Act places restrictions on traditional non-compete agreements which prohibit certain activities after employment ends, it does not abolish such agreements entirely, nor does it cover other types of restrictive covenants that companies already utilize to guard their business interests. While it will require significant changes for some employers to comply with the Act, we believe the new restrictions it imposes can be managed so as not to impinge on an entity’s ability to protect itself when employees seek to join a competitor.
The Act’s New Restrictions
The Act contains many restrictions on non-compete agreements, some which are set out as clear rules, others which may be open to interpretation. Many of its provisions should be examined with this distinction in mind.
To Whom the Act Applies. Certain classes of employees cannot be subject to non-compete agreements going forward, specifically:
(a) non-exempt employees under the Fair Labor Standards Act;
(b) student interns, undergraduate or graduate students employed for a short duration;
(c) employees who have been terminated without cause or are laid off; and
(d) those who are 18 years of age or younger.
While these four classes appear to be straightforward, the terms “cause” and “laid off” from subsection (c) are not defined, and may lead to sustained adjudication depending on an incident’s facts.
The statute’s provisions apply to both direct employees and independent contractors who are, or have been for at least 30 days immediately prior to termination, either a resident of or employed in Massachusetts. Important exceptions to the Act’s coverage include non-compete agreements made in connection with the sale of a business, and those made in connection with separation of employment and severance agreements, provided they include a seven day employee revocation period.
Specific Non-Compete Requirements. There are numerous specific requirements which must be met in order to have an enforceable noncompete agreement, including:
- It must be in writing and signed by both parties, and if entered into before employment begins, it must be provided to the employee by the earlier of either the time of the formal offer or ten business days before employment begins and provide for the right to consult counsel; if instead it is entered into after employment has commenced, it must also provide fair and reasonable compensation for the agreement, of which the promise of continued employment alone is not sufficient.
- It can have a maximum duration of 1 year, unless the employer can establish the employee breached his fiduciary responsibilities to the company or has taken confidential or proprietary information, in which case activity can be restricted for up to two years.
- Its restrictions cannot be broader than necessary to protect an employer’s “legitimate business interests”, only three of which are specifically recognized by the Act: (1) trade secrets, (2) confidential information and (3) goodwill. This requirement is met under the Act if the employer can show no other restrictive covenant can adequately protect its legitimate business interest other than a non-compete agreement, a potential area of dispute between parties.
- It must be reasonable in “geographic scope”, which is defined as any area in which the employee “provided services or had a material presence or influence” during the last two years of his employment. Although reasonable geographic scope requirement is also found under common law, this new definition does not add enough clarity to end litigation of this element.
- It must reasonably “proscribe activities in relation to the interests protected”, i.e. activities can be “limited to only the specific types of services provided by the employee” during the last two years of employment.
- It must provide for either a “garden leave” pay during the restricted period, defined at least 50% of the employee’s highest annualized base salary paid by the employer within the two years preceding the employee’s termination, or some “other mutually-agreed upon consideration,” the latter of which has no specific requirements on the amount or timing of the agreed to consideration, an inconsistency sure to lead to disputes requiring adjudication.
What the Act Excludes
The Act is limited in scope to non-compete agreements only, and does not curb other restrictive employee covenants already commonly used, specifically non-solicitation, non-disclosure and assignment of invention agreements. The validity of these agreements will continue to be evaluated under established Massachusetts common law standards, and are powerful tools that can be extended to offset many protections eroded under the new statute.
What Venue is Proper
The Act requires claims to enforce noncompete agreements be brought in Massachusetts in the county where the employee resides or in Suffolk business litigation session.
What Employers Should Do Next
While the Act explicitly restricts non-compete agreements, Massachusetts courts had already made enforcement of such contracts problematic, so these new regulations are not as burdensome as they first appear, especially given that they do not apply to agreements entered into before October 1, 2018. However, employers should consider some or all of the following measures 1) a review of its current non-compete form complies with the changes in the law; 2) evaluating whether business interests can be adequately protected by continuing to use non-solicitation and non-disclosure agreements. Because it is also likely litigants may claim on public policy grounds that an agreement that does not comply with the Act is unenforceable, employers would be wise to take the steps necessary to review agreements entered into prior to October 1, 2018.
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