Summary: An Act relative to the judicial enforcement of noncompetition agreements

The following is a section by section summary of S.988, An Act relative to the judicial enforcement of noncompetition agreements.

S.988, An Act relative to the judicial enforcement of noncompetition agreements, would adopt the Uniform Trade Secretes Act and put strong limits on the use of non-compete agreements. The legislation has two main parts:

This bill would repeal Sections 42 and 42A of Chapter 93 of the General Laws, which are the current Massachusetts trade secrets laws.

This bill would add a new Chapter – 93L to the General Laws, adopting the Uniform Trade Secrets Act (UTSA).

Section 1 of the UTSA provides definitions, including of: improper means, misappropriation, person, and trade secret.

Section 2 of the UTSA has three parts. First, it states that injunction based on principles of equity can be sought for actual or threatened misappropriation of a trade secret. These principles may include consideration of party conduct and circumstances of potential use for the trade secret. The injunction will be terminated when the trade secret no longer exists, but may continue longer in order to eliminate economic advantage that would be derived from the secret’s misappropriation. Second, the section states that in some special circumstances, an injunction may apply to future use of the trade secret with payment of a royalty, for at most the duration of time that use of the secret could have been prohibited. Finally, it states that in some circumstances, the court may compel affirmative protection of a trade secret.

Section 3 of the UTSA states that a complainant is entitled to recover damages for the misappropriation of a trade secret. These may include the actual loss caused by the misappropriation, and any other “unjust enrichment” caused by the misappropriation. If this cannot otherwise be measured, the damages can be measured by imposing liability for a reasonable royalty for the unauthorized use of the trade secret. Additionally, in the case of willful and malicious misappropriation of the trade secret, the court can award additional damages up to twice this amount. Section 4 of the UTSA states that the court can also award attorney’s fees to the prevailing party in cases where either the claim of misappropriation is made or defended in bad faith, a motion to enter or terminate an injunction is made or resisted in bad faith, or in cases of willful and malicious misappropriation.

Section 5 of the UTSA states that a court should preserve the secrecy of the alleged trade secret by reasonable means, including granting protective orders, holding in-camera hearings, sealing the relevant records, and ordering those involved with the litigation to not disclose the alleged secret without court approval. A person alleging trade secret misappropriation must identify the nature of the trade secrets and the reason for their protection in order to allow the courts to determine appropriate parameters of discovery and to enable the other party to reasonably prepare their defense.

Section 6 of the UTSA states that an action for misappropriation of a trade secret must be brought within 3 years after the misappropriation was discovered (or should have been discovered by the exercise of reasonable diligence).

Section 7 of the UTSA states that this chapter will not supersede any conflicting laws regarding misappropriation of a trade secret except: contractual rights and remedies, remedies based on submissions to governmental units, other civil remedies not based on misappropriation of a trade secret, or all criminal remedies, whether or not based on misappropriation of a trade secret. Section 8 states that this chapter will be applied and construed to make the law regarding trade secrets uniform among the states that enact it. Finally, Section 9 states that the chapter will be known as the Trade Secrets Act.

The legislation inserts a new Section – 24L into Chapter 149 of the General Laws, which governs labor and industries.

Clause (a) of the section provides definitions, including of: business entity, employee, forfeiture agreement, forfeiture for competition agreement, noncompetition agreement, and restricted period. A forfeiture agreement is an agreement that imposes financial consequences on a former employee as a result of the termination of employment, which does not include forfeiture for competition agreements. A forfeiture for competition agreement is an agreement that imposes adverse financial consequences on a former employee if the employee engages in competitive activities after the termination of employment. A noncompetition agreement is an agreement arising out of an existing or anticipated employment relationship where the employee agrees not to engage in certain activities which compete with the employer after the employment relationship is terminated. Noncompetition agreements do include forfeiture for competition agreements, but do not include:

• Agreements not to hire other employees of the employer,
• Agreements not to do business with customers, clients, referral sources, or vendors of the employer,
• Agreements made in connection with the sale of a business where the party restricted by the agreement is a significant owner in the business who will receive a benefit from the sale,
• Agreements outside of an employment relationship,
• Forfeiture agreements,
• Nondisclosure or confidentiality agreements,
• Invention assignment agreements,
• Agreements made as part of a severance agreement or otherwise in connection with separation from employment, or
• Agreements where an employee agrees to not reapply for employment to the same employer after termination.

A restricted period is the period after termination in which an employee is restricted by a noncompetition agreement from engaging in competitive activities.

Clause (b) states that to be valid and enforceable, a noncompetition agreement must meet the following requirements: If the noncompetition agreement is entered into in connection with the commencement of employment, the employer must provide the employee with the agreement two weeks before the employment begins (unless the offer of employment is given within two weeks of when the employment is to begin). If the noncompetition agreement is entered into after the commencement of employment, it must be supported by consideration independent from the continuation of employment, and notice must be provided with at least 10 business days before it takes effect. In both cases, the agreement must be made in writing and signed by the employer and the employee, and it must state that the employee has the right to consult with a lawyer prior to signing the agreement. To remain valid and enforcable, the employer must review noncompetition agreements at least once every three years.

The agreement must also be no broader than necessary to protect legitimate business interests of the employer, which include: trade secrets, confidential information, or the employer’s good will. A noncompetition agreement may be presumed necessary when the business interest cannot be protected through an alternative agreement, such as one not to hire employees of the employer or a nondisclosure agreement, or when the employee has taken property belonging to the employer, or when the employee has breached a fiduciary duty to the employer.

The agreement may only restrict employment for 12 months after termination. If the employee has breached a fiduciary duty to the employer or has taken the employer’s property, an agreement can restrict employment for 2 years. The agreement must also be reasonable in geographic scope relative to the business interests it protects, and must be reasonable in the scope of activities relative to the interests protected. For example, an agreement is presumed reasonable when it is limited to the areas in which the employee provided services in the last 2 years of employment and limited to the specific types of services provided by the employee in the last two years of employment.

Within 10 business days after the termination of employment, the employer must notify the employee of his or her intent to enforce the noncompetition agreement; otherwise, the agreement is waived by the employer. This does not apply if the employee took property belonging to the employer or the employee has already breached the noncompetition agreement, an agreement to not transact with customers, etc. of the employer, an agreement not to hire the employer’s employees, a confidentiality agreement, or a fiduciary duty.

The agreement must also be consonant with public policy.

Clause (c) states that a noncompetition agreement will not be enforceable against the following types of workers:

• Employees classified as nonexempt under the Fair Labor Standards Act (hourly employees),
• Undergraduate or graduate students participating in a paid or unpaid internship or otherwise in a short-term employment relationship,
• Employees that have been terminated without cause or laid off,
• Employees age 18 or younger, or
• Persons who are not considered employees in Section 148B who perform services to the employer for less than one year

Clause (d) states that a court may not enforce a noncompetition agreement that does not satisfy the requirements in (b) except that the court may reform or revise the agreement to make it valid and enforceable.

Clause (e) states that otherwise valid sections of a noncompetition agreement which fail to satisfy the requirements in (b) are not affected by this section, and does not preclude imposition of a noncompetition agreement by a court.

Clause (f) states that no choice of law provision can have the effect of avoiding the requirements of this section if the employee is a resident of or employed in the Commonwealth at the time of (and for at least 30 days preceding) the termination of employment.

Clause (g) states that all relevant civil actions that are commenced in state courts are to be brought in the county where the employee resides (or in Suffolk County if the employee is not a resident of Massachusetts, and the employer agrees).

Aja Watkins
Intern
Office of Senator Brownsberger