Quick Update: The rumors of Massachusetts noncompete reform’s death have been greatly exaggerated

Despite the lack of headlines, the Massachusetts Legislature has continued to move closer and closer toward noncompete and trade secret reform. It now looks potentially imminent.

On January 23, 2017, Representative Lori Ehrlich and Senator Will Brownsberger submitted companion bills entitled, “An Act relative to the judicial enforcement of noncompetition agreements.” The House bill (H. 2366) and Senate bill (S.988) were accompanied by several other bills filed by other legislators, most based on the language of these bills or prior iterations, but one seeking an outright ban. See Massachusetts Noncompete Reform: What you need to know – by October 31

On April 17, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development favorably reported H.4419 (i.e., essentially the trade secrets and noncompete bill pending at the end of the legislative session, with a few tweaks) to the House Steering, Policy and Scheduling. On May 21, the bill was to be placed in the Orders of the Day and is poised to come to the floor.

The current bill (H.4419) was since appended to the economic development bond bill (An Act relative to economic development in the commonwealth (Bill H.4714)), where it currently remains.

Yesterday, July 9, Representative Lori Ehrlich proposed an amendment (amendment number 123) making a few grammatical changes and a couple minor practical fixes to the version of the noncompete bill, leaving it largely as it existed at the end of the last legislative session.

Here are the key aspects of the bill, which would create the Massachusetts Trade Secrets Act and Massachusetts Noncompetition Agreement Act, are as follows:

  • Changes Massachusetts trade secrets law from our current law (based largely on the 1939 Restatement (First) of Torts) to the Uniform Trade Secrets Act (UTSA), with some modifications.
  • Noncompetes are limited to 12 months, unless the employee is a bad actor (stealing information or breaching his fiduciary duties).
  • If entered into at the commencement of employment, it must be signed by both the employer and employee and state that the employee has the right to consult council prior to signing. And, the agreement must be provided by the earlier of the time of the formal offer or ten business days before commencement of employment.
    • In the recent past versions of the bill, there had been no express exception for an employee who planned to start in less time. Accordingly, for example, if an employee was ready to start immediately (perhaps because of a lay off or simply by choice), the employer would need to force the employee to wait ten days or forgo the noncompete. The potential harm caused by this scenario was fixed by Representative Ehrlich’s amendment, which permits for a shorter duration if ten days is not reasonably feasible.
  • Continued employment alone will not be sufficient consideration for a noncompete entered into after employment; “fair and reasonable consideration” is required – but see garden leave below. (The other requirements for noncompetes entered into at the time of commencement of employment also apply, i.e., ten business days notice, signed by both parties, and notice of the right to obtain advice of counsel.)
  • Maintains other aspects of existing law, including the following:
    • The requirement that the noncompete be necessary to protect the currently recognized legitimate business interests, i.e., the protection of trade secrets, confidential information, and goodwill
    • The requirement that the noncompete be reasonable in time, space, and scope.
    • The requirement that the noncompete be consonant with public policy.
    • An overly broad noncompete can be reformed by a court.
  • Some of the presumptions from earlier bills are retained (while others are not). The following presumptions have been retained:
    • The agreement will be presumed reasonably necessary where the legitimate business interests cannot be adequately protected by other restrictive covenants.
    • The agreement will be presumed reasonable in geographic reach if it is limited to areas where the employee, within the last two years of employment, provided services or had a material presence or influence.
    • The agreement will be presumed reasonable in scope if it is limited to the types of services provided by the employee during the last two years of employment.
  • Garden leave – defined in the statute as (essentially) 50% of the employee’s annualized base salary – or “other mutually-agreed upon consideration” (which is not defined and must be specified in the agreement) is required for a noncompete. It is unclear how the garden leave or “other mutually-agreed upon consideration” requirement squares with the “fair and reasonable consideration” requirement above.
  • Noncompetes are banned for the following groups:
    • Nonexempt employees under the Fair Labor Standards Act (FLSA).
    • Undergrads and grad students who are not working full time.
    • Employees who are terminated without cause or laid off.
    • Anyone 18 or younger.
  • Springing noncompetes are permitted (and presumably encouraged) in lieu of a traditional noncompete.
    • This is an alternative to using a standard noncompetes that I came up with for a client years ago.
    • It permits an employer to assume that the employee will comply with the law and other restrictive covenants and therefore not require an employee to be bound by a noncompete. However, if the employee does not comply with the law or other restrictions, the court may impose a noncompete as a remedy.
  • Massachusetts law will be applied to agreements for Massachusetts residents and workers.
  • All actions must be brought in the employee’s county or in Suffolk County. If in Suffolk County, it can only be brought in the Superior Court or the Business Litigation Session, though Representative Lori Ehrlich‘s amendment leaves open the ability to go to federal court (which the current bill arguably seemed to foreclose).
  • The bill does not have retroactive effect.

The goal of the legislature over the past, nearly decade-long, effort has been to achieve a fair balance of the interests of the employer and the (often forgotten) remaining employees (who depend on the continued viability of the company) – i.e., the protection of the company’s trade secrets and other confidential information and goodwill – with the interests of the departing employee in mobility. This bill seeks to do that.

However, as Representative Ehrlich has identified, there are a few additional changes that bring a bit more balance to those interests.

First, the garden leave requirement is, at the moment, window dressing. Because the parties can essentially waive it by agreeing to any alternative consideration, it will likely rarely be used.

That is not necessarily a bad thing given that mandating garden leave (1) ignores the many potential alternative forms of consideration for a noncompete and (2) carries myriad potential unintended consequences, including, for example, making it impossible for startups and small companies (who may have the greatest exposure to their legitimate business interests), insofar as they lack the resources to pay garden leave in the form contemplated by the bill.

However, if the legislature wishes to encourage garden leave, it can easily do so with one or more carrots. For example, they can create a presumption of validity and enforceability if garden leave is provided. Or, they can make reformation of an overly broad noncompete mandatory if garden leave is provided.

Second, one of the central goals of the legislators has been to encourage narrow drafting of noncompetes. When courts reform (or “fix”) an overly broad restriction (as they currently do in Massachusetts), there is no incentive to draft a narrow (enforceable) noncompete.

However, as Representative Ehrlich and Senator Brownsberger have previously suggested, precluding reformation of overly broad noncompetes and thereby requiring a court to strike an overly broad noncompete (i.e., the so-called “red pencil” or “all or nothing” approach) is one way to encourage employers to write agreements that are narrowly tailored to protect legitimate business interests.

Because of the potential for such a rule to harm employers who actually made a good faith effort to draft a narrow noncompete, Representative Ehrlich and Senator Brownsberger previously proposed the so-called “purple pencil” rule, which is a hybrid of the two rules. It requires a court to apply the red pencil rule unless the court determines that the employer made a good faith effort to draft a narrow restriction. In that case – and only in that case – the court could reform the agreement to make it enforceable.

With those two additional changes, the bill will go a long way to achieving the legislative goals of meaningful noncompete reform here in Massachusetts.

 

 

 

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