United States: Massachusetts Legislature Passes Comprehensive Noncompete Reform

After years of negotiation, on July 31, 2018, the Massachusetts legislature finally was able to pass legislation that, if signed by Governor Charlie Baker, would significantly limit the enforceability of noncompetition agreements in the Commonwealth. The Massachusetts Noncompetition Agreement Act ("the Act") would apply to all noncompetition agreements entered into on or after October 1, 2018. If signed into law, the Act generally would limit all post-employment noncompetes to a maximum duration of 12 months, and, absent agreement to the contrary, require employers to pay 50% of the former employee's base salary – termed "garden leave" pay – during the restricted period, among other constraints. This significant change to employment relationships in Massachusetts was included in a broader economic development bill, and is now on Governor Baker's desk for signature.

In addition to imposing new minimum requirements for noncompetes, the Act prohibits noncompetes for numerous categories of employees, empowers courts to reform or revise otherwise invalid noncompetes, and addresses the legality of other common contractual provisions. The Act will apply to all noncompetes entered into on or after October 1, 2018, which means employers may still seek to enforce noncompete agreements entered into before October 2018 that do not meet the Act's requirements. Furthermore, the Act does not apply to other restrictive covenant agreements, including non-disclosure, customer non-solicit or employee non-solicit agreements. In addition to reforming the use of noncompetes, the underlying economic development bill also adopts the Uniform Trade Secret Act, codifying an action for misappropriation of trade secrets and providing for recover of attorneys' fees if an employer is successful in such an action.

New Minimum Requirements for Noncompetition Agreements in Massachusetts

As noted above, the Act specifically curtails the duration of any noncompete entered into on or after October 1, 2018, to 12 months post-employment. However, if the employee has breached its fiduciary duty to the employer, or misappropriated employer property, the restricted period can be extended up to two years. And while the Act also commands that noncompetes must include a garden leave clause that entitles the subject employees to 50% of their highest annualized base salary within the two years prior to termination, parties can avoid garden leave payments if the agreement specifies "other mutually-agreed upon consideration." The Act does not describe what constitutes sufficient "consideration." However, the Act does state that when demanding current employees sign new noncompete agreements, continued employment is no longer "fair and reasonable consideration," which is a significant departure from current Massachusetts noncompete law. In other words, if an employer wants existing employees to enter into noncompete arrangements, it will need to offer something of value these employees are not already entitled to receive, such a signing bonus, in order to secure an enforceable agreement. If the restricted period is extended due to misconduct on the employee's behalf, like theft of employer property, employers are not required to pay garden leave during the extension.

In addition to these new minimum requirements, to be legally enforceable in Massachusetts, the Act stipulates that noncompetes entered into on or after October 1, 2018, must:

  • Be in writing signed by the employer and employee;
  • Expressly state that the employee can consult an attorney before signing; and
  • Be provided to the employee either before a formal offer letter, or at least 10 business days before the start of employment, whichever comes first (or in the case of a current employee at least 10 business days before the effective date).

The Act also addresses the scope and geographic parameters of noncompetes, declaring that noncompetes can be "no broader than necessary to protect" the employer's trade secrets, confidential information, or customer goodwill, and cannot extend beyond "the geographic areas in which the employee ... provided services or had a material presence or influence [within the last 2 years of employment]." These restrictions on scope are consistent with how Massachusetts courts have enforced noncompete agreements over the years. Notably, the Act specifically recognizes the court's discretion to revise an overly broad agreement to render it enforceable to protect an employer's legitimate business interests.

Enforceability of Noncompetition Agreements against Certain Employees

The Act's restrictions on post-employment noncompetes apply to both employees and independent contractors. However, employers may not enter into a noncompete with:

  • Employees who are classified as nonexempt under the Fair Labor Standards Act;
  • Undergraduate or graduate students on internships (either paid or unpaid), or other short-term employment while enrolled in full- or part-time education (it is unclear, but this limitation is presumably limited to short-term positions directly related to the students' course of study);
  • Employees who are terminated without cause or laid off; and
  • Employees under 18.

The Act does not define what it means to be terminated for cause.

Choice-of-Law Provisions

Choice-of-law provisions that assign jurisdiction outside Massachusetts are unenforceable if the employee is a resident of or has been employed in Massachusetts for at least 30 days immediately preceding the cessation of employment.

Practical Considerations

Going forward, we recommend employers review their noncompete agreements, offer letters, and policies for compliance with the Act. For example, employers should consider incorporating a definition of "cause" into their noncompetition agreements. In addition, employers should give thought to whether they wish to include garden leave or some other form of mutually agreed-upon consideration in their noncompetition agreements. Because of the significant changes imposed by the Act, employers should consult with experienced employment counsel when drafting noncompete agreements in Massachusetts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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