8.13.18

Over the last decade, non-compete reform has been a third rail of Massachusetts politics. Although many employers believe non-compete agreements are necessary to protect their trade secrets and confidential information, others view them as unduly restrictive of employees’ rights.  For example, the New England Venture Capital Association released a statement at the end of July pushing for the passage of strong non-compete legislation to protect workers in the so-called innovation economy. Non-compete debate on Beacon Hill has largely mirrored these competing arguments. The State House has attempted multiple times to pass legislation in some form or another – in 2016, those attempts failed when the House and Senate could not reconcile their versions of the bill. In 2017, legislators introduced multiple non-compete bills, but similarly failed to get a deal done.

Finally, on August 1, the Massachusetts legislature (formally called the General Court) enacted the Noncompetition Act, a non-compete and trade secret reform bill imposing new rules and obligations on employers with Massachusetts employees. The reform provisions were tucked inside a broader economic development bill in a last-ditch effort to pass a non-compete bill after legislators missed a mid-July legislative deadline. Republican Governor Charlie Baker signed the bill into law this past weekend.

As described below, the Act will impose both substantive and procedural requirements for employers’ use of non-compete agreements with their employees and will, in many cases, outlaw such agreements in their entirety.

Substantive requirements

Currently, Massachusetts non-compete law is, for the most part, governed by court opinions. The Act largely reaffirms this body of case law by making clear that a non-compete agreement can be no broader than necessary to protect the employer’s legitimate business interests, including (1) trade secrets; (2) confidential information; or (3) goodwill. It also provides that a non-compete is “presumed necessary” where “the legitimate business interest cannot be adequately protected through an alternative restrictive covenant,” such as a non-solicitation or non-disclosure agreement.

Under the Act, an employee’s non-compete obligation cannot exceed 12 months from the date of cessation of employment, unless the employee is in breach of his or her fiduciary duty or has unlawfully taken the employer’s property. In those instances, a court could extend the non-compete for up to two years. As under current Massachusetts case law, all non-competes must be reasonable in geographic scope and may proscribe only the performance of services that are reasonably related to the former employer’s legitimate business interests.

Perhaps the most significant change from current Massachusetts law is the garden leave requirement. “Garden leave,” common in Europe, is wage payments made to an employee after he or she is relieved of work obligations for a specified period of time. (The name comes from the concept that the employee cannot be employed during the period of leave and can only putter in the garden.)

Garden leave allows employees to maintain their income while transitioning to a new job. The reform bill provides that all non-competes “must be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee.” Under the Act, “garden leave” is defined as wage payments equal to at least 50 percent of the employee’s highest annualized base salary over the two years immediately before the employee’s separation from employment.

Employers do not need to make garden leave payments to employees whose non-competes are extended because of the employee’s breach of fiduciary duty or taking of company property.

The proposed law also makes clear that garden leave payments will be considered “wages” for purposes of the Massachusetts payment of wages statute, M.G.L. c. 149, § 148. Accordingly, an employer’s failure to make garden leave payments may subject the employer to liability for three times the withheld wages and payment of the former employee’s attorneys’ fees.

This garden leave provision appears to be the first of its kind in the United States.

Procedural requirements

The Act’s protections extend to all “employees” of the employer. However, the Act defines “employee” expansively, and “also include[s] independent contractors under section 148B,” the Massachusetts independent contractor statute. Accordingly, the Act presumably applies to non-compete agreements between employers and individuals who would not otherwise be “employees” for purposes of Massachusetts wage and hour law.

The bill imposes different obligations depending on whether the non-compete is entered into at the start of employment or afterward:

  1. If the agreement is entered into at the outset of employment, it must be in writing signed by employer and employee, and must state that the employee has the right to consult with legal counsel before signing. The agreement must also be provided to the employee either with the initial offer of employment or 10 business days before the employee starts work, whichever is earlier.
  2. If the agreement is entered into after the employee begins work but not in connection with his or her separation from employment, it must be supported by “fair and reasonable” consideration. The mere continuation of employment is not enough. Notice of the agreement must be provided at least 10 business days before the agreement becomes effective.  In addition, the agreement must be in writing signed by employer and employee, and it must expressly state that the employee can consult with legal counsel. (Non-competition agreements entered into upon termination of employment are not usually covered by the Act, as discussed below.)
  3. Employers cannot opt out of the requirements of the Act through a choice-of-law provision which purports to apply another state’s law, provided that the employee resided in or was employed in Massachusetts for the 30 days immediately preceding the termination of employment.

Certain non-competes banned completely

Notably, the Act institutes an outright ban on non-competes as applied to (1) non-exempt workers; (2) undergraduate or graduate student interns or employees; (3) employees who are terminated without cause or are laid off; and (4) employees age 18 or younger.

Other restrictive covenants not covered by the Act

The definition of “noncompetition agreement” under the Act excludes (1) covenants not to solicit or hire the employer’s employees; (2) covenants not to solicit the employer’s customers; (3) non-competition agreements in connection with the sale of a business; (4) non-competition agreements outside the employment relationship; (5) forfeiture agreements; (6) nondisclosure or confidentiality agreements; (7) invention assignment agreements; (8) garden leave clauses; (9) noncompetition agreements made in connection with an employee’s separation from employment, provided that the employee is given seven business days to rescind the agreement; or (10) agreements not to reapply for employment with the same employer after termination.

However, agreements that impose adverse financial consequences (typically the forfeiture of stock or deferred compensation) on former employees who compete with the employer after their employment ends (called “forfeiture for competition agreements”) are included in the definition of “noncompetition agreement” and are therefore covered by the substantive and procedural provisions applicable to traditional non-compete covenants.

Legislation takes effect October 1

The Act will apply to non-competes entered into on or after October 1, 2018. It will not apply retroactively to agreements entered into before that date.

Adoption of the Uniform Trade Secrets Act

In addition to non-compete reform, the economic development bill will also enact the Massachusetts Uniform Trade Secret Act. Among other things, the UTSA (1) provides a statutory definition of trade secret; and (2) permits recovery of up to double damages for a competitor’s or employee’s willful and malicious misappropriation of trade secrets. Currently, Massachusetts trade secret protections are governed by case law, including the Supreme Judicial Court’s seminal opinion in Jet Spray Cooler, Inc. v. Crampton. Under Jet Spray Cooler, Inc., a “trade secret” is defined by application of a fact-specific six-factor inquiry.

Looking ahead

Taken as a whole, the Act’s requirements demonstrate the legislature’s intent to discourage the use of blanket prohibitions on competition in favor of the narrower restrictions found in non-solicitation and nondisclosure agreements. Although the Act will apply only to agreements entered into on or after October 1, employers should consider reviewing their existing restrictive covenant agreements now to incorporate the Act’s new substantive and procedural requirements, most of which will be unfamiliar.

As noted above, the Act provides protections for restricted employees that are uncommon or completely new in the United States. In the coming years, employers can expect litigation over the interpretation and application of the Act’s more ambiguous provisions; for example, whether employers can satisfy the garden leave requirement by paying employees some form of consideration other than wages, as implied by the Act’s language.

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