On June 29, 2016, just four months after Massachusetts House Speaker Robert A. DeLeo promised to put new legislative limits on noncompetition agreements, the House unanimously passed a bill (150-0) doing just that and also passed the Massachusetts Uniform Trade Secrets Act. To become law, the bill (House Bill 4434) still needs to pass the Senate and be signed by Governor Charlie Baker.
While much of the bill would merely codify some of the key issues judges already look at when analyzing whether an agreement is enforceable under Massachusetts law, there are some provisions that represent a sea change in the noncompete landscape.
Here are the highlights of the bill relating to noncompetes:
- Notice: Noncompetes entered into at the commencement of employment must be provided the earlier of a formal offer of employment or 10 business days before commencement of employment. Notice of noncompetes entered into after the commencement of employment must be provided at least 10 days before the effective date.
- Right to counsel: Noncompetes must expressly state that the employee has a right to consult with counsel prior to signing.
- Time limits: There is a one-year limit to noncompetes unless there is a breach of fiduciary duty or employee theft, in which case, the duration cannot exceed two years.
- Garden leave or other consideration: Mere continuation of employment is not sufficient consideration for a noncompete entered into after the commencement of employment. Noncompetes must be supported by “Garden leave” or “other mutually agreed consideration” specified in the agreement. “Garden leave” is payment during the restricted period of at least 50 percent of the employee’s annualized base salary within the two years preceding termination. There is no definition of “other mutually agreed consideration.”
- Exemptions for certain workers: Noncompetes are unenforceable as to nonexempt workers under the FLSA, student interns, employees terminated without cause (not defined) or laid off, or employees under age 18.
- Reasonableness: The agreement must be no broader than necessary to protect the employer’s trade secrets, confidential information or goodwill; reasonable in geographic reach and the scope of proscribed activities in relation to the interests protected; and consonant with public policy. The bill contains certain presumptions concerning reasonableness. It also permits a court, in its discretion, to reform or revise a noncompete to render it valid and enforceable.
- Choice of Law and Venue: The bill provides that no choice of law provision that would avoid the requirements of the bill’s noncompete requirements will be enforceable if the employee is a resident of or employed in Massachusetts at the end of employment and for at least 30 days immediately preceding the end of the employment. The bill provides that all civil actions relating to employee noncompete agreements or subject to the noncompete requirements must be brought in the county where the employee resides or in Suffolk County.
The noncompetition law will apply to agreements executed on or after October 1, 2016. With respect to trade secrets, the law will apply only to misappropriations occurring after October 1, 2016.
It is worth noting that the bill does not impact or limit employers’ use of confidentiality agreements or non-solicitation agreements.
Governor Baker has not taken a position on noncompetition agreements, but has previously stated through a spokesperson that he will consider any measure that makes it through the Legislature. So, here we are about halfway through that Legislative process, but it still remains unclear whether it will pass the Senate and whether Governor Baker will sign it into law.
What This Means for Employers
Employers may want to monitor the proposed legislation and consult with counsel to ensure that any restrictive covenants that are drafted meet all requirements for enforcement under Massachusetts law. Employers should also review with counsel other ways to protect trade secrets and customer good will, whether by way of confidentiality agreements or non-solicitation agreements or other protections.