United States: Umpteenth Time's The Charm? Massachusetts Has Another Go At Non-Compete Reform

The Massachusetts legislature is back at it again — as the Boston Globe reports, the Joint Committee on Labor & Workforce Development has sponsored a compromise bill with the goal of limiting non-competes in the Commonwealth.

As our readers may recall, for nearly a decade, Massachusetts legislators have attempted to pass legislation regarding non-competes, to no avail. In fact, in recent years, there have been unsuccessful attempts to join California in banning non-compete agreements outright (including a failed proposal by former Governor Deval Patrick himself).

Now, with still over 2 months to go before the formal legislative session ends, legislators are once more taking a crack at it, although unlike the attempts to ban non-competes 2 years ago, the current bill may not be nearly as concerning to proponents of non-competes.

That said, the proposed legislation is not controversy-free. In fact, the inclusion of a provision requiring "garden leave," which would force employers to pay former employees bound by non-compete agreements 50% of their highest annualized salary over the last 2 years of employment for the restricted period, has prompted many in the business community to express their concern. Some, such as executive vice president of the Associated Industries of Massachusetts, Chris Geehern, have noted that employees who are bound by non-competes are often highly-paid employees to begin with, who may receive the benefit of inflated compensation in their base salary to reflect the fact that they are so bound. Likewise, the Greater Boston Chamber of Commerce's president and CEO, Jim Rooney, told the Boston Globe that the inclusion of the garden leave provision was "unexpected," and likely "would be a problem for [the Chamber]." Notably, we are unaware of any other jurisdiction in the United States that requires — statutorily or otherwise — "garden leave" payments as a prerequisite for the enforcement of non-competes.

Other provisions of the proposed legislation may cause some consternation for businesses, or at the very least, may require those businesses to change their practices. For example:

  • The proposed legislation prohibits judicial reform of non-competes in contrast to current Massachusetts common law. This provision could have disastrous results for employers who have a good-faith belief that their agreement is reasonable and enforceable, but whose agreements are nonetheless found to be over-reaching by a reviewing court. Without the ability to reform the agreement, the proposed legislation could be read to require the court to strike the entire agreement. The proposed legislation does not indicate whether it merely prohibits reformation in the sense that a court could not replace a nationwide restriction with a 10 miles restriction, for example, or if a court could not even "blue pencil" the agreement to strike only offending portions of the non-compete and leave the remainder.
  • As is the case in certain other states, the bill would do away with "continued employment" as sufficient consideration for the non-compete agreement. This could be potentially costly for employers seeking to enter into non-compete agreements with existing employees as they will need to provide some other form of consideration.
  • With certain exceptions (addressed below), the proposed legislation limits the length of non-competes to 1 year. While this is certainly an improvement from a prior bill that would have rendered agreements lasting longer than 6 months "presumptively unreasonable," some Massachusetts employers may find a one-year period insufficient to protect their legitimate business interests, particularly given that courts in the Commonwealth have historically found that longer restrictions are warranted in some cases.
  • Notwithstanding the one-year limit noted above, the bill allows a longer restricted period if "the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment." It is unclear whether this provision merely suggests that the restricted period will be tolled in the event the employee has acted improperly.
  • The bill prohibits non-competes for employees "classified" as non-exempt under the Fair Labor Standards Act ("FLSA") (although the bill does not clarify by whom the employee would be classified — the employer, or the Department of Labor?), student interns or grad/undergrad students engaged in short-term employment while enrolled in school, employees who have been terminated without cause or laid off, or employees aged 18 or under. While most of these categories will likely be accepted by the business community as common-sense, some may find the prohibition on non-competes for any and all non-exempt employees to be overly simplistic. Some businesses will likely seek for the legislature to carve out non-exempt employees who have unique access to the employee's confidential and/or trade secrets in order to perform the functions of their jobs.

    Additionally, as we have observed in many posts on our Wage and Hour Litigation Blog, the FLSA's overtime exemptions are not always a model of clarity and can be a moving target. Accordingly, if an employee is exempt (and otherwise can legally be bound by a non-compete agreement under the proposed legislation) at the time of execution, but later becomes non-exempt due to changing FLSA regulations or caselaw, it is unclear whether a court would enforce a non-compete against the employee. Given that the bill provides that a "noncompetition agreement shall not be enforceable against . . . an employee who is classified as nonexempt" (emphasis added), as opposed to "was classified as nonexempt at the time of execution," it appears likely that changes in the FLSA regulations could instantaneously prohibit an employer from enforcing certain non-compete agreements that were enforceable the day prior, without any change in an employee's roles or responsibilities.
  • The proposed legislation also prohibits choice-of-law provisions that would avoid the effects of the bill where the employee, for the 30 days preceding the cessation of employment, is a Massachusetts resident or was employed in the Commonwealth. This provision could prove difficult for multi-state employers, who will need separate agreements for Massachusetts employees (and would need to rigorously and regularly review where its employees reside or work, in case an employee relocates). It also means an employee could move to Massachusetts specifically to avoid enforcement of his or her non-compete.
  • The bill also purports to grant exclusive jurisdiction for any disputes relating to non-compete agreements in the Massachusetts superior courts or the Business Litigation Session of the Suffolk County superior court. This suggests that parties may be prohibited from bringing claims related to non-compete agreements in federal court (which may be unconstitutional), potentially leading to claim-splitting (such as where an employer wishes to also assert a Defend Trade Secrets Act claim or other claims in federal court), and may unnecessarily tax the already burdened superior courts of the Commonwealth.
  • The bill also defines "employee" to include independent contractors, notwithstanding the many fundamental differences between employees and independent contractors under Massachusetts law. It's unclear why the committee chose to define "employee" in this way, given that its definition as drafted seems to have no rational tie to "employee" as that term is used in other laws.

Not all provisions of the bill will be concerning to employers. For example, the legislation will not be retroactive — a major improvement over previous attempts to limit non-competes. Nor would the bill affect non-solicit provisions, non-disclosure agreements, non-competes made in connection with the sale of a business (or otherwise made outside of employment relationships), forfeiture agreements, or agreements not to reapply for employment. Other uncontroversial provisions include requirements that the agreement be signed, in writing, state that the employee has the right to consult with counsel, and must be provided to the employee by the earlier of a formal offer of employment or 10 business days before the commencement of the employee's employment (which are already considered best practices for enforcement of non-competes in Massachusetts). Finally, the bill also would adopt the Uniform Trade Secret Act, which would leave New York as the lone hold-out.

At this point, the bill may move straight to a vote, or may be further discussed in the Ways & Means committee. In any event, given the apparent appetite in the Commonwealth both in the legislature and in the business community to come to some form of compromise, it appears that there is a fair chance we will see some non-compete legislation passed this year, or early in the next session.

Stay tuned...

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Erik W. Weibust
 
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