United States: Frequently Asked Questions About The New Massachusetts Noncompetition Agreement Act

The recently-enacted Massachusetts Noncompetition Agreement Act ("Act") provides a roadmap for employers to follow to ensure enforcement of noncompetition agreements entered into on or after October 1, 2018. Although the Act sets forth several new requirements for noncompetition agreements, it also codifies what Massachusetts courts have held for years: if the restrictions in a noncompetition agreement are reasonable in activity, time and geographic scope, and are narrowly drafted to protect a legitimate business interest, the agreement should be enforced (provided the agreement complies with the Act).

The Act applies only to noncompetition provisions and does not apply to other restrictive covenants, such as customer and employee non-solicitation or non-disclosure agreements. Although it limits the use of noncompetition agreements in Massachusetts, it also acknowledges that there are circumstances where such agreements are necessary and should be enforced. The Act provides that, "[a] noncompetition agreement may be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant."

In light of the Act, before asking an employee to enter into a noncompetition agreement going forward, it will be imperative for employers to explore the reason(s) for the agreement and the necessity of its scope. Employers will first need to identify the business interests the company seeks to protect and whether the company can achieve adequate protection for its legitimate business interest(s) through a less restrictive covenant. For example, if an employer is mostly concerned about protecting its customer relationships, and less concerned about confidential information, the employer should consider requiring the employee to enter into a customer non-solicitation agreement.

Once an employer determines a noncompetition agreement is necessary, the employer must determine the activity it is going to restrict and what duration and geographic scope of a restriction that is necessary to protect the legitimate business interests. Finally, employers will also need to consider whether the Act prohibits them from entering into an agreement with the employee and what consideration, beyond employment, the employer is willing to give to support the agreement.

Overall, the new law provides guidance to employers seeking to draft enforceable noncompetition agreements in Massachusetts. Some frequently asked questions about the Act are addressed below.

1. Does the Act apply to existing agreements?

No. The Act applies only to agreements entered into on or after October 1, 2018. Agreements entered into before that date will be scrutinized under existing case law.

2. Does the Act apply to all noncompetition agreements?

The Act applies to any agreement between an employer and an employee where the employee agrees not to engage in specified activities competitive with the employer after the employment relationship ends. It does not apply to restrictive covenants such as non-solicitation agreements, non-disclosure agreements, invention assignments, and certain noncompetition agreements made in connection with the sale of a business or business ownership interest, outside of an employment relationship, or in a separation agreement.

The Act uses the definition of "employee" found in the Massachusetts independent contractor statute, which expansively includes anyone who "performs any services" to an employer, unless the person (A) is free from control of the employer, (B) works outside the usual course of the employer's business, and (C) is customarily engaged in an independent trade, occupation, profession or business. This definition is broadly interpreted and may include many individuals who are not traditionally considered employees, such as consultants, temporary workers, or partners.

The Act then goes further, however, to expressly include independent contractors. That is, even if a person could be considered an independent contractor under the "ABC" test above, the Act would still apply. In essence, the Act must be followed any time a noncompetition agreement is entered into with a person who provides any work or services for an employer.

The Act does not apply to agreements entered into "outside of an employment relationship." Given the Act applies to independent contractors, presumably this provision refers to agreements entered into in the context of business-to-business transactions, not with an individual.

3. Is there any restriction on who an employer can ask to sign a noncompetition agreement?

The Act identifies three categories of employees for whom noncompetition agreements are unenforceable at any time:

  1. Undergraduate or graduate students in an internship or other short-term employment relationship while enrolled in college or graduate school;
  2. Employees who are 18 or younger;
  3. Employees who are classified as nonexempt under the Fair Labor Standards Act (FLSA).

This last category may prove tricky for some types of employees. Whether a person is properly classified as FLSA-exempt—particularly under the executive, administrative or professional exemptions—is often a hotly contested issue. Having to prove, or disprove, that an employee was properly classified as FLSA-exempt in connection with a motion for temporary restraining order or preliminary injunction, which are often litigated on short notice with limited facts, may prove especially challenging.

In addition, although Massachusetts overtime law and the FLSA overlap in many ways, the FLSA has several overtime exemptions not present in Massachusetts law—for instance, inside salespeople at retail establishments may be exempt under the FLSA, but not under Massachusetts law. On the other hand, some occupations are exempt under Massachusetts overtime law, such as employees who work in restaurants or hotels, but not under the FLSA.

4. When do I have to give the noncompetition agreement to an employee?

The Act has strict notice requirements. For new hires, the noncompetition agreement must be given either with the offer letter or 10 business days before the person's start date, whichever is earlier. It is unclear whether there is any way to cure a failure to provide notice if the employer forgets to provide the noncompetition agreement with the offer letter.

For current employees receiving a new noncompetition agreement, the document must be given to the employee at least 10 business days before it is effective. (Note these are business days, not calendar days.)

5. What formal requirements are needed for a noncompetition agreement?

A noncompetition agreement must be in writing and signed by both the employee and the employer. It also must inform the employee of the right to consult with counsel before signing.

Noncompetition agreements entered into "in connection with the cessation of or separation from employment," such as a severance or separation agreement, are not subject to the other requirements of the Act, but the employee must expressly be given seven business days to revoke it after signing.

6. Is employment alone still sufficient consideration for a new employee?

It is somewhat unclear.

The Act states that for new employees, noncompetition agreements must be supported by a garden leave clause (i.e., a provision requiring that a former employee be paid during the period of time when he or she is restricted from competing with his or her former employer) or "other mutually-agreed upon consideration," which must be specified in the agreement. What constitutes "mutually-agreed upon consideration" is not certain.

On the one hand, the plain language of the statute suggests that initial employment constitutes consideration sufficient to support a noncompetition agreement. Specifically, the Act refers to "other mutually-agreed upon consideration." Thus, it seems reasonable (and consistent with the case law preceding the Act) to interpret the Act as providing that the value of the employment relationship is sufficient consideration to support a noncompetition agreement for a new employee.

On the other hand, the Act provides that when an existing employee enters into a noncompetition agreement, such agreement must be supported by fair and reasonable consideration, and continued employment is not sufficient. It follows that courts could interpret the Act to indicate employment alone is not sufficient consideration for new employees either. On the other hand, courts could see this provision as evidence that the Legislature made a deliberate choice to permit initial employment, but not continued employment, to be consideration sufficient to support a noncompetition agreement. To avoid this potential issue, employers that are not providing a garden leave clause should consider providing new employees with some additional consideration, such as a signing bonus, stock options or other items of monetary value, to support the noncompetition agreement.

If an employer elects to provide a garden leave clause, the agreement must provide for the payment on a pro-rata basis during the entirety of the restricted period of at least 50 percent of the employee's highest annualized base salary paid by the employer within two years preceding the termination. Further, unless the employee breaches the agreement, the garden leave clause cannot permit the employer to unilaterally discontinue or otherwise fail or refuse to make payments. However, employers are not required to continue the payments beyond 12 months if the restricted period is extended because of the employee's breach of fiduciary duty to the employer or the employee unlawfully takes property belonging to the employer.

The new consideration requirement is perhaps the most significant change involved in enforcing noncompetition agreements in Massachusetts. For years, courts have enforced noncompetition agreements where the sole consideration was employment or continued employment. Thus, it is likely that this issue will be the source of much litigation in the future.

7. Restricted activities, time and geographic scope: how broad is too broad?

A noncompetition agreement must protect an employer's legitimate business interests, and must be reasonable in geographic scope and time. It also must be "reasonable in the scope of proscribed activities in relation to the interests protected." Except for the length of time, the Act does not set clear boundaries about what is or is not "reasonable," but instead defines certain restrictions that are "presumptively reasonable."

8. What activities can a noncompetition agreement restrict?

The noncompetition agreement must be reasonable in "the scope of proscribed activities" relative to the legitimate business interest protected. Under the Act, the presumption is that a restriction limited to "the specific types of services provided by the employee at any time during the last 2 years of employment" is reasonable. Because this is a presumption, not a limitation, one can argue broader restrictions are necessary for certain positions – for example, an engineer who interacted extensively with customers may be limited from going into a sales role for a competitor.

9. What is a reasonable geographic scope?

With respect to geographic scope, the Act states that the noncompetition agreement has to be "reasonable," and that limiting the scope to areas in which the employee "provided services or had a material presence or influence" in the past two years is "presumptively reasonable." This "presumption" language leaves open the possibility that broader geographic restrictions may be enforceable—for instance, for a senior executive responsible for operations worldwide, a global restriction may be necessary if the legitimate business interest at stake is confidential information that could be used anywhere in the world.

10. How long can a noncompetition agreement last?

The Act is clear on the maximum length of a noncompetition agreement: 12 months after separation, unless the employee has breached a fiduciary duty to the employer or unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration of the agreement may not exceed two years from the date of separation.

Notably, this extension of time to two years is not necessarily related to a breach of the noncompetition agreement itself. Thus, an employee who breaches his or her noncompetition agreement, but does not breach a fiduciary duty or steal any of the former employer's property, would not have his noncompetition agreement extended. On the other hand, it appears that an employee who stole from his or her employer, but did not otherwise breach the noncompetition agreement, could have the noncompetition restriction extended to two years.

11. Can employers avoid the Act by choosing a state other than Massachusetts for choice of law or venue?

No. The Act makes it clear that no choice-of-law provision that would avoid the requirements of the Act will be enforceable if the employee is, and has been for at least 30 days immediately preceding the separation of employment, a resident of or employed in Massachusetts at the time of termination. Consequently, if an employee lives in Massachusetts but only works in New Hampshire, Massachusetts law must be applied.

Furthermore, any lawsuit to enforce a noncompetition agreement covered by the Act must be brought in the county where the employee resides or, if stated in the agreement, in the superior court or business litigation session for the Superior Court in Suffolk County.

12. If the noncompetition agreement complies with the Act, will it always be enforced?

Not necessarily. Even if an agreement conforms to the requirements set forth in the Act, the statute prohibits employers from enforcing agreements against employees who are laid off or terminated without cause. Therefore, employers wishing to restrict post-employment activities for such employees should include a noncompetition provision in a separation agreement. As stated above, separation agreements are not covered by the Act.

Notably, although the Act provides that employers may enforce noncompetition agreements against employees who are terminated for cause, the statute does not contain a definition of "cause." Thus, to support a later claim that an employee was terminated for cause, employers should consider including a clear definition of "cause" in their noncompetition agreements.

13. What about protection of trade secrets?

The Massachusetts legislature also enacted a version of the Uniform Trade Secrets Act (UTSA). While misappropriation of trade secrets has long been unlawful, the UTSA as enacted in Massachusetts offers some additional protections to employers.

First, the Massachusetts UTSA states that an injunction may issue to prevent "actual or threatened misappropriation" of trade secrets. Many courts in other states interpreting this language have found it to be an endorsement of the "inevitable disclosure" doctrine—the argument that an injunction should enter even if a departed employee has not physically taken trade secrets, because the employee will inevitably draw upon the trade secrets in his/her head by working for a competitor in a position similar to the one formerly held.

Second, the Massachusetts UTSA provides protection for information that has "actual or potential" economic value to the employer. Under Massachusetts common law, it was unclear whether potential value was a sufficient basis for protection.

The Massachusetts UTSA also provides for the possible recovery of attorneys' fees and costs, which were not previously available. Fees and costs are awarded only if a plaintiff can prove the defendant opposed the lawsuit or a motion for injunction in bad faith, or there was willful and malicious misappropriation. Likewise, a defendant can recover attorneys' fees and costs if it can prove that the lawsuit or a motion for injunction was brought in bad faith.

Conclusion

Employers that wish to enter into noncompetition agreements on or after October 1, 2018 should carefully consider whether their existing agreements comply with the requirements imposed by the Act. Given the complexity of the new law, employers should consult with experienced employment counsel as part of this process.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Christopher B. Kaczmarek
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions