Massachusetts Non-compete Reform Bill passed by House of Representatives

July 01, 2016

Employment Law Alert

Author(s): David S. Rosenthal

On Wednesday, the Massachusetts House of Representatives unanimously approved a bill that, if ultimately enacted, would make sweeping changes to existing Massachusetts law regarding the enforceability of non-competition agreements in the Commonwealth. The bill would also adopt the Uniform Trade Secret Act.

After many years of failure, noncompetition reform may come to Massachusetts in 2016. Here’s what employers need to know.

By a vote of 149-0, the Massachusetts House of Representatives approved a bill that would drastically change the law in Massachusetts regarding the enforceability of noncompetition and other restrictive covenants. The bill would also enact the Uniform Trade Secrets Act and repeal current statutes addressing trade secret theft. The Senate has not yet considered the bill, and it may not become law. This Alert is intended as an update to keep you informed about the state of play on these hotly debated topics.

Under this bill, to be valid and enforceable, a noncompetition agreement must meet a number of specific requirements, including:

  • The length of the restricted period may not exceed 12 months, unless the employee breaches a fiduciary duty to the employer or has taken property belonging to the employer, in which case, the maximum duration is two years.
  • For new employees, the candidate must be given the agreement by the earlier of the date on which an offer of employment is extended or 10 days before the first day of employment.
  • For existing employees, continued employment is no longer sufficient consideration for the agreement. The bill requires “fair and reasonable consideration,” which term is not defined.
  • The geographic reach of the agreement must be limited to an area that corresponds to “the interest to be protected,” considering the activities of the employee during the last two years of employment. While the meaning of this provision is not yet clear, this suggests that a geographic scope may not be “reasonable” just because an employer does business in a particular location, if the employee was not personally active in that location.
  • The noncompetition provision “shall be supported by a garden leave clause or other mutually agreed upon consideration … specified in the agreement.” The “garden leave clause” must provide for payment of no less than 50% of the employee’s highest annual salary during the last two years of employment. It is not clear what “other mutually agreed-upon consideration” means, but it suggests that employers will have to pay a former employee after departure to enforce a noncompetition covenant.
  • The bill prohibits noncompetition restrictions for certain types of employees. Significantly, noncompetition restrictions would be prohibited for all non-exempt employees as defined by the federal FLSA and for employees who are terminated without cause or are laid off. Given that most at-will employees are terminated without cause and that recent changes in the FLSA will render many more workers non-exempt, this provision will make a significant portion of the workforce totally exempt from noncompetition restrictions.
  • The prohibitions of the bill apply to employees and independent contractors.
  • The House bill does, however, expressly exempt many types of contracts. For example, provisions prohibiting nonsolicitation of customers and employees are not barred by the bill. Noncompetition agreements entered into in connection with the sale of a business or its assets are still permitted, and this exception covers owners, members, or partners of the business being sold where such person receives “significant consideration or benefit” from the transaction. Exactly what “significant consideration or benefit” means is not defined. Further, nondisclosure and confidentiality provisions remain fully enforceable. Likewise, noncompetition agreements made in connection with the separation from employment – as long as a seven-day revocation period is provided – are not affected.

Importantly, the bill does not have retroactive effect. It applies only to agreements entered into on or after October 1, 2016. It remains to be seen, however, whether and to what extent courts adjudicating current cases may be influenced by this new expression of Massachusetts public policy ostensibly set forth in this bill, assuming it becomes law.

The bill also establishes the Uniform Trade Secrets Act (UTSA) as the law of the Commonwealth, bringing Massachusetts into conformity with 48 other states, leaving New York as the lone hold-out. With the enactment in May of the federal Defend Trade Secrets Act, this should ensure relative uniformity of trade secret litigation not only in the Commonwealth, but across New England. Given existing Massachusetts statutes (including Chapter 93A) and case law, it is not clear that the UTSA will provide employers with protections or remedies they do not already possess. However, the UTSA may make exemplary damages and attorneys’ fees more readily available in litigation arising from employment, where Chapter 93A generally does not apply.

This is just a House bill; it has not been taken up by the Senate. Some or all of its provisions may not be approved. Even if it is passed by both houses, it remains unclear whether Governor Baker will sign it or, if he does not, whether the legislature would override a veto. However, the unanimous decision in the House suggests that this may be the year in which noncompetition reform will be enacted in Massachusetts.

If that occurs, Massachusetts employers who have relied on noncompetition covenants to protect trade secrets, confidential information, and customer good will would need to consider making changes immediately to their form documents (offer letters and employment agreements), hiring practices, and trade secret protection programs – among other steps – to safeguard the company’s confidential information from misappropriation by current or former employees and to protect against unfair competition. For some employers, provisions prohibiting solicitation of customers will suffice, but that protection may not be adequate for others. Likewise, some employers may decide that the cost of noncompetition provisions (in the form of garden leave or otherwise) may not be worth it, given the other forms of protection that exist. Thoughtful consideration of these business decisions, and careful redrafting of documents to effectuate these decisions, will be necessary if noncompetition reform is enacted into law.

Members of Nixon Peabody’s Labor and Employment Group are available to discuss these and other provisions of the law, and what employers should be doing now to prepare for noncompetition reform in the Commonwealth. We will continue to keep you informed of developments regarding this legislation.

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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