August 03, 2018
Employment Law Alert
Employment Law Alert
On August 1, 2018, the Massachusetts House and Senate passed legislation to restrict the use of non-competition agreements in Massachusetts, which legislation is expected to be signed by the governor. The law is a compromise, leaving in place—that is, not reforming—much of the existing common law of the Commonwealth on restrictive covenants. Certain non-competition provisions may still be enforced, and the requirements for enforcement are less onerous than earlier versions of the proposed law. This alert discusses these requirements, describes what is new and not new and suggests the immediate steps employers should take in order to comply with the new law.
After years of trying and failing to reach agreement, on August 1, 2018, the Massachusetts House and Senate passed compromise legislation to restrict the use of noncompetition agreements in Massachusetts. If the bill is signed by Governor Baker, as expected, it will become effective October 1, 2018. A careful review of the bill reflects that for those in favor of reining in the use of noncompetition agreements, certain provisions of the legislation will accomplish that goal. In other respects, however, the law is consistent with Massachusetts common law and thus will likely not change Massachusetts practice substantially.
The statute expressly only applies to non-competition agreements between employers and employees and does not cover several other types of restrictive covenants, such as: (i) non-disclosure agreements, which prohibit the use or disclosure of a company’s trade secret, confidential or business information; (ii) non-solicitation provisions, which may seek to bar the solicitation of a company’s customers, prospects, suppliers or vendors, and/or may seek to prohibit the solicitation of the company’s employees; or (iii) assignment of invention agreements, which require that inventions belong to the company and may not be used by a departed employee or disclosed to his or her new employer.
These commonly used restrictions will continue to be analyzed according to existing Massachusetts law, and will be enforced if the employer can establish the long-established requirements of this state’s law. Many employers consider these types of restrictions sufficient to protect their trade secrets and other legitimate business interests.
In addition, two types of non-competition provisions can be enforced because they are expressly not covered by the new law. Non-competition agreements imposed in connection with the sale of a business remain enforceable. Importantly, non-competition restrictions agreed upon as part of a severance agreement can be enforced, provided the employee is given at least seven days to revoke his or her acceptance of the provision after signing it.
If signed, the new law will become effective on October 1, 2018, and will apply to agreements entered into on or after that date. Thus, existing non-competition agreements entered into before that date would not be controlled by the new law.
The new law does apply to traditional non-competition provisions. The statute defines a non-competition provision as one in which an employee agrees that he or she will “not engage in certain specified activities competitive with” his or her employer after the employment relationship terminates. The law also applies to so-called forfeiture-for-competition provisions, which, in substance, dictate that if a former employee competes with his or her employer, he or she forfeits certain valuable rights or benefits, such as the right to deferred compensation or stock options. The former employee can compete, but if she does so, she pays a price for the opportunity.
Non-competition provisions, under the new law, cannot be used at all with (a) non-exempt employees (as defined by the federal Fair Labor Standards Act), (b) student interns or short-term employees at the undergraduate or graduate level and (c) employees who are 18 years of age or younger. Also, non-competition restrictions cannot be enforced against employees who are terminated “without cause” or are laid off. The statute does not define “cause,” so the definition of the term, which can be the subject of substantial negotiation (especially in employment agreements of high-level employees) will become particularly important in agreements going forward.
Employers also cannot “contract around” the new restrictions by including a choice of law provision in their employee agreements providing for the application of another state’s laws so long as the employee, for at least 30 days before termination, resides or is employed in Massachusetts.
The act sets out various procedural requirements that must be followed if a non-competition provision covered by the new law can be enforced. Most important:
In sum, while the legislation will impose new burdens on employers, most employers should be able to comply with them without significant trouble or expense. Indeed, earlier proposed versions of the bill imposed far more onerous restrictions on the use of non-competition agreements, including an outright ban, as is the case in California. Legitimate questions exist as to whether this compromise reform legislation will accomplish the primary economic argument touted by proponents of the bill—to make Massachusetts more competitive with California in this technology-driven economy. It is also unlikely that the legislation will reduce litigation between employers and former employees (and often their new employer) when there are disputes—as there often are—regarding the enforceability of a non-competition agreement, as such disputes are heavily fact-driven by, for example, the employer’s industry and the various circumstances surrounding the employee’s past and new job duties. These fact-driven disputes will still have to be resolved in court.
The legislation also will codify a version of the Uniform Trade Secrets Act (“UTSA”), bringing Massachusetts in line with every other state—other than New York—which has already adopted some form of the UTSA. Among other changes to existing Massachusetts law, the UTSA would allow for an aggrieved party to obtain an injunction for the threatened or actual misappropriation of a trade secret and also provides the court discretion to award attorneys’ fees and costs to a prevailing party if a claim of misappropriation is made in bad faith.
It is expected that Governor Baker will sign the legislation, and, if he does so, it will become effective October 1, 2018. In the meantime, employers should consider taking the following steps:
These next steps are crucial for those organizations that rely on restrictive covenants to protect their businesses. This statute, like many others, leaves open a number of important questions, the answers to which may not be provided by judicial decisions for some time. Counsel who work in this area of the law are best-suited to do this analysis and provide advice regarding the clear and less clear provisions of the new law. Where an employer has a real and legitimate need for restrictive covenants to protect its trade secrets, confidential information and goodwill from misuse by a departed employee, having the right agreement in place is an essential first step.
Experienced counsel who are part of Nixon Peabody’s Labor and Employment group, are available to assist you in this analysis, and to draft the provisions needed to comply with the changes in Massachusetts law.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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