After numerous legislative false starts over the past decade, Massachusetts has finally enacted legislation defining the boundaries of enforceable noncompetition agreements in the employment context. The new law takes effect on October 1, 2018 and is codified at M.G.L. c. 149, § 24L. While it sets several clear and understandable limitations on such agreements, it also raises significant questions that will eventually need to be answered by the courts. Chief among these questions are, what consideration is necessary to support a restriction on competition and what is termination “for cause: sufficient to enforce such restrictions.
Minimum Requirements for Enforceability
The bulk of the new statute is dedicated to setting forth “minimum standards” that noncompetition agreements must satisfy to be “valid and enforceable.” Many of these minimum standards can be viewed as either a codification of existing caselaw or reasonable industry practices. These include: (1) the requirement that the agreement be supported by a legitimate business interest of the employer (including trade secrets, confidential information, or goodwill); (2) limiting the restricted period to a maximum of 12 months in most situations; (3) limiting the geographic scope and stating that being limited to areas in which the employee provided services or had a material presence in the last two years of employment is presumptively reasonable; (4) limiting the scope of proscribed activities and stating that a prohibition limited to those types of services provided by the employee over the past two years is presumptively reasonable; and (5) requiring that the agreement be consistent with public policy.
While the above do not substantially change the law in Massachusetts, they do provide some certainty when employers and employees weigh the enforceability of noncompetition agreements.
The following provisions, however, add some new wrinkles to the state of the law in Massachusetts, and employers should be wary of the application of these standards to their agreements. These include:
- The agreement must be supported by a “garden leave clause” or some other mutually agreed-upon consideration stated in the agreement. A “garden leave clause” under this section means that the employee must be paid during the restricted period at least 50% of his or her highest base salary over the last two years. The inclusion of the phrase “or some other mutually agreed-upon consideration” is fertile ground for litigation, as it is unclear what courts will consider sufficient consideration to support such a restriction.
- If the employee has unlawfully taken property belonging to the employer, the duration of the restricted period may be extended to up to two years. Because misappropriation of trade secrets claims often accompany noncompetition claims, employers would be wise to include such an extension in their noncompetition agreements.
- The agreement must be signed by both the employer and the employee and expressly advise the employee that he or she has the right to consult with counsel prior to signing.
- If the agreement is entered into at the commencement of employment, it must be provided to the employee by the earlier of the formal offer or 10 business days before the commencement of employment.
- If the agreement is entered into during employment, it must be supported by fair and reasonable consideration independent from the continuation of employment and it must be presented at least 10 business days prior to its effective date.
What is a Noncompetition Agreement?
While the statute defines a noncompetition agreement in an unsurprising way, what is more interesting is what is excluded from the definition, and thereby not subject to the restrictions set forth in the statute. These include:
- Non-solicitation of employee clauses;
- Non-solicitation of customers, clients or vendors clauses;
- Noncompetition agreements ancillary to the sale of a business;
- Noncompetition agreements outside of the employment relationship;
- Forfeiture agreements that impose adverse financial consequences on former employees but are not based on competitive activities;
- Nondisclosure or confidentiality agreements;
- Invention assignment agreements;
- Garden leave clauses;
- Noncompetition agreements as part of a severance agreement, as long as the employee is given seven days to rescind acceptance;
- Agreements by which an employee agrees to not reapply for employment with the employer.
Who is Covered?
The new law has a broad reach, applying to both employees and independent contractors. On the flip side, the statute also excludes specific types of employees against whom noncompetition agreement will be unenforceable. These include: (1) nonexempt (hourly) employees under the FLSA; (2) undergraduate and graduate students who are interns or short-term employees; (3) employees under the age of 18; and (4) employees who have been terminated without cause or laid off.
The big takeaway from these limitations on the types of employees who are covered is that, in most cases, employers will only be able to enforce noncompetition agreements against exempt (salaried) employees who either quit or are terminated for cause. In many cases, this will add another disputed issue that the court will need to decide before enforcing a noncompetition agreement.
Despite setting forth detailed “minimum standards” for enforceability, the statute expressly allows courts to “blue pencil” contracts that do not comply with these minimum standards. That means that a court will be able to reform contractual provisions that offend the statute so that they are valid and enforceable if the court finds a basis upon which to do so. The statute, however, bars the enforcement of choice of law provisions that would avoid the requirements of the statute by applying another state’s law, if the employee has lived and/or worked in Massachusetts for at least 30 days prior to the termination of employment.