On October 1, 2018, a new Massachusetts noncompetition statute went into effect that will impact PE investors with offices or portfolio companies located in Massachusetts. The key provisions of the new law are set forth below.
Definition Of “Noncompetition Agreement”
The new law broadly defines “Noncompetition Agreements” as any agreement in which an employee or independent contractor “agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.”
The new law does not apply to:
- confidentiality and intellectual property protection provisions;
- employee nonsolicitation and no-hire provisions;
- covenants not to solicit or transact business with customers, clients or vendors;
- restrictions during the employment/contracting relationship;
- sale-of-business noncompetition provisions where the restricted party is a “significant owner of, or member or partner in, the business entity” and will receive “significant consideration or benefit” from the transaction;
- noncompetition provisions that are outside of an employment relationship, which seems to imply that partnership, limited liability company, stockholder and other similar agreements in which an individual is a partner, member or owner, rather than an employee, may be exempt from the new law under this exception (particularly where employees of one entity (e.g., a management company) are partners in, or members or owners of, a different entity (e.g., a limited partnership)); or
- covenants negotiated and entered into at the time of a separation from service, so long as the person is expressly given seven business days to rescind acceptance.
Forfeiture-For-Competition Clauses Are Covered Noncompetition Agreements
The new law covers any “agreement that by its terms or through the manner in which it is enforced imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities.”1
Limits on Noncompetition Period
Noncompetition Agreements may not exceed one year, unless the individual breached his or her fiduciary duty or unlawfully obtained or retained property belonging to the company, in which case the duration may not exceed two years.
Must Be Consideration
Noncompetition Agreements entered into at the inception of the relationship must be supported by garden leave (which is simply severance) or “other mutually-agreed upon consideration,” which is not defined (but initial employment may satisfy this requirement).
Noncompetition Agreements entered into during the relationship must be supported by “fair and reasonable consideration independent of continuation of employment,” which is also not defined.
Until there is further clarity regarding what satisfies the alternative consideration requirements under the new law, consideration other than a provision for the payment of garden leave during the restricted period runs some risk of being deemed to be insufficient.
Under the new law, a “garden leave” clause is sufficient consideration so long as it requires a company to pay the individual during the restricted period at least 50% of the individual’s highest annualized base salary within the preceding two years.
If garden leave is provided as consideration, it should be paid for the length of the noncompetition period, up to one year.
Individuals Terminated Without Cause or Laid Off and Nonexempt Employees Cannot Be Bound to Noncompetition Agreements
Any individual who is either (i) a nonexempt employee under the Fair Labor Standards Act or (ii) terminated “without cause” or “laid off” (with both terms being undefined in the law) cannot be subject to a Noncompetition Agreement. The new law is unclear regarding whether a company can still have noncompetition provisions with these individuals so long as the company is providing garden leave.
Alternatively, it may still be possible to secure noncompetition provisions from these employees either by structuring an employment agreement where an employee must give six months or a year of notice prior to terminating his or her employment or as negotiated at the end of the relationship, as both of these situations are not “Noncompetition Agreements” under the new law.
The Law Is Not Retroactive
The new law only applies to agreements entered into on or after October 1, 2018. However, the new law does not address whether amended agreements or evergreen renewals on or after October 1, 2018, trigger the law.
Very Technical Requirements Must Be Satisfied To Have A Valid Noncompetition Agreement
If entered into at the inception of the employment relationship, the employer must provide the candidate with the Noncompetition Agreement either at the time of a formal offer of employment or 10 business days prior to the commencement of employment, whichever is earlier.
If entered into during the employment relationship, the employee must have 10 business days to review the agreement before it becomes effective.
The Noncompetition Agreement must be in writing and signed by the employer and the individual.
The Noncompetition Agreement must explicitly state that the individual has the right to consult with counsel prior to signing.
The Law Covers Employees and Independent Contractors
The new law covers employees and independent contractors who are employed or engaged in Massachusetts — but does not explicitly cover partners, members or owners.
The new law severely limits the parties’ ability to circumvent its application by choosing another state’s law to govern the agreement.2
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Companies with employees in Massachusetts should review and update their form Noncompetition Agreements in light of the new law.
1. In many states, such as New York, court will not scrutinize the reasonableness of a noncompetition provision so long as the only result of a breach is the loss of some benefit. Massachusetts appears to have foreclosed this legal construct by holding that such forfeiture clauses also need to conform to the parameters of the new law. ↩
2. All civil actions relating to Noncompetition Agreements must be brought in the Massachusetts county where the individual resides (the new law does not specify that this must be in state court) or, if mutually agreed upon, in Suffolk County in Massachusetts (in the superior court or the business litigation session of the superior court).↩
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