Massachusetts Legislature Makes Another Attempt to Pass a Non-Compete Law

[caption id="attachment_2097" align="alignright" width="113"] Barry A. Guryan[/caption]

Over the last several years, I have blogged about the Massachusetts Legislature’s many unsuccessful attempts to pass a statute establishing guidelines applicable to non-competes.  (See my latest blog posted last March “Proposed Legislation to Place Limits on Enforcement of Non-Competes in Massachusetts.”)  Former proposed bills have contained several types of provisions to accomplish this including ones that: a) prohibited the enforcement of all non-competes following California’s approach; b) created presumptions of reasonableness regarding the time and geographic scope; and c) banned the enforcement of non-competes signed by non-exempt and lower paid employees. (See my previous blog post “Massachusetts Legislature Fails to Pass any Proposed Bills on Non-Compete or Trade Secret Laws,” which discussed these bills.)

The common goal of all of these bills has been to balance the interests of some employers (primarily startups in the High-Tech sector) in facilitating employee mobility in order to foster more innovation with those of other employers whose goal is to protect their business interests, confidential information and trade secrets.  The debate has been lively in the Legislature as well as the business community.

On May 16, the Joint Committee on Labor Workforce Development in the Massachusetts legislature made another attempt at a “compromise” bill by favorably reporting H. 1701, which includes amendments to the “Massachusetts Non-Competition Agreement Act” proposed this past March.  If it becomes law, it would apply to agreements entered into or after July 1, 2016.

Unlike prior bills, this bill contains a “garden leave” provision that has a lot of stakeholders expressing strong opinions for and against it.  Although “garden leave” traditionally has been understood as an extension of the employment relationship through the end of the “leave,” under the proposed bill the employment relationship does not continue during this period.  The proposed bill requires that a garden leave clause be included within a non-compete agreement, and that a covered departing employee will receive payment, on a pro rata basis, of at least 50% of his or her pay during the restricted period.  The only exception to the applicability of garden leave is when an employee breaches his or her fiduciary duty.

According to legislative observers, this provision has generated criticism from large employers and trade associations which could jeopardize the passage of the bill.  Garden leave provisions have been used as a technique for limiting competition from employees who leave the company, but unlike this bill, they are not used in addition to the non-compete which is supported by its own financial incentives.  Some well-known employer trade organizations have criticized the provision, stating that since the employee is usually paid an additional sum of money when the non-compete is signed, they believe it is unfair to also pay someone additional pay for not working.  Those in favor of this provision believe that an employer would be willing to pay to insure that a particular employee stays out of the market. No doubt, there will be more debate as the bill continues through the legislative process.

The following is a summary of the other key elements of the proposed bill.

Non-compete agreements:

1. must be signed, in writing, and state that the employee has the right to seek advice from an attorney;
2. must be given to the employee the earlier of a “formal offer of employment or 10 days before” starting work;
3. that are signed after employment must be supported by “fair and reasonable consideration” in addition to continued employment.  The current prevailing view of the courts in Massachusetts is that continued employment is adequate consideration whether signed before being hired or signed after employment;
4. must be tailored to protect certain legitimate business interests, such as confidential business information, goodwill and trade secrets.  Interestingly, the bill states that if another restrictive covenant cannot adequately protect these interests, such as a non-solicitation agreement or a nondisclosure agreement, the non-compete “may be presumed reasonable” if it meets this mandate;
5. may not exceed a 12 month term (This extends a former bill’s maximum term of 6 months.);
6. must be reasonable in scope of proscribed activities.  In other words, if there is a nexus between the restricted activities and services that the affected employee has performed over the last 2 years of employment, the non-compete agreement will be “presumptively reasonable”;
7. must be reasonable in geographic reach, which is limited to the geographic areas where the employee provided services in the last 2 years of employment;
8. will not be enforced against certain types of workers, including non-exempt employees, student interns or employees that are employed for a short term while in school, employees that have been terminated or laid off, and employees 18 years of age and under;
9. may not be judicially “reformed” or revised to render it valid (otherwise known as the “blue pencil” rule).  In the past, judges have not been consistent in this regard.

What to Do Now:

There is nothing different that employers must do until a final bill becomes law.  Employers should continue to seek legal advice about properly drafting and enforcing non-competes or to seek legal assistance to enjoin their enforcement.  At present, we are guided by precedent generated by different judges.  The goal of this new legislation is to pass a law that will generate more consistency.  We will continue to keep you posted on its progress through the legislature.