The new Massachusetts legislative session has begun, and again this year legislators have filed a bill to limit the enforceability of employee non-compete agreements. This session’s iteration of the bill incorporates feedback from members of the business community who support the enforceability of non-competes. Nonetheless, the bill still imposes substantial and unwaivable limitations on an employer’s ability to hold an employee to such an agreement, which may be of concern to employers who rely on non-competes to protect their confidential information and goodwill. Conversely, members of the business community who view non-compete agreements as a hindrance to their ability to recruit qualified talent may think that the bill does not go far enough in limiting the enforceability of non-competes.
Notice and Consideration Required for Entry Into the Agreement
The bill requires that when employment is conditioned on execution of a non-compete, a statement that this is so and a copy of the non-compete agreement itself must be provided to the employee seven days before employment begins or when a written employment offer is first given, whichever is sooner. If the employment offer is first given verbally, the employee must simultaneously be told that a non-compete is a condition of employment, or must receive the written notice before resigning from his or her current employer.
When a non-compete agreement is entered during a pre-existing employment relationship, the employer must give notice of the agreement at least two weeks before its effective date, and must provide to the employee “fair and reasonable consideration” beyond simply the continuation of employment.
Limitations on Scope and Duration of the Agreement
To be enforced by a court, a non-compete agreement must be necessary to protect the employer’s trade secrets, confidential information or goodwill. Employers should thus expect that overbroad non-compete agreements, which contain provisions that are not required to protect the employer’s interests, will not be enforced or will be reformed by the court.
The bill also imposes strict time limits on the duration of non-competes. A restricted period of no more than six months is presumptively reasonable, but restricted periods of over a year are per se impermissible absent a garden leave clause. A garden leave clause is one in which the employer provides compensation to the former employee without any offset for the former employee’s income received from unrestricted activities. Where a garden leave clause exists, the restricted period may be no more than two years. The bill requires that, to obtain the benefit of this longer restricted period, compensation provided to a former employee under a garden leave clause must be the greater of either 50 percent of the employee’s highest annualized base salary over the two years prior to the cessation of employment, or $35,000 plus an additional $700 for each year from the date the bill takes effect.
The geographic reach and scope of activities restricted by the non-compete must likewise be reasonable. The bill provides that where an agreement is limited to the area where an employee “provided services or had a material presence or influence” during the last two years of employment, its geographic reach is presumptively reasonable. The scope of activities prohibited by the agreement is presumptively reasonable when the limit protects a legitimate business interest and is confined to “the specific types of services provided by the employee” during the last two years of employment. The presumptions of reasonableness provided in the bill in this regard, like the presumption regarding temporal duration, do not guarantee enforcement of the agreement.
The bill also explicitly rejects and prohibits use of the inevitable disclosure doctrine. Currently, employers may attempt to use the inevitable disclosure doctrine to prevent a former employee from working for a competitor even absent a non-compete agreement, under the assumption that such work would inevitably cause disclosure of the former employer’s trade secrets or confidential information. Although the bill bars the inevitable disclosure doctrine, it would still allow a court to enjoin a former employee from disclosing the employer’s trade secrets and confidential information, even absent a non-compete agreement.
Attorneys’ Fees
Although typically each party to litigation pays their own attorneys’ fees, the bill provides that in certain circumstances courts may award reasonable attorneys’ fees expended by a former employee defending against enforcement of a non-compete. Notably, fees may be awarded and become immediately due at any time during the proceedings, including for example as part of a decision on a motion for preliminary injunction in which the employer prevails but the court substantially reforms one or more restrictions in the agreement.
An employer may be awarded reasonable attorneys’ fees only if the non-compete agreement is presumptively reasonable in duration, geography and scope, is enforced by the court without substantial modification, and if the court finds that the employee acted in bad faith.
Business leaders may wish to contact their state legislators and professional associations of which they are members to express their opinions about the bill.
For more information on this alert, please contact any of the lawyers listed below:
Boston
John Adkins, john.adkins@bingham.com, 617.951.8551
Jenny Cooper, jenny.cooper@bingham.com, 617.951.8473
Louis Rodriques, Co-chair, Labor and Employment Group, lou.rodriques@bingham.com, 617.951.8340
Los Angeles/Orange County
Jacqueline Cookerly Aguilera, jackie.aguilera@bingham.com, 213.229.8439
Debra Fischer, debra.fischer@bingham.com, 213.680.6418
San Francisco
James Severson, james.severson@bingham.com, 415.393.2242
New York
Douglas Schwarz, douglas.schwarz@bingham.com, 212.705.7437
Tokyo
Mie Fujimoto, mie.fujimoto@bingham.com, 81.3.6721.3138
This article was originally published by Bingham McCutchen LLP.