New and Complex Non-Compete Agreement Restrictions & Uniform Trade Secrets Act

On August 10, 2018, Massachusetts adopted a new, far reaching, and, for businesses, controversial law putting significant restrictions on companies’ ability to use Non-Compete Agreements. Polls showed high levels of support for the changes as a ballot question. In a rushed deadline for implementation, unlike the new Massachusetts Family Leave Act starting in 2021 and other laws, with months to years to prepare, the new law is effective on October 1, 2018.  Not retroactive, the new law leaves current Non-Competition Agreements in place. Judges may enforce them under the old rules developed by courts as tests of reasonableness in time, space, and public interest, etc. The good news is that common Non-Disclosure Agreement provisions such as non-solicitation protections, non-raiding of employees, and assignment of inventions will still be enforceable. You need to put in place Non-Compete Agreements for new employees after that date.  You can no longer simply have them sign one at time of hiring with other new employee documents; you need to give them 10 days to review it. There are some positives for both employees and employers.

Your current Confidentiality / Non-Disclosure Agreements and Non-Compete provisions, whether in one or separate documents, should be enforceable and contain broad geographical language. We will no longer advise [because of concern about lost protections] clients to re-execute those prior non-compete documents every year or when an employee receives more pay and/or a promotion. Under the new law, the non-compete period is one year, which makes sense.  The geographical reach requires an individualized employee assessment or of a class of employees of the “space” where their duties lie.   Non-exempt hourly employees may no longer be required to sign such agreements.  A related change is the new Uniform Trade Secrets Act (“UTSA”) repealing the prior Massachusetts Trade Secrets law.  These two new laws and others require updates to your Confidentiality / Non-disclosure Agreements and parts of your Employee Handbook to be valid under the new law starting next week.  We will discuss in a future newsletter / blog article the Uniform Trade Secrets Act, which improves and adds certainty, which is also effective on October 1, 2018.

 The New Rules: Enforceability Restrictions, Coverage and Scope

 The soon to be effective non-compete law sets minimal standards for such agreements:

  1. Must be in a written document signed by the employee and employer;
  2. Include provisions which expressly state that the employee has a right to legal advice prior to signing and must be provided to the employee at least ten days prior to the date of hire (or at least ten days prior to the effective date of the agreement, if entered into after the date of hire);
  3. Must not exceed 12 months in duration, unless the employee has breached a fiduciary duty (such as honesty, good faith, and loyalty) or has unlawfully taken the employer’s physical or electronic property, which could extend the duration to a maximum of 24 months;
  4. Include an expensive “garden leave” provision, in which the employer agrees to pay the employee at least 50% of the employee’s highest annualized base salary in the past two years or  “other mutually agreed upon consideration” (which is not defined the law); and

This is perhaps the biggest and most costly change, but employers will be motivated to agree on “other mutually agreed upon consideration,” or some lesser consideration, something that the employer can handle, and the employee can accept.

5. After employment has commenced, the employer must provide “fair and reasonable consideration,” which must be worth more than an offer of continued employment alone.

It could be a promotion, a new benefit, or a payment. We will be giving the issue some thought, but it should be more than a nominal payment.

The following classes of workers are prohibited from signing these agreements:

1. employees classified as nonexempt, i.e. hourly workers; under the Fair Labor Standards Act;

2. significantly, employees who are terminated “without cause” or laid off. Because the term “without cause” is not defined, your documents should now include a definition of termination “for cause.”; and

With no definition of “without cause”, it seems likely that any contracts containing non-compete provisions will now include a definition of termination “for cause”.

3. employees who are under the age of 18; undergraduate or graduate students working as interns or in other short-term employment.

The courts will provide meaning and interpretation, on a case by case basis to determine what is “other mutually agreed upon consideration,” “fair and reasonable compensation,” and firing “for cause” as well as other terms.  New non-compete agreements should contain definitions of the new terminology.

Severance Agreements and Settlement Agreements May Have Traditional Language

Notably the new law does not apply to non-compete agreements at time of an employee’s separation from employment if the company provides the employee 7 days to rescind acceptance.  Traditional non-compete rules will be available for Severance Agreements / Settlement Contracts that meet that requirement as they do to comply with the Older Workers Benefit Protection Act.

The law covers Massachusetts residents and employees, including independent contractors in a surprising development.  By definition, independent contractors usually have their own business and would not want to restrict available customers in most situations.

Employers cannot sidestep the legal requirements regarding Massachusetts employees, residents, or independent contractors by use of choice of law provisions that would require application of another state’s law. Employers who have an out-of-state principle place of business cannot apply laws of that state to its non-compete agreements or to individuals who are Massachusetts residents but work elsewhere.

More Uncertainty, Costs, Timing issues and Less Protection – Other Requirements   

The new provisions will increase uncertainty and complexity and require attention to timing and documentation.  The law will obviously raise costs for employers: in training and other administrative matters, legal fees and fair and reasonable and garden leave payments, and in less protection against “unreasonable” competition.  The law makes an effort to make clear legal principles such as those requiring that a noncompete be reasonable in scope.  A geographic reach “that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence,” it is to be treated presumed to be reasonable.  Moreover, the scope of prohibited activities must also be reasonable, and should be assessed based on the employee’s services over the prior 24 months.  Finally, the non-compete must be no broader than necessary to protect the legitimate business interest of the employer and be consistent with public policy about the movement of the employee.

To enforce a noncompete, the action must be initiated in the county of the employee’s residency, or in Suffolk County Superior court if mutually agreed upon by the parties. If a court determines that a non-compete covenant part of a larger agreement is unenforceable, such a determination will not void the other provisions of the agreement. In addition, the law permits courts to “reform or otherwise revise” invalid non-compete agreements in order to make the offending provision(s) enforceable. Courts are also granted the ability to impose non-compete restrictions as a remedy for a breach of contract or statutory or common law duties.