On August 10, 2018, Massachusetts’ Governor signed into law the Massachusetts Noncompetition Agreement Act (the “Act”), establishing strict new requirements for noncompetition agreements with employees entered on or after October 1, 2018. Although noncompetition agreements are still permitted for most employees, the Act requires employers to take a new approach to drafting, implementing, and enforcing those agreements.
Key highlights of the new law include:
The significant restrictions and limitations of the Act, however, do not apply to:
Scope and Duration
The Act codifies existing case law that a noncompetition agreement “must be no broader than necessary” to protect an employer’s legitimate business interests, which the Act defines as the employer’s trade secrets, confidential information, or goodwill. Noncompetition restrictions are presumed reasonable where: (1) they are limited to “only the specific types of services provided by the employee at any time during the last 2 years of employment”; or (2) they are “limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence.”
The new law prohibits any noncompetition agreements that exceed 12 months post-employment. The 12-month duration can be extended for up to 2 years post-employment if the employee “has breached his or her fiduciary duty to the employer” or taken “property belonging to the employer.”
The Act provides two methods for employers to show the consideration necessary to enforce noncompetition agreements. First, an employer can include a garden leave clause where it agrees to pay ex-employees during the time that he or she is restricted from competing. Employers opting for garden leave must pay employees “on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.” Employers can halt payments if the restricted employee breaches the agreement or unlawfully takes the employer’s property. Second, employers can provide other “mutually agreed upon consideration” that is specified in the noncompetition agreement. Because the Act is silent as to what constitutes satisfactory “mutually agreed upon consideration,” it is unclear whether an initial offer of employment is adequate consideration to support enforcement of a noncompetition agreement entered at the start of employment or if monetary payments, such as signing bonuses, or other forms of consideration are necessary.
The Act also changes Massachusetts precedent by making continued employment insufficient consideration to enforce a noncompetition agreement. Instead, those agreements must be supported by “fair and reasonable consideration” other than continuation of employment. Although it is clear that the consideration must be more than de minimis, what constitutes “fair and reasonable consideration” is undefined.
Applicability to Certain Employees and Independent Contractors
For the first time, the new law precludes employers from entering noncompetition agreements with the following categories of employees:
The Act, however, applies to noncompetition agreements with independent contractors.
Drafting and Procedural Requirements
The Act imposes the following drafting and procedural requirements for noncompetition agreements:
Choice of Law and Forum Selection
Employers cannot try to avoid the Act’s requirements by selecting the law of another jurisdiction in the noncompetition agreement. The Act voids any choice of law provision that assigns jurisdiction outside of Massachusetts for employees that are residents of or have been employed by their employer in Massachusetts for at least 30 days immediately prior to the end of their employment. Additionally, the Act requires all civil actions to enforce covered noncompetition agreements be brought in the employee’s county of residence or, if mutually agreed upon, in the Suffolk County Business Litigation Session of the superior court. This requirement is especially important for employers headquartered outside of Massachusetts but employing people within the state.
Blue Penciling and Severability
Massachusetts courts will continue to have discretion to blue pencil, or modify, noncompliant or overbroad noncompetition agreements to render them enforceable to the extent necessary to protect the employer’s legitimate business interests under Massachusetts law. The Act also clarifies that a judicial determination that a noncompetition provision in a contract is unenforceable has no impact on the remaining provisions of that agreement.
Practical Steps for Compliance
Although the Act largely codifies existing Massachusetts common law standards, it creates new restrictions and procedures on noncompetition agreements that employers will need to consider. With less than a month before the Act goes into effect, employers should consider taking the following steps:
We will continue to monitor developments related to the Act and similar laws and will provide updates as needed.