by Erica E. Flores

On the final day of the legislative session, the Massachusetts legislature passed a bill reforming current law governing non-competition agreements and trade secret protections.  Governor Charlie Baker is expected to sign the bill.

We will be studying the new law and its implications for employers in the coming weeks, and if the Governor signs as expected, we will provide detailed coverage of these changes at our upcoming Breakfast Briefing in September.  For the moment, however, these are the highlights of the anticipated new law:

• • The bill will only apply to non-competes entered into on or after October 1, 2018.

 

• •  For the first time, the bill codifies Massachusetts non-compete law, as it has been developed by the courts, including the standard for enforceability – that the agreement is necessary to protect a legitimate business interest, is reasonable in time, space and scope, and is consonant with public policy.  The new law also retains Massachusetts courts’ discretion to modify or sever unreasonable provisions.

 

• • However, the bill makes several important changes to existing law:

    • • Non-compete agreements with the following employees will be unenforceable:

        • • Employees who are nonexempt under the Fair Labor Standards Act;

         

        • • Employees who are terminated without cause or who are laid off (unless the provision is contained in a separate severance agreement that provides at least 7 days to revoke);

         

        • • Undergraduate and graduate students who are not working full time; and

         

        • •  Employees aged 18 or younger.

         

      • Non-competes are limited to 12 months unless the employee has breached fiduciary duties or unlawfully taken employer property, in which case the non-compete may not exceed 2 years.

     

    • • If entered into at the outset of the employment relationship, a non-compete agreement must be provided to the employee at the earlier of the date of the firm offer of employment or 10 business days before the employee’s start date.

     

    • • If entered into during the employment relationship, the employee must receive at least 10 business days’ notice.

     

    • • Non-competes must be supported by “mutually agreed-upon consideration” that is specified in the agreement:

        • • For new employees, it is unclear whether employment alone will satisfy this requirement.  For current employees, however, the consideration must be “fair and reasonable” and must be something other than the promise of continued employment.

         

        • • Paying an employee for the duration of the restriction (so-called “garden leave”) will be sufficient consideration if the payments amount to at least 50% of the employee’s highest annual base salary within the previous two years, prorated during the restricted period, and the employer does not have the right to unilaterally discontinue the payments except in the event of a breach by the employee.

         

      • All non-competes must state that the employee has the right to consult with legal counsel before signing and both the employee and the employer must sign.

     

    • In litigation, certain presumptions will now apply for purposes of determining whether and to what extent a non-compete should be enforced:

      • • Non-competes may be presumed to be reasonably necessary where
          the legitimate business interests cannot be adequately protected by other restrictive covenants like non-solicitation agreements, no-raid agreements and non-disclosure agreements.
        • Non-competes will be presumed to be reasonable in space (i.e., geographic scope) if limited to areas where the employee provided services or had a “material presence or influence” during the last two years of employment.

       

      • •  Non-competes will be presumed to be reasonable in scope if limited to the types of services provided by the employee during the last two years of employment.

       

  •  Massachusetts law will govern all non-competes entered into with Massachusetts residents and workers.

 

• • All actions to enforce a non-compete must be brought in the employee’s home county or, if the parties agree, in Suffolk County Superior Court.

 

• • The bill covers non-compete agreements with both employees and independent contractors, including so-called “forfeiture for competition” agreements – by which the employee or contractor is allowed to compete but must give up some type of benefit to which they would otherwise be entitled.

 

• • The bill does not cover other types of restrictive covenants, such as non-solicitation agreements, non-disclosure agreements, severance agreements (if the employee has seven days to revoke), or non-competes entered into in connection with the sale of a business.

 

• The bill adopts the Uniform Trade Secrets Act, which will replace current law.  This will make Massachusetts’ trade secrets law consistent with the vast majority of other states.  Specifically:

  • • The definition of “trade secret” will change.  Current law defines a “trade secret” as anything that “constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement.”  The new law will define a “trade secret” as “specified or specifiable information” that “provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use” and “was the subject of efforts that were reasonable under the circumstances . . . to protect it against being acquired, disclosed or used without the consent” of the owner or predecessor in interest.

   

  • • Recovery for misappropriation of trade secrets will include both the actual loss suffered by the plaintiff and any unjust enrichment to a competitor, and may be doubled in the event the misappropriation was “willful and malicious.”

   

  • • Reasonable attorneys’ fees may be awarded to the prevailing party if a claim is made or defended in bad faith, if a motion to enter or terminate an injunction is made or opposed in bad faith or if a proven misappropriation is found to be “willful and malicious.”

   

We will continue to keep employers apprised of any new developments.  In the meantime, stay tuned for more information about our upcoming Breakfast Briefing, where we will break down these important changes in detail and make sure local employers understand how to ensure the enforceability of their non-compete agreements under the new law.