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.
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.