Quick Update: Massachusetts Legislature Reports Out Noncompete Bill

On Tuesday, April 17, the Massachusetts legislature’s Joint Committee on Labor and Workforce Development favorably reported H.4419 to the House Steering, Policy and Scheduling.

The new bill – which covers both trade secrets and noncompetes – is a compilation of S840, S988, S1017, S1020, H43, H854, H2366 and H2371. Accordingly, much of the language is from bills that we have been discussing since the inception. (For a discussion of those bills, see Massachusetts Noncompetes Reform: What you need to know – by October 31.)

While much of the original language floating around for quite some time has remained the same (from some of Senator Brownsberger‘s and Representative Ehlich‘s proposed bills), there are some meaningful modifications.

Here are a few of the key aspects of the bill:

  • Changes Massachusetts trade secrets law from our current law (based largely on the 1939 Restatement (First) of Torts) to the Uniform Trade Secrets Act (UTSA), with some modifications.
  • Noncompetes are limited to 12 months, unless the employee is a bad actor (stealing information or breaching his fiduciary duties).
  • If entered into at the commencement of employment, it must be signed by both the employer and employee and state that the employee has the right to consult council prior to signing. And, the agreement must be provided by the earlier of the time of the formal offer or ten business days before commencement of employment. (There is no express exception for an employee who plans to start in less time.)
  • Continued employment alone will not be sufficient consideration for a noncompete entered into after employment; “fair and reasonable consideration” is required – but see garden leave below. (The other requirements for noncompetes entered into at the time of commencement of employment also apply, i.e., ten business days notice, signed by both parties, and notice of the right to obtain advice of counsel.)
  • Maintains other aspects of existing law, including the following:
    • The requirement that the noncompete be necessary to protect the currently recognized legitimate business interests, i.e., the protection of trade secrets, confidential information, and goodwill
    • The requirement that the noncompete be reasonable in time, space, and scope.
    • The requirement that the noncompete be consonant with public policy.
    • An overly broad noncompete can be reformed by a court.
  • Some of the presumptions from earlier bills are retained (while others are not). The following presumptions have been retained:
    • The agreement will be presumed reasonably necessary where the legitimate business interests cannot be adequately protected by other restrictive covenants.
    • The agreement will be presumed reasonable in geographic reach if it is limited to areas where the employee, within the last two years of employment, provided services or had a material presence or influence.
    • The agreement will be presumed reasonable in scope if it is limited to the types of services provided by the employee during the last two years of employment.
  • Garden leave – defined in the statute as (essentially) 50% of the employee’s annualized base salary – or “other mutually-agreed upon consideration” (which is not defined and must be specified in the agreement) is required for a noncompete. It is unclear how the garden leave or “other mutually-agreed upon consideration” requirement squares with the “fair and reasonable consideration” requirement above.
  • Noncompetes are banned for the following groups:
    • Nonexempt employees under the Fair Labor Standards Act (FLSA).
    • Undergrads and grad students who are not working full time.
    • Employees who are terminated without cause or laid off.
    • Anyone 18 or younger.
  • Springing noncompetes are permitted (and presumably encouraged) in lieu of a traditional noncompete. This has been an alternative to the use of noncompetes that I came up with for a client years ago. It permits an employer to assume that the employee will comply with the law and other restrictive covenants and therefore not require an employee to be bound by a noncompete. However, if the employee does not comply with the law or other restrictions, the court may impose a noncompete as a remedy.
  • Massachusetts law will be applied to agreements for Massachusetts residents and workers.
  • All actions must be brought in the employee’s county or in Suffolk County. If in Suffolk County, it can only be brought in the Superior Court or the Business Litigation Session.
  • The bill does not have retroactive effect.

Thanks to Erik Winton for letting me know that the bill came of out committee!