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:

1. Applicability

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.

4. Reformation

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.

10. Venue

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.

We recently reviewed a situation where a bank set off on a customer’s deposit account, following an event of default. The customer claimed that that bank did so wrongfully.

We all understand that the relationship between the bank and its customer with respect to the common law right of setoff is that of creditor (the “Depositor”) and debtor (the “Bank”). Once deposited, the money is then the property of the Bank subject to the customer’s right to retake such property. The Bank of course has a right of setoff, which allows it to exercise such right and seek redress of a claim in full or partial satisfaction of what it owes to the Depositor.

In exercising the right of setoff, there must be mutuality of obligations, which means that the Bank can only exercise such right against the Depositor in the same capacity that the Depositor owes money to the Bank. Moreover, the Depositor’s obligation to the Bank must be due. Certain deposits, such as a payroll account or other trust account will generally not be subject to set off. Furthermore, Chapter 167D of the Massachusetts General Laws imposes a requirement that state chartered banks notify a Depositor immediately following a set off by written notice, sent first class mail to their last known address. The failure to do so could jeopardize its set off.

Lastly, it is critically important that you review the Bank’s loan documents prior to the exercise of the right of setoff. In this case, the prior loan officer who negotiated the transaction documents, allowed the borrower’s counsel to modify the right of set off to make it subject to the Bank’s liquidation of “all collateral” securing the loan (“Marshalling Clause”). As such, the right of set off should not have been exercised until the collateral was liquidated.

Equally problematic was the way that the Marshalling Clause was written. This will be further explained next month.

Presumably documents you are asked to sign are carefully read. I recently ran into a case, however, where a mortgagee for a commercial/industrial building was asked to sign a Landlord Waiver and Collateral Access Agreement for the lender financing the FF&E for a tenant. The lender had signed off on the agreement, but prior to mailing it back asked us to take a brief look. They thought it was a “standard agreement.”

We have all seen Landlord Waiver Agreements. They essentially state that the landlord releases and subordinates any landlord lien or claim to the FF&E that is secured to the tenant’s lender. There are, however, other points which must be included in these agreements, such as: (i) whether the secured creditor pays use and occupancy, (ii) how long possession is to be provided, (iii) mutual sharing of default notices, (iv) whether the secured creditor may abandon any of its collateral in place if it takes possession, (v) repairs or damages to the building in connection with the collateral removal, (vi) whether a public auction sale may be held on the premises, or (vii) whether the landlord should be given notice if the secured party intends to take possession.

There are numerous other provisions that can be inserted into these agreements. Landlord Waiver Agreements are anything but standard and depending on the size and complexity of the transaction, they must tailored accordingly.

In our last bank alert notice, we were talking about the right of setoff. The operative language of the erroneous setoff provision stated that the “bank would not exercise its right of setoff until all of the bank’s collateral had been liquidated.”

This agreement to “liquidate all collateral” prior to exercising rights is a marshalling agreement. Under no circumstances should the bank agree to such vague proposition with respect to such an important concept. Moreover, what does the word “all” mean? There are often times where the cost of liquidation exceeds the value of the collateral. For sure, the bank did not intend that it would liquidate such collateral and increase its loss. On the other hand, the guarantor who requested the marshalling refused to pay on his guaranty as the bank did not want to liquidate all of the collateral.

In appropriate circumstances, when credit otherwise warrants such an agreement, we do sometimes recognize limited marshalling agreements. Such a limited marshalling agreement in a guaranty for example, could provide as follows:

“LIMITED MARSHALLING RIDER

It is agreed as a condition of this Guaranty Agreement that the Lender shall first proceed to attempt collection of the Obligation from the Borrower’s Collateral prior to making demand upon the Guarantor hereunder, provided however Lender shall not be required so to do, upon the happening of any of the following:

A. Any material diminution of Guarantor’s assets at any time as reasonably determined by Lender;

B. Inability of Lender to proceed, or continue to proceed against any Collateral in expeditious and uninterrupted fashion based upon any order of Court or operation of law, including without limitation, inter- position of the automatic stay pursuant to 11 U.S.C. 362;

C. The determination by Lender, in its sole discretion, of the need to commence any suit(s) or action(s) in any court or with any administrative agency, or by arbitration, in order to recover and thereafter sell any Collateral of Borrower or other property secured or mortgaged to Lender;

D. The determination by Lender, in its sole discretion that the costs of liquidation of the collateral exceeds the value thereof.

E. The absence of any Collateral secured or mortgaged to Lender.

Upon any of the above occurrences, Lender may exercise any and all of its cumulative rights and remedies without further reference to this paragraph.”

As you can see, the bank agrees to liquidate collateral, but then the parties acknowledge that the obligation to liquidate the collateral does not apply in certain important circumstances. In case specific circumstances, additional limited factors can also be incorporated, but generally, the above-stated ones are critical and you should avoid waiving important rights or remedies whether against a deposit account or against a guarantor without carefully drafting them.

To be protected by the handicap discrimination law, employees must have an impairment that substantially limits one or more major life activities. They must also be qualified which means they must be able to perform the essential functions of their job or would be so capable if they were given a reasonable accommodation.

What someone’s essential job functions are, and what accommodations are reasonable, depend upon the particular facts of each case. A discrimination complaint must be filed either with the Massachusetts commission against discrimination here in Springfield or with the equal employment opportunity commission in Boston within three hundred days.

Federal and Massachusetts employment law both protect handicapped employees. Just having a disability is not enough to be protected. A person must have a physical or mental impairment that substantially limits one or more major life activities, have a record of such impairment, or be regarded as having such an impairment.

Whether someone is substantially limited depends on the particular facts of each case. Major life activities include a number of different functions, such as caring for one’s self, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, and working.