Elements of the July 2 Non-compete Amendment

This post is intended to help people understand the compromise language that the Senate passed on July 2. The actual language appears in italics.  This language is not law at this time — it is currently under negotiation in a House/Senate conference committee.

The first few sections provide a set of definitions that operate to narrowly apply the new rules only to true employee non-compete agreements and not to various other business arrangements. For example, non-solicitation agreements, non-disclosure agreements and business sale agreements are not regulated by the language.

Section 24L. (a) As used in this section, the following words shall have the following meanings:

“Employee”: an individual who is considered an employee under section 148B of this chapter.

“Employee noncompetition agreement”: an agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain activities competitive with his or her employer after the employment relationship has ended. Employee noncompetition agreements include forfeiture for competition agreements, but do not include (i) covenants not to solicit or hire employees of the employer; (ii) covenants not to solicit or transact business with customers of the employer; (iii) noncompetition agreements made in connection with the sale of a business or substantially all of the assets of a business, when the party restricted by the noncompetition agreement is an owner of at least a five percent interest of the business who received significant consideration for the sale; (iv) noncompetition agreements outside of an employment relationship; (v) forfeiture agreements; (vi) nondisclosure agreements; (vii) invention assignment agreements; (viii) garden leave agreements; (ix) noncompetition agreements made in connection with the cessation of employment; or (x) agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.

“Forfeiture agreement”: an agreement that imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engages in competitive activities following cessation of the employment relationship. Forfeiture agreements do not include forfeiture for competition agreements.

“Forfeiture for competition agreement”: an agreement that by its terms or through the manner in which it is enforced imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities.

The compromise also declines to regulate non-compete agreements in which the employee receives payments from the employer during the restricted period at a rate equal to least 50% of the employee’s highest annual base salary.

“Garden leave agreement”: a type of employee noncompetition agreement by which an employer agrees to pay the employee during the restricted period. To constitute a garden leave clause within the meaning of this section, the agreement must (i) provide for the payment, on a pro-rata basis during the entirety of the restricted period, of at least fifty percent of the employee’s highest annualized base salary paid by the employer within the two years preceding the employee’s termination and (ii) not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments, even if the employer voluntarily shortens the restricted period.

“Restricted period”: the period of time after the date of cessation of employment during which an employee is restricted by an employee noncompetition agreement from engaging in activities competitive with his or her employer.

The compromise sets two kinds of standards for enforceability of employee non-competition agreements — procedural standards and reasonability standards.

(b) To be valid and enforceable, an employee noncompetition agreement must meet the minimum requirements of subsections (i) through (iii) hereof and meet or be capable of being reformed to meet the minimum requirements in subsections (iv) through (viii) hereof.

The procedural standards require that the agreement include notice of right to counsel, be provided at the time of a job offer and, if entered after the commencement of employment, be supported by additional consideration.

(i) The agreement must be in writing and signed by both the employer and employee and expressly state that the employee has the right to consult with counsel prior to signing.

(ii) The agreement must, to the extent reasonably feasible, be provided to the employee by the earlier of five business days before the commencement of the employee’s employment or when any formal offer of employment is first made to the employee.

(iii) If the agreement is entered into after commencement of employment but not in connection with the separation from employment, it must be supported by fair and reasonable consideration in addition to the continuation of employment, and notice of the agreement must be provided at least ten business days before the agreement is to be effective. If the agreement is entered into in connection with the separation from employment of the employee, the agreement must expressly provide the employee with seven days to rescind acceptance.

The language restates the existing common law requirements that an agreement be necessary to protect trade secrets, confidential information or business goodwill.

(iv) The agreement must be necessary to protect one or more of the following legitimate business interests of the employer: (A) the employer’s trade secrets, as that term is defined in section 1 of chapter 93K, to which the employee had access while employed; (B) the employer’s confidential information that otherwise would not qualify as a trade secret; or (C) the employer’s goodwill.

As to reasonability, the language creates presumptive reasonability for a six month agreement limiting competition in the geographic area that the employee worked and with reference to the work the employee actually did. Longer or broader agreements are not presumptively unreasonable, but will have to meet a heavier burden if litigated.

(v) The agreement must be reasonable in duration in relation to the interests protected and the duration of actual employment. A stated restricted period of no more than six months is presumptively reasonable.

(vi) The agreement must be reasonable in geographic reach in relation to the interests protected. A geographic reach that is limited to only the geographic area in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence is presumptively reasonable.

(vii) The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected. A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last two years of employment is presumptively reasonable.

(viii) The agreement must be consonant with public policy.

The language bans use of non-competition agreements for hourly employees outright.

(c) No employee noncompetition agreement shall be enforceable against an employee who is nonexempt under the Fair Labor Standards Act, 29 U.S.C. 201-219. This section does not render void or unenforceable the remainder of the contract or agreement containing the unenforceable noncompetition agreement, nor does it preclude the imposition of a noncompetition restriction by a court, whether through preliminary or permanent injunctive relief or otherwise, as a remedy for a breach of another agreement.

The language makes Massachusetts into a “Red Pencil” state, meaning that a court may not reform to make reasonable an unreasonable agreement that is outside the presumptively reasonable range. An unreasonable agreement is not valid or enforceable (pursuant to the sections above). In conjunction with the presumptive reasonability standards, this change will encourage employers to write agreements of shorter duration and narrower scope.

(d) Notwithstanding anything to the contrary in this section, a court may, in its discretion, reform an employee noncompetition agreement so as to render it valid and enforceable, provided, however, that a court may reform the duration, the scope of proscribed activities, and the geographic reach only if the provision to be reformed was either presumptively reasonable as set forth above or the employer made objectively reasonable efforts to draft the particular provision so that it would be presumptively reasonable as set forth above. Further, a court may decline to enforce some or all of the restrictions in an otherwise valid and enforceable employee noncompetition agreement where necessary to prevent injustice or an unduly harsh result, including those arising from the employee’s economic circumstances, or based on any other common law or statutory legal or equitable defense or doctrine.

(e) No choice of law provision that would have the effect of avoiding the requirements of this section will be enforceable if the employee is, and has been for at least thirty days immediately preceding his or her cessation of employment, a resident of or employed in Massachusetts at the time of his or her termination of employment.

The language is prospective, applicable only to agreements entered into after January 1, 2015.

SECTION XXI. SECTION XX may be referred to as the Massachusetts Noncompetition Agreement Act and shall apply to employee noncompetition agreements entered into on or after January 1, 2015.

In addition to making these substantive changes, the language creates a study commission to recommend possible further changes.

SECTION XXII. Notwithstanding any general or special law to the contrary, there shall be a special commission to study and report on the use and possible abuse of non-competition agreements in the Commonwealth. The commission shall consist of the secretary of housing and economic development, or a designee; 3 members of the house of representatives, 1 of whom shall be appointed by the minority leader; 3 members of the senate, 1 of whom shall be appointed by the minority leader; and 6 commission members to be appointed by the governor: a representative of Associated Industries of Massachusetts; a representative of the Smaller Business Association of New England; a representative of the New England Venture Capital Association; a representative of the Massachusetts Biotechnology Council; a representative of the AFL-CIO of Massachusetts; and an expert on the law of non-competition agreements. The scope of the commission shall include, but not be limited to, researching and evaluating: (1) the use of non-competition agreements; (2) the possible abuse of non-competition agreements; and (3) recommendations to curb any such abuse and to strengthen the economy of the Commonwealth. The commission shall submit a final report of its findings and recommendations, together with drafts of legislation necessary to implement those recommendations, by filing the same with the clerks of the senate and house not later than October 1, 2015.