Massachusetts Non-Compete Reform Bill Leaves Much to Be Desired

After several years of stalled attempts, the Massachusetts Legislature has passed a comprehensive though largely self-defeating bill regulating the use of non-competition agreements. The bill, which was appended to a larger economic development package signed by Governor Baker on August 10, 2018, will become effective to all non-competes executed on or after October 1, 2018, and will be known statutorily as Section 24L of Massachusetts General Laws Chapter 149. Notably, the statute applies to both individual “employees” and “independent contractors,” as those terms are defined under M.G.L. c. 148B.

The new statute codifies many common law principles that have been developed and applied for decades throughout the courts of Massachusetts.  For example, the statute enunciates a limited number of “legitimate business interests” that may be invoked by employers to seek a non-competition agreement, specifically the protection of (1) trade secrets, (2) confidential information that does not qualify as a trade secret, and/or (3) employer “goodwill.” If these interests can be adequately protected through some less restrictive measure – for example, a non-disclosure or confidentiality agreement – then a non-competition agreement is inappropriate, and subject to invalidation by the courts. Even if the circumstances are appropriate to support a non-competition agreement, the agreement must be reasonable in time, geographic reach and scope of prohibited activity.

The status quo described above, now statutorily prescribed, has and will continue to leave plenty of room for debate over the concepts of “reasonableness,” “adequate protection,” “confidential information,” and “goodwill,” among others. Overall, these gray areas operate to the distinct advantage of employers seeking to enforce non-competes, as most individual employees do not have the resources to engage in costly battles of legal interpretation. The new statute presumably attempts to address these realities in three ways, none of which this author believes will increase freedom of labor without redrafting or clarification by the Legislature or Judiciary.

First, the statute requires employers to offer some type of consideration (value) in exchange for executing a non-competition agreement. With respect to existing employees, the consideration must be “fair and reasonable” – yet another vague concept for the courts to pick apart – and independent from the offer of continued employment. With respect to new hires, however, the consideration need only be “mutually agreed upon,” not fair or reasonable, meaning that the mere offer of employment or nominal payment of $1.00 could serve as enforceable consideration. And while early commentary on the new law has focused on its reference to “garden leave” as an acceptable form of agreed-upon consideration – that is, payment of at least 50% of an employee’s highest annualized base salary during the non-compete period – there is nothing in the statute that requires such consideration to be provided. Given the vast power imbalance between most putative employees and those corporations seeking to aggressively compel and enforce non-competes, it is highly unlikely that the latter will feel compelled to offer such generous “garden leave” in order to secure non-competitive covenants from new hires.

Second, the new statute purports to place a blanket prohibition on requesting non-competition agreements from certain classes of workers, the most important being employees who have been terminated or laid off without cause (the other classes to which this blanket prohibition is extended – nonexempt hourly wage earners under the Fair Labor Standards Act, student interns, and employees under the age of 18 – do not typically perform job functions justifying a request for non-competitive covenants). Yet the very definition of “non-competition agreement” under the new statute excludes “non-competition agreements made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance.” Therefore, it appears that employers may still demand non-competitive covenants from employees who have been terminated or laid off without cause, so long as the non-compete terms are included within some type of separation agreement that the employee has been given seven days to rescind. Conspicuously absent from the statute is any requirement that (1) the employer provide “fair and reasonable consideration” in exchange for a non-competition agreement that is incorporated into an employee separation agreement, or (2) that the employer expressly notify employees of their right to consult with counsel prior to signing any such separation agreement.

Finally, the new statute attempts to strong arm employers (and, apparently, out of state courts) into accepting Massachusetts law with respect to the interpretation and evaluation of any non-competition agreement signed by an employee who has lived in Massachusetts for at least 30 days prior to the cessation of his or her employment. Specifically, the statute states that “[n]o choice of law provision that would have the effect of avoiding the requirements of this section will be enforceable” with respect to such employees, regardless of whether or not the employee performed his or her physical work in Massachusetts, or whether the employer is headquartered (or even has a presence!) in Massachusetts. This provision runs headlong into established legal principles of personal jurisdiction, choice of law, and freedom of contract. The list of scenarios in which the above clause could be rendered ineffectual, within the courts of Massachusetts and other jurisdictions, is too long to list here; suffice to say, it is likely to be re-written or stricken down altogether in the not-so-distant future.

For those looking forward to true non-compete reform, the Legislature’s final product leaves much to be desired. The forward-thinking policies envisioned within the new bill are largely toothless or unenforceable as a matter of law. Whether the present bill is representative of legislative oversight and imprecise drafting, or simply a feigned attempt at demonstrable progress on a hot-button issue, both businesses and employees within the Commonwealth deserve better. Hopefully, amendments to both substance and form will be introduced in the not-too-distant future.