As many of you may have already heard, after many years of failed attempts, the Massachusetts legislature finally passed a new non-competition law which became effective October 1, 2018, and which is a version of the Uniform Trade Secret Act (“UTSA”). The highlights of the law are as follows:
a. Applies to both employees and independent contractors.
b. Applies to most non-compete agreements, including forfeiture for competition agreements (an agreement that imposes adverse financial consequences on a former employee as a result of employment termination if employee engages in competition).
c. Does not apply to other enforceable restrictive covenants, such as:
(1) Covenants not to solicit or hire employer’s employees.
(2) Covenants not to solicit or transact business with employer’s customers, clients, or vendors.
(3) Non-compete agreements made regarding the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or division or subsidiary thereof, when the party being restricted is a significant owner of, or member or partner in, the business entity receiving significant consideration or benefit from the sale or disposal.
(4) Non-compete agreements outside employment relationship.
(5) Forfeiture agreements.
(6) Non-disclosure or confidentiality agreements.
(7) Invention assignment agreements.
(8) Garden leave clauses.
(9) Non-compete agreements made in connection with the cessation of/separation from employment if employee is expressly given 7 business days to rescind acceptance.
(10) Agreements where employee agrees not to re-apply for employment to same employer after termination.
2. Prohibited Applicability Against Certain Employees
Non-compete agreements prohibited against the following:
a. Employees classified as non-exempt under the Fair Labor Standards Act “FLSA”).
b. Undergraduate and graduate students that partake in an internship or otherwise enter a short term employment relationship with employer, paid or unpaid, while enrolled in fulltime or parttime undergraduate or graduate educational institution.
c. Employees age 18 and younger.
d. Employees terminated without cause or laid off.
3. Limits On Time, Geographic Scope, And Prohibited Activities.
a. The bill confirms pre-existing law that the non-compete agreement must be no broader than necessary to protect the employer’s legitimate business interests (trade secrets as defined by this law, confidential information that would otherwise not qualify as a trade secret, or goodwill) and must be consonant with public policy. It may be presumed necessary where the legitimate business interest cannot be adequately protected through an otherwise restrictive covenant including, but not limited to, a non-solicitation agreement or non-disclosure or confidentiality agreement.
b. It must be reasonable in time and geographic scope and the scope of activities prohibited.
(1) Duration (“restricted period”) limited to 12 months following employee’s separation of employment, unless employee breached a fiduciary duty to employer or has unlawfully taken, physically or electronically, the employer’s property, in which case the duration can be up to 2 years following separation.
(2) Geographic scope will be deemed presumptively valid if limited to the locations in which the employee provided services or had a material presence or influence in the last 2 years of employment.
(3) Scope of prohibited activities will be deemed presumptively valid if limited to those services provided by employee during the last 2 years of employment.
A court may “reform or otherwise revise” overbroad or otherwise unenforceable non-compete agreements so as to render it valid and enforceable to the extent necessary to protect applicable business interests.
5. Requirements For Non-Compete Agreements Entered Into At Commencement Of Employment
a. Must be in writing and signed by both employer and employee.
b. Must expressly state employee has a right to consult counsel before signing.
c. Must be provided with the formal offer letter or at least 10 business days prior to employee’s first day, whichever is earlier.
6. Requirements For Non-Compete Agreements Entered Into After Commencement Of Employment But Not In Connection With Employment Separation
a. Same as 5.a. above.
b. Same as 5.b. above.
c. Similar to 5.c. above, notice of the non-compete agreement must be provided at least 10 business days notice before it is to be effective.
d. “Fair and reasonable consideration” (not defined by the law), independent of continued employment must be provided by employer (continued employment is no longer sufficient consideration).
7. Garden Leave – Payments Required For Restricted Period
Employer must pay what is referred to as “garden leave” during the restricted period or some other “mutually agreed upon consideration” (not defined in the law) which must be specified in the non-compete agreement. To constitute a garden leave clause under this law the agreement must
a. Provide for payment, consistent with the Weekly Payment of Wages Law, M.G.L., c. 149, § 148, on a pro-rata basis during the entirety of the restricted period, of at least 50% of employee’s highest annualized base salary paid by employer within the 2 years preceding employee’s termination;
b. Except in the event of a breach by employee, not permit employer to unilaterally discontinue or otherwise fail or refuse to make payments; provided, however, if the restricted period has been increased beyond 12 months due to employee’s breach of a fiduciary duty or unlawful taking of employer’s property, employer shall not be required to provide payments to employee during the extension of restricted period.
8. Court Created Non-Compete As Penalty
A court may impose a non-compete as a penalty for an employee’s breach of
a. Some other enforceable restrictive covenant.
b. A statutory duty.
c. A duty required by common law.
9. Choice Of Law
Employer prohibited from applying another state’s law to an employee’s non-compete agreement provided employee was resident of, or employed in, Massachusetts for the last 30 days before separation of employment.
All actions relating to non-compete agreements subject to this law must be commenced in the county where employee resides or, if mutually agreed upon, in Suffolk County, provided that in any action brought in Suffolk County, the Superior Court or the Business Litigation Session of the Superior Court shall have exclusive jurisdiction.
11. Effect On Non-Compete Agreements Executed Prior To October 1, 2018
The law is silent on whether it applies retroactively. However, the consensus is that non-compete agreements executed prior to October 1, 2018, are not subject to the law and are still enforceable provided they are compliant with pre-October 1, 2018, law.