New England Biz Law Update
It’s just over a year since the “new” Massachusetts Noncompetition Agreement Act took effect, and it already has had some very tangible, positive effects. However, one aspect of the new law — namely, what consideration is required to support a noncompete — continues to create significant uncertainty.
A review of preexisting Massachusetts noncompete law provides a useful framework for understanding the new consideration requirements.
Prior to the new law (i.e., before Oct. 1, 2018), noncompetition agreements, like other contracts, had to be supported by consideration. See, e.g., Marine Contractors Co. v. Hurley, 365 Mass. 280, 284–86 (1974) (discussing consideration and noting that “consideration is conclusively presumed for a promise under seal”); Cypress Group, Inc. v. Stride & Assocs., Inc., 2004 WL 616302, at *3 (Feb. 12, 2004) (Burnes, J.) (“Any time a restrictive covenant is signed by an employee, the employer must provide some clear additional benefit.”).
Consideration can, of course, take many forms. See, e.g., Optos, Inc. v. Topcon Med. Sys., Inc., 777 F. Supp. 2d 217, 233 (D. Mass. 2011) (Casper, J.) (“access to confidential and proprietary information belonging to the company”); Alloy Media, LLC v. Landon, No. 11-4397-BLS, slip op. at 4, 9 (Mass. Super. Ct. April 24, 2012) (Roach, J.) (“Money is not the sine qua non of consideration.”); Oxford Global Res., Inc. v. Consolo, 2002 WL 32130445, at *1 (Mass. Super. Ct. May 6, 2002) (Botsford, J.) (stock option agreement and continued employment). Indeed, consideration could be supplied simply by the employee’s hiring on an at-will basis. See, e.g., Stone Legal Res. Group, Inc. v. Glebus, 2003 WL 914994, at *5 (Mass. Super. Ct. Dec. 16, 2002) (Burnes, J.).
While there was never any real dispute that the start of employment provided the requisite consideration to support a noncompete, courts questioned whether the mere continuation of employment was alone sufficient consideration for a noncompete entered into after employment started.
By about 2009 to 2010, it became generally accepted that the prospect of continued employment was in fact sufficient. See, e.g., Inner-Tite Corp. v. Brozowski, 2010 WL 3038330, at *16 (April 14, 2010) (Kenton-Walker, J.); EMC Corp. v. Donatelli, 2009 WL 1663651 (Mass. Super. Ct. May 4, 2009) (Neel, J.).
Enter the new law:
“The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement. To constitute a garden leave clause within the meaning of this section, the agreement must (i) provide for the payment, consistent with the requirements for the payment of wages under section 148 of chapter 149 of the general laws, on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination; and (ii) except in the event of a breach by the employee, not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments … .” G.L.c. 149, §24L(b)(vii) (emphasis added.)
With that language, there is no question that complying with the specifications of the so-called “garden leave” will satisfy the statute’s stated consideration requirements. However, the real question is: What will satisfy the statute’s alternative option of “other mutually-agreed upon consideration”?
While some have argued that there is a connection between the value of garden leave and “other mutually-agreed upon consideration,” no such connection exists on the face of the statute. And the legislative history confirms that the two are not tethered together.
We were involved in the legislative process from its beginning and drafted much of the language that appears in the new law. However, there were myriad significant changes to the language of the many bills over the years. Language was added. Language was removed. Language was shifted around from different versions of the bills. It was a work in progress for nearly a decade. And, in the end, the law was, as it needed to be, a compromise — much as a camel is a horse designed by a committee.
The dissonant language concerning consideration is the clearest example, resulting from strongly held, conflicting perspectives. Some legislators wanted to ban employee noncompetes (think California, Oklahoma and North Dakota), while others wanted no changes to our existing middle-of-the-road approach.
The diversity of viewpoints came to a head on July 31, 2016 (the last day of the legislative session), when the then-pending House and Senate bills could not be reconciled on the issue of consideration.
The House version (H.4434) provided:
“The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement.”
The competing Senate bill (S.2418) provided:
“The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee which shall be equal to or greater than the value of the garden leave clause and is negotiated during the 30-day period immediately following the termination of employment.”
(Emphasis added.)
It took until the end of the following legislative session (mid-2018) for the Legislature to reach agreement. Specifically, lawmakers agreed on the language from the prior session’s House bill (itself a compromise), expressing no parameters for “other mutually-agreed upon consideration” other than that it be specified in the noncompete.
The result: While the legislative history demonstrates that “other mutually-agreed upon consideration” was not to be gauged by garden leave, it provides little insight into how to reconcile the legislative compromise of including both options.
Instructively, the new law affirmatively changes the consideration required for noncompetes arising after commencement of employment. As to those, the new law overlays a requirement that such agreements “must be supported by fair and reasonable consideration independent from the continuation of employment,” G.L.c. 149, §24L(b)(ii) — a requirement that does not exist for a noncompete entered at the start of employment. That language appeared early in the legislative process and reflects a recognition that employees have less leverage when presented with a noncompete mid-employment than they have when deciding whether or not to accept a job in the first instance.
Reading the two consideration provisions together, the question becomes, if “fair and reasonable consideration” is the standard for consideration for mid-employment noncompetes (when there is a heightened concern for an employee’s leverage), doesn’t that mean that something less than “fair and reasonable consideration” suffices for a noncompete entered at the commencement of employment (when the concern is less pronounced)?
The relative concern giving rise to the requirement of “fair and reasonable consideration” seems to support such a conclusion.
Although the conclusion that something less than “fair and reasonable consideration” is all that is required for a noncompete signed at the start of a new job might seem unfair, that is precisely what the law has always been. Courts do not review the adequacy of consideration, just the fact of it. Marine Contractors Co., Inc. v. Hurley, 365 Mass. 280, 286 (1974) (“The requirement of consideration is satisfied if there is either a benefit to the promisor or a detriment to the promisee.”); Graphic Arts Finishers, Inc. v. Boston Redevelopment Authority, 357 Mass. 40, 43 (1970) (“The law does not concern itself with the adequacy of consideration; it is enough if it is valuable.”).
But, if that is what the Legislature intended, why include the option of garden leave? The unsatisfactory answer is that inclusion of the garden leave option was a necessary compromise to avoid losing all of the progress that had already been made, including notice requirements, a ban on noncompetes for nonexempt employees, a 12-month durational limit, and, of course, the “fair and reasonable consideration” requirement for employees asked to sign a noncompete mid-employment.
Given this, and given that the statute in many respects merely codifies existing noncompete law, a fair reading of the statute is that (other than eliminating the ability to rely on consideration substitutes like signing a noncompete under seal) what was adequate consideration for a noncompete entered at commencement of employment before the new law remains adequate consideration after the new law.
The principal argument against such an interpretation is that it renders the garden leave language unnecessary.
So, is there a satisfactory way to reconcile all of the statute’s language concerning consideration (i.e., “fair and reasonable,” garden leave, and “other mutually-agreed upon”)? Perhaps.
A possible inference to be drawn is that the garden leave language provides an option from which the parties can negotiate, suggesting that something more than what existed before will be required, though it need not be garden leave nor rise to the level of “fair and reasonable.”
Ultimately, the courts will be asked to interpret the noncompete statute’s consideration requirements. Given the brief period during which the law has been in place, there is, not surprisingly, a dearth of decisions under the new law. To date there are only five reported decisions addressing it, all from the federal court.
Four of those decisions rejected application of the new law: Agrero Administrative Service Corp. v. Campolo, 366 F. Supp.3d 170, 172 n.2 (D. Mass. 2019) (Zobel, J.) (agreement executed before Oct. 1, 2018); Sodexo Operations, LLC v. Abbe, 382 F. Supp.3d 162, 164 n.1 (D. Mass. 2019) (Zobel, J.) (same); Tannatt v. Varonis Systems, Inc., 2019WL830482, at *4 (D. Mass. Feb. 21, 2019) (Dein, M.J.) (report and recommendation rejecting the notion that the new law “consolidated existing Massachusetts public policy on non-competition agreements and should be deemed to reflect a strong Massachusetts public policy against enforcement of non-competition agreements”); and Nuvasive, Inc. v. Day, 2019 WL 5067964, at *5 (D. Mass. Oct. 9, 2019) (Casper, J.) (noting that the new law excludes “‘covenants not to solicit or hire employees of the employer’ [and] ‘covenants not to solicit or transact business with customers, clients or vendors of the employers’”).
The fifth, however, Nuvasive, Inc. v. Day, 2019 WL2287709, at *4 (D. Mass. May 29, 2019) (Casper, J.), seems consistent with the notion that “other mutually-agreed upon consideration” will be interpreted to require something akin to that which was required by existing noncompete law.
Specifically, in that case, the court concluded that the following statement of consideration would be sufficient under the new Massachusetts Noncompetition Agreement Act:
“In consideration of my engagement by the Company, the compensation I … receive from the Company (including for example monetary compensation, Company goodwill, confidential information, restricted stock units and/or specialized training) … .”
Thus, a new job and associated compensation and rights may be — as it always has been — sufficient consideration under the new noncompete law.
Time will tell if courts will read greater implications into the inclusion of the garden leave option. Until then, as with many other new laws, we will continue to grapple with some uncertainty, while our clients benefit from the many positive aspects of the new law.
Russell Beck is a founding partner of Beck, Reed, Riden in Boston. He litigates and advises on trade secret and noncompete agreement matters nationally and assisted the Legislature with the new noncompete and trade secrets laws. Erika Hahn, a paralegal at the firm, has been a substantial contributor and editor on a book on Massachusetts noncompete law.
