Planning for possible changes to non-compete law

For the second time, Massachusetts lawmakers have taken up the question of whether to overhaul existing non-compete laws that allow employers to prevent former employees from working against them after their employment ends.

Although it made significant headway during the legislative session that ended last year, the bill died when the session wrapped up. Throughout the process, the legislation received both strong support and opposition, as well as extensive commentary.

Since then, the bill has been modified to address concerns raised in the last go-round, giving the current version a better chance of getting passed.

Likely changes to existing law

Massachusetts non-compete law will change both procedurally and substantively.

Codification and fundamentals. As a threshold matter, the bill, if passed, will be the first codification of Massachusetts non-compete law. It will not, however, dramatically change the fundamentals. Noncompetition agreements will remain enforceable if, among other things, they are reasonable in duration, geographic reach and scope of proscribed activities, and necessary to protect the employer’s trade secrets, other confidential information or goodwill. Similarly, courts may continue to reform otherwise nonenforceable noncompetition agreements to make them enforceable, as well as refuse to enforce otherwise enforceable non-compete agreements when circumstances warrant.

Writing requirement. Although current law is unclear about whether non-competes must be in writing, agreements entered into after the law becomes operative will need to be in writing and signed by both parties. The prior version of the bill had required, in addition to a signed writing, that the non-compete appear in its own separate, stand-alone document.

Timing and consideration. Although not necessary under current law, the bill, if passed, would require that, if reasonably feasible, noncompetition agreements be provided to the employee seven business days in advance of employment. Further, if the agreement is entered into after employment begins, the employee must be provided with notice and “fair and reasonable” consideration — beyond simply continued employment. The “fair and reasonable” standard in the current version of the bill replaced a “reasonably adequate” standard and a difficult to meet presumption in the prior version.

Duration. Post-employment noncompetition restrictions would be limited to one year. While this reflects a seemingly-significant change to Massachusetts non-compete law, as a practical matter, it is not as far reaching as it may appear. Most noncompetition agreements here are either written not to exceed one year or not enforced by the courts beyond one year. Nevertheless, if an employer has a legitimate need for the restrictions to last longer than one year, it may — at its option — substitute a garden leave clause and thereby extend the restricted period to up to two years. This option was not in the final version of the prior bill.

Presumptions of reasonableness/safe harbors. The bill provides presumptions of reasonableness or safe harbors (see below) relating to each of the three fundamental requirements of reasonableness: duration, geographic reach and scope of restrictions. As to time, the bill provides that six months or less will be presumptively reasonable. As to geographic reach, the bill provides that limiting the geographic area to the location in which the employee had a material presence or influence during his or her last two years of employment will be presumptively reasonable. And, finally, as to scope of restrictions, the bill provides that restricting the employee from engaging in the specific types of services provided by the employee during his or her last two years of employment will be presumptively reasonable.

Legal fees. In order to deter overzealous enforcement of non-compete agreements, the bill mandates payment of the employee’s legal fees under certain circumstances – primarily where the agreement is not enforced in most respects by the court or where the employer sought to enforce the agreement in bad faith. However, assuming the employer did not act in bad faith, its compliance with the safe harbor provisions will insulate it from having to pay the employee’s legal fees. These safe harbors are applicable not only if the employer in fact fit within them, but also where the employer made objectively reasonable efforts to fit within them. The ability to benefit from the safe harbors by merely attempting to comply with them was added in the current version of the bill.  Because the law seeks to deter all improper litigation over non-compete agreements, it also provides a mechanism for employers to receive their legal fees. Employers can be reimbursed for their legal fees when permitted by statute or contract and the agreement falls within the relevant safe harbors, the non-compete was enforced, and the employee acted in bad faith.

Inevitable disclosure. Although current Massachusetts law is in doubt, the bill would expressly reject the inevitable disclosure doctrine (a doctrine by which a court can stop an employee from working for a competitor of the former employer even in the absence of a noncompetition agreement). The current version of the bill has been clarified to reject only the narrow doctrine and not prevent a court from enjoining a former employee who has disclosed, threatened to disclose, or is likely to intentionally disclose trade secrets or other confidential information.

Other restrictive covenants. The bill is narrow in its reach. It does not affect nondisclosure agreements, nonsolicitation agreements, anti-piracy agreements, other similar restrictive covenants, or noncompetition agreements outside of the employment context (for example, in the context of the sale of a business). The bill applies only to employee noncompetition agreements and certain forfeiture agreements (i.e., agreements that can be used as de facto noncompetition agreements). Unlike the prior version of the bill, the current version states that it does not apply to forfeiture agreements that constitute incentive equity compensation plans or agreements.

Effective date. If enacted, the bill will apply only to agreements entered into after the law becomes effective. Of course, lawyers representing employees can be expected to argue that the bill provides guidance that should be followed in interpreting preexisting agreements.

Compensation threshold. One of the main sticking points from the prior draft of the bill was the prohibition on using non-compete agreements for employees whose compensation falls below certain thresholds. Those thresholds have been eliminated.

Under the present version, courts are to simply factor in the economic circumstances of and economic impact on the employee.

Steps to take now

The possibility of passage of the Massachusetts Non-compete Act provides an impetus to perform a comprehensive review of all existing non-compete agreements.

Nevertheless, this review should be performed not just because of the potential changes to Massachusetts law and the consequent advantages to taking action now, but because many other states have recently changed their non-compete laws or are in the process of doing so, thereby putting at risk existing agreements that may have interstate application.

When performing such a review, non-competes should be analyzed for their enforceability not only under current law, but under the law as it will likely be if the bill were to pass. There is no downside to complying with the anticipated changes early, whereas there is risk, such as the potential unenforceability of the agreement later, for failing to do so.

As a starting point in the analysis, non-competes should be narrowly tailored in time, space and scope to meet the company’s legitimate business objectives. Moreover, because the safe harbors will insulate employers from the risk of attorneys’ fees, the agreements should, if possible, fit within the safe harbors.

That said, it is the geographic reach and scope of restrictions that will likely be the area of controversy. Although the duration requirement is the only true bright-line standard, it is the rare case in which a court finds a one-year duration to be unreasonable, thus, compliance with the space and scope safe harbors should be the focus.

Alternatively, to obtain even greater assurances of enforceability and avoidance of legal fees, a garden leave clause may be appropriate, especially for employees who pose the greatest risks to the company.

Even under current law, while there is some controversy on the issue, mid-employment changes to a non-compete without the provision of consideration beyond continued employment may invalidate the agreement in its entirety.

Similarly, material changes in an employee’s position or role within the company may invalidate an existing agreement. To the extent changes to an agreement or employment relationship are to be made, it is advisable to couple together “fair and reasonable” consideration (e.g., substantial stock option grants, raises, promotions and bonuses) with a new or modified agreement.

Further, advance notice of any new agreement should now be routine as well.

While reviewing and updating existing non-compete agreements, employers should perform a comprehensive assessment of their trade secret protection programs. That assessment should focus not just on the non-compete agreements and other restrictive covenants, but all the measures taken by the company to protect its trade secrets and other confidential business information.

Russell Beck is a business and intellectual property litigator, mediator and founding partner of Beck, Reed, Riden in Boston. He teaches trade secrets and restrictive covenants at Boston University School of Law and is the lead author and advisor on the Massachusetts Noncompetition Act bill. He can be contacted at [email protected].