Do you currently operate or do business in Massachusetts? Do you employ a skilled workforce of any nature, work in technology, or have a sales force? If so, Governor Patrick’s recent announcement could have a significant impact on how you do business in the Commonwealth. On August 13, 2014, Governor Deval Patrick announced that he re-filed legislation that would limit the use of non-competition agreements and adopt the Uniform Trade Secrets Act in Massachusetts.
Employer’s Current Protection/Remedies Under Massachusetts Law
Historically, Massachusetts courts have generally enforced non-compete agreements between employers and employees so long as they (1) protect an employer’s legitimate business purpose; (2) are supported by consideration; (3) are reasonable in scope as to duration and geographic area or distance; and (4) consistent with the public interest. See All Stainless, Inc. v. Colby, 364 Mass. 773 (1973). This provides an employer with a limited right to restrict an employee’s ability to compete against his/her employer after the employee/employer relation has terminated through an agreement and the ability of the employer to enforce such agreement in court. Nevertheless, courts look critically at such agreements in light of the recognized public policy favoring every person’s ability to freely engage in his/her trade or occupation.
Massachusetts courts also have recognized liability of an employee for the misappropriation of trade secrets under a tort theory of recovery based on a duty to not disclose or to make unauthorized use of trade secrets, proprietary business information or other confidential information. See Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159 (1979); G.L. c. 93, §§ 42, 42a. Massachusetts law imposes a confidential relationship in the employer/employee context, and thus, a duty of an employee to protect the trade secrets of his/her employer. In order for an employee to be liable for a misappropriation of his/her employer’s trade secrets the employer must prove that it (1) possess a trade secret; (2) took reasonable steps to preserve the secrecy of the trade secret; and (3) the employee breached the duty not to disclose or use the trade secrets.
Governor Patrick’s Current Proposal
With the re-filing of H4401 Patrick continues the recent effort to free up mobility of employees in technology, life sciences, and other industries while maintaining protection for legitimate business interests in trade secrets.
The legislation would amend Chapter 149 of the General Laws, pertaining to Labor and Industries, by inserting § 24L, titled the Massachusetts Noncompetition Agreement Act. The Noncompetition Agreement Act renders unenforceable non-compete agreements against an employee who is nonexempt from overtime pay, as required under the Fair Labor Standards Act. For exempt employees, the Noncompetition Agreement Act permits “an agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain activities competitive with his or her employer after the employment relationship has ended.”
Under the proposed legislation, to be enforceable, a noncompetition agreement must be:
- in writing;
- signed by both the employer and employee;
- expressly state that the employee has the right to consult with counsel prior to signing;
- provided to the employee by the earlier of five business days (to the extent reasonably feasible) before the commencement of the employee’s employment or when any formal offer of employment is first made to the employee.
A noncompetition agreement can be enforceable prior to the commencement of employment, after the commencement of employment, or in connection with the separation of employment if certain requirements are met. Noncompetition agreements entered into after employment require notice, fair and reasonable consideration, and continued employment.
The employee noncompetition agreement must also:
- be necessary to protect a legitimate business interests of the employer: (A) the employer’s trade secrets, as that term is defined in section 1 of chapter 93K, to which the employee had access while employed; (B) the employer’s confidential information that otherwise would not qualify as a trade secret; or (C) the employer’s goodwill.
- be reasonable in duration in relation to the interests protected and the duration of actual employment. A stated restricted period of no more than six months is presumptively reasonable.
- be reasonable in geographic reach in relation to the interests protected. A geographic reach that is limited to only the geographic area in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence is presumptively reasonable.
- be reasonable in the scope of proscribed activities in relation to the interests protected. A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last two years of employment is presumptively reasonable.
- be consistent with public policy.
Under Governor Patrick’s proposed legislation the General Laws would be further amended to repeal §§ 42 and 42a of Chapter 93 and would add Chapter 93K, titled the Uniform Trade Secrets Act. The Uniform Trade Secrets Act proscribes liability for the misappropriation of trade secrets with express definitions of “misappropriation,” “improper means,” and “trade secrets.” The Act also provides for the issuance of injunctions in certain circumstances, measures of damages, exemplary damages, and awards of attorneys fees to a prevailing party in certain circumstances. A claim for misappropriation of trade secrets must be plead by the complainant with particularity within 3 years after the discovery of the misappropriation.
Today’s litigation landscape is marked by scores of lawsuits filed in state or federal courts seeking ex parte temporary restraining orders, preliminary injunctions and claims against former employees and their new employers on common law theories of breach of contract, tortious conduct, and for unfair and deceptive trade practices in violation of G. L. c. 93A. Substantial judicial resources and money spent on attorneys’ fees are expended resolving these disputes, in addition to the potential monetary terms which may be involved in a final determination or settlement of any such issues. Individual employees can find themselves caught between large businesses competing for customer information, market share and innovative business ideas. Although Governor Patrick’s proposed legislation seeks to limit the type of employees subject to these cases and seeks to more clearly define and limit the causes of action for breach of contract and misappropriation of trade secrets, it is unclear whether this legislation will have the on the overall number of cases filed affecting companies in the Commonwealth.