Massachusetts Noncompete Law – A Primer

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For those looking for a basic primer on Massachusetts noncompete law, I thought I’d provide the following from my book, Negotiating, Drafting, and Enforcing Noncompetition Agreements and Related Restrictive Covenants (5th ed., MCLE, Inc. 2015). (What is reproduced is heavily edited for brevity.)

 

Note that Massachusetts noncompete law is very similar to noncompete laws around the country. For a summary of all state’s laws, see my 50 State Noncompete Chart.

Background

In its most basic form, a noncompetition agreement is a contract that prohibits one of the contracting parties (typically, although not always, an employee) from engaging in activities that are competitive with the other contracting party. Recognized in Massachusetts for almost 200 years, noncompetition agreements (“noncompetes”) have made their way into virtually every industry. The same is true for the related restrictive covenants that are also available to protect company trade secrets, confidential information, and goodwill.

“A ‘[r]estrictive covenant’ is a clause in a contract . . . which ‘limit[s] a contracting party after termination of the contract in performing similar work for a period of time and within a certain geographical area.’” Falmouth Ob-Gyn Assocs., Inc. v. Abisla, 417 Mass. 176, 180 (1994) (quoting Black’s Law Dictionary 1315 (6th ed. 1990)). Generally included under the “noncompete” rubric, restrictive covenants include not only true noncompetition agreements, but also agreements not to solicit customers, not to hire employees, and not to disclose information. Oxford Global Res., Inc. v. Consolo, 2002 WL 32130445, at *4 (Mass. Super. Ct. May 6, 2002) (Botsford, J.).

Restrictive covenants will be enforced when a court determines that it is reasonable and appropriate to do so. The court’s determination requires a fact-intensive analysis based on an extremely abbreviated factual record prepared by the parties at the beginning of the case, typically very quickly, with no (or limited) discovery. Accordingly, successful enforcement of such agreements takes proper drafting of the agreements, advance planning, a thorough understanding of the governing law, and myriad strategic decisions. Similarly, successful defense of such agreements requires an in-depth understanding of their potential weaknesses and how to exploit them.

It should be noted at the outset that while the general legal framework is established by the Supreme Judicial Court and the Appeals Court, most of the cases are fully resolved by the Superior Court at the preliminary injunction stage.

General Law

Noncompetition agreements are enforceable in Massachusetts. However, they are only enforceable if, and to the extent that, they are

  • reasonable in duration, geographic reach, and scope of restricted activities;
  • necessary to protect the enforcing party’s legitimate business interests; and
  • to the extent that the agreement and its enforcement is consonant with public policy.

See, e.g., Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 643 (2004); Marine Contractors Co. v. Hurley, 365 Mass. 280, 287–88 (1974); Cynosure, Inc. v. Detter, C.A. No. 2015-00724, at 8 (Mass. Super. Ct. Feb. 26, 2015) (Salinger, J.); KNF & T Staffing, Inc. v. Muller, No. CV201303676-BLS1, 2013 WL 7018645, at *3 (Mass. Super. Ct. Oct. 24, 2013) (Billings, J.); Interpros, Inc. v. Athy, No. 201300214F, 2013 WL 2181650, at *3 (Mass. Super. Ct. May 5, 2013) (Curran, J.); Curves Int’l, Inc. v. Fox, 2013 WL 1946826, at *2 (D. Mass. May 9, 2013) (Stearns, J.); Aspect Software, Inc. v. Barnett, 787 F. Supp. 2d 118, 128 (D. Mass. 2010) (Casper, J.); Talentburst, Inc. v. Collabera, Inc., C.A. No. 08-10940-WGY, *12 (D. Mass. July 25, 2008) (Young, J.); see also Restatement of Contracts (Second) § 188 (1981) (as a restraint on trade, a noncompete must satisfy the above requirements and be “ancillary to an otherwise valid transaction or relationship”).

The Supreme Judicial Court stated the standard most recently as follows: “A covenant not to compete is enforceable only if it is necessary to protect a legitimate business interest, reasonably limited in time and space, and consonant with the public interest.” Boulanger v. Dunkin’ Donuts Inc., 442 Mass. at 639. Although not stated in Boulanger and infrequently directly focused on, a noncompetition agreement must also be limited in the scope of proscribed activities.  See, e.g., Forti v. Grand Circle Travel, C.A. No. 07-3622-BLS1 (Mass. Super. Ct. Jan. 11, 2008) (Gants, J.) (“Courts will enforce [noncompetition agreements] only when they have a legitimate business purpose and are reasonable in time, space, and scope, based on all the circumstances.” (emphasis added)); Ounce Labs, Inc. v. Harwood, C.A. No. 08-2377BLS1 (Mass. Super. Ct. June 18, 2006) (Gants, J.) (noncompetition agreement was “quite limited in its scope” insofar as it precluded employment by only two companies); Getman v. USI Holdings Corp., C.A. No. 05-3286-BLS2 (Mass. Super. Ct. Sept. 1, 2005) (Gants, J.) (the agreement must not be unreasonable “in its time, space, or scope”).

It also bears mention that, although reasonable noncompetition agreements are generally permissible in Massachusetts, they are generally disfavored, see Genzyme Corp. v. Laidlaw, 84 Mass. App. Ct. 1134 (2014) (unpublished decision; text available at 2014 WL 470409, at *2); Synergistics Tech., Inc. v. Putnam Invs., LLC, 74 Mass. App. Ct. 686, 691 n.3 (2009), and certain statutory, regulatory, and common law exceptions to the enforcement of an otherwise enforceable noncompetition agreement have developed over time.

Reasonableness

The reasonableness of a noncompetition agreement is the touchstone of the enforceability analysis. Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 639 (2004) (“Covenants not to compete are valid if they are reasonable in light of the facts in each case.”); Cheney v. Automatic Sprinkler Corp. of Am., 377 Mass. 141, 147 (1979) (“We have not automatically held a former employee to the terms of his covenant not to compete. A test of reasonableness, based on the circumstances of the parties and the public interest, has been traditional in our cases involving covenants not to compete.”).

Determining whether the restrictions imposed by the noncompetition agreement are reasonable is a highly fact-based analysis. See, e.g., Blackwell v. Helides, 368 Mass. 225, 228 (1975); Marine Contractors Co. v. Hurley, 365 Mass. 280, 287–88 (1974); EMC Corp. v. Breen, No. 12-04477-BLS2, 2013 WL 1907460, at *2 (Mass. Super. Ct. Feb. 25, 2013) (Roach, J.).

The test for reasonableness is context specific, meaning that the context in which a noncompete arises will affect the nature of the court’s inquiry into the reasonableness of the agreement. For example, courts will analyze a noncompetition agreement arising from an employment relationship more vigorously than they analyze agreements arising from other relationships. An unreasonable restrictive covenant will, if feasible, be narrowed (“reformed”) to make it reasonable. As the Supreme Judicial Court explained, “If the covenant is too broad in time, in space or in any other respect, it will be enforced only to the extent that it is reasonable and to the extent that it is severable for the purposes of enforcement.” All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974).

Duration

The duration, like all other aspects of a restrictive covenant, must be reasonable. What is reasonable depends on many factors, including, among other things, the context in which the agreement arises, the interests sought to be protected, and the nature of the industry. Significantly, even if a time limitation is not expressly stated, a court may allow enforcement “for a ‘reasonable time.’” Catania v. Hallisey, 352 Mass. 327, 331 (1967) (quoting Childs v. Sherman, 351 Mass. 450, 456 (1966)). But see Steelcraft, Inc. v. Mobi Med., LLC, C.A. No. 08-1934, at *3 (Mass. Super. Ct. Nov. 10, 2008) (Tucker, J.) (absence of agreed-upon duration renders agreement unreasonable). Accordingly, “[t]he phrase ‘maximum period allowed by law’ used in the context of noncompetition agreements has no relevance under Massachusetts law, which evaluates the length of these agreements for reasonableness on a case-by-case basis.” Felix A. Marino Co. v. Anderson, 76 Mass. App. Ct. 1127 (2010) (unpublished decision; text available at 2010 WL 1655824, at *1 n.4).

Generally, in the context of an employment relationship, a one-year duration has routinely been viewed as reasonable. See, e.g., Edwards v. Athena Capital Advisors, Inc., 2007 Mass. Super. LEXIS 378, at *8 (Mass. Super. Ct. Aug. 7, 2007) (Macdonald, J.); Advanced Cable Ties, Inc. v. Hewes, 2006 WL 3292810, at *2 (Mass. Super. Ct. Oct. 19, 2006) (Locke, J.); Zabota Cmty. Ctr., Inc. v. Frolova, 2006 WL 2089828, at *2 (Mass. Super. Ct. May 18, 2006) (van Gestel, J.); EMC Corp. v. Gresham, C.A. No. 01-2084-BLS (Mass. Super. Ct. Nov. 14, 2001) (van Gestel, J.); EMC Corp. v. Allen, 1997 WL 1366836 (Mass. Super. Ct. Dec. 15, 1997) (Kottmyer, J.); Marcam Corp. v. Orchard, 885 F. Supp. 294, 296 (D. Mass. 1995) (Lindsay, J.).

Geographic Reach

In determining the reasonableness of the geographic scope of a restrictive covenant, geographic reach in absolute terms is not controlling. Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 644 (2004) (“even in the employment context, large geographic areas are deemed reasonable in some circumstances”). Rather, a noncompetition agreement must be reasonable in geographic scope “in relation to the interests served.” Lunt v. Campbell, No. 07-3845-BLS, at *6–7 (Fabricant, J., Sept. 2007); see also All Stainless, Inc. v. Colby, 364 Mass. 773, 779 (1974); Marine Contractors Co. v. Hurley, 365 Mass. 280, 289 (1974) (“The geographical scope of the agreement [within 100 miles of Boston] coincides with the area in which Marine performs almost all of its work, and thus is precisely drawn to protect Marine’s good will.”); Novelty Bias Binding Co. v. Shevrin, 342 Mass. 714, 717–18 (1961) (enforcing twenty-six-state limitation, noting that court has “rejected a rule which would arbitrarily limit the restriction to the geographical area of the place of employment”); New Eng. Tree Expert Co. v. Russell, 306 Mass. 504, 510–11 (1940) (appropriate geographic reach governed by reasonableness); Cypress Group, Inc. v. Stride & Assocs., Inc., 2004 Mass. Super. LEXIS 69, at *11 (Feb. 12, 2004) (Burnes, J.) (refusing to enforce noncompetition agreement where the “geographical restraint [was] completely arbitrary” and did not serve to protect any goodwill); Sentient Jet, Inc. v. Lambert, 2002 WL 31957009, at *5 (Mass. Super. Ct. Nov. 18, 2002) (van Gestel, J.) (“essentially unlimited geographical reach” was reasonable “given that the business . . . is the chartering and flying of private jet aircraft all around the country and, indeed, the world”); EMC Corp. v. Allen, 1997 WL 1366836, at *1 (Mass. Super. Ct. Dec. 15, 1997) (Kottmyer, J.) (worldwide restriction was reasonable where employee’s responsibilities had been worldwide); Marcam Corp. v. Orchard, 885 F. Supp. 294, 299 & n.4 (D. Mass. 1995) (Lindsay, J.) (recognizing that permissible restraints sometimes extend beyond reach of company’s business at time employee departs, court noted more generally that “[a] geographic restriction is reasonable as long as it restricts a former employee from doing business in an area in which the company itself conducts business”); cf. Steelcraft, Inc. v. Mobi Med., LLC, C.A. No. 08-1934, at *3 (Mass. Super. Ct. Nov. 10, 2008) (Tucker, J.) (rejecting agreement as unreasonable where no geographic area was agreed upon).

Scope of Restricted Activities

Although Massachusetts courts rarely identify the scope of proscribed activities as a separate element of the analysis, the scope of the noncompetition agreement is nevertheless reviewed. Sometimes it is reviewed as an independent factor, although, more typically, it is incorporated as part of the courts’ analysis of reasonableness and the protection of legitimate business interests. For example, in each of the following cases, the Superior Court reviewed the scope of the proscribed activities as an independent part of its analysis: Cynosure, Inc. v. Detter, No. 2015-00724, slip op. at 8 (Mass. Super. Ct. Feb. 26, 2015) (Salinger, J.); KNF & T Staffing, Inc. v. Muller, No. CV201303676-BLS1, 2013 WL 7018645, at *3 n.5 (Mass. Super. Ct. Oct. 24, 2013) (Billings, J.); Edwards v. Athena Capital Advisors, 2007 Mass. Super. LEXIS 378, at *8 (Mass. Super. Ct. Aug. 7, 2007) (Macdonald, J.); Ounce Labs, Inc. v. Harwood, C.A. No. 08-2377BLS1 (Mass. Super. Ct. June 18, 2006); and EMC Corp. v. Gresham, C.A. No. 01-2084-BLS (Mass. Super. Ct. Nov. 14, 2001) (van Gestel, J.). Similarly, in Sherman v. Pfefferkorn, 241 Mass. 468, 475–77 (1922), the Supreme Judicial Court, focusing in on what restrictions were necessary to protect the former employer’s legitimate business interests, refused to enjoin the former employee from mere stock ownership in the competitor or from employment by the competitor in capacities that did not implicate the former employer’s legitimate business interests.

Modification of Unreasonable Restrictions/Reformation

An unreasonable restrictive covenant will, if feasible, be narrowed (“reformed”) to make it reasonable. As the Supreme Judicial Court explained, “If the covenant is too broad in time, in space or in any other respect, it will be enforced only to the extent that it is reasonable and to the extent that it is severable for the purposes of enforcement.” All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974). The purpose of permitting such reformation is to achieve, as closely as possible, the intent of the parties. See Edgecomb v. Edmonston, 257 Mass. 12, 20–21 (1926). The reformation approach seeks to balance giving effect to the parties’ intentions to the extent reasonably permissible against wholesale rewriting of the agreed-upon restrictions based solely on the court’s judgment. The approach differs from the so-called blue pencil approach, in which a court simply deletes the offending language (literally crossing it out, with no new language written in) and, if—but only if—the agreement still makes sense with such language omitted, enforces the balance of the contract as written. See Edgecomb v. Edmonston, 257 Mass. at 20 (explaining blue pencil doctrine); Compass Bank v. Hartley, 430 F. Supp. 2d 973, 979 (D. Ariz. 2006) (blue penciling allows elimination of “grammatically severable, unreasonable provisions”); Hamrick v. Kelly, 392 S.E.2d 518, 519 (Ga. 1990) (“The ‘blue pencil’ marks, but it does not write.”). The approach also differs from the “red-pencil” approach taken in some states where a noncompetition agreement that purports to be more restrictive than the court deems necessary will be deemed unenforceable in its entirety, regardless of whether the agreement is capable of being narrowed. See, e.g., Harville v. Gunter, 495 S.E.2d 862, 864 (Ga. Ct. App. 1998) (agreement must be enforceable as written).

Legitimate Business Interests

Even when a noncompetition agreement is limited in duration, geographic reach, and scope, it will be enforced “only to the extent . . . necessary to protect the legitimate business interests of the employer.” EMC Corp. v. Gresham, C.A. No. 01-2084-BLS (Mass. Super. Ct. Nov. 14, 2001) (van Gestel, J.). In Massachusetts, the recognized legitimate business interests are generally identified as the protection of trade secrets, confidential information, and goodwill. E.g., Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 641 (2004).

Public Policy

While there are myriad potential public policy implications, the most basic one implicated by enforcing such agreements (and the one that causes such agreements to receive the level of scrutiny they do) is that “public policy favors an employee’s right to move from job to job unencumbered by restrictions that are not narrowly tailored to protect an employer’s legitimate interests.” Edwards v. Athena Capital Advisors, Inc., 2007 Mass. Super. LEXIS 378, at *6 (Mass. Super. Ct. Aug. 7, 2007) (Macdonald, J.) (citing Club Aluminum Co. v. Young, 263 Mass. 223, 225 (1928)).

There are likewise many public policy implications supporting enforcement of restrictive covenants. Indeed, “[a]s a matter of long-standing Massachusetts case law, it is ‘beneficial to the public that contracts for the partial restraint of trade should be upheld to a reasonable extent.’” Corporate Techs., Inc. v. Harnett, 943 F. Supp. 2d 233, 245 (D. Mass. 2013) (Woodlock, J.) (quoting New Eng. Tree Expert Co. v. Russell, 306 Mass. 504 (1940)), aff’d, 731 F.3d 6 (1st Cir. 2013)

 Exceptions

Certain broad-based exceptions to the enforceability of noncompetition agreements have developed over time. Some have arisen by statute (physicians, nurses, psychiatrists, social workers, and members of the broadcast industry), while others have been the result of specialized industry rules (lawyers and certain members of the financial services industry).

BRR 50-State Noncompete Chart Updated

World MapThe BRR 50 State Noncompete Chart has been substantially updated to reflect numerous developments in statutory or case law since the last draft, as well as clarifications of existing laws. Click here to get the latest version.

Please note that the chart has been revised through yesterday, August 23.

BRR’s 50 State Noncompete Chart UPDATED

BRR 50 State Noncompete Chart 20130814The BRR 50 State Noncompete Chart has been updated to reflect various changes in statutory or case law, as well as clarifications of existing laws. Click here to get the latest version.

Fairly Competing – A New Podcast

FairComp LogoI am thrilled to announce that I have been given the opportunity to work with two of my favorite (though far more prolific) bloggers, Ken Vanko and John Marsh, to create a brand new podcast: Fairly Competing, a Competition Law Podcast. It is among the first podcasts devoted to trade secrets, restrictive covenants (noncompetes), and related unfair competition laws.

We have recorded two episodes so far, and will be recording our third soon. We hope to record one every two weeks or so. They will generally last about 20-25 minutes, after the first episode (which was about 40 minutes). The will be available to listen to through the three speakers’ blogs, on iTunes, and on Fairly Competing.

The first episode is an examination of a few of the most significant trade secrets/noncompete/unfair competition developments in 2012 (sort of an abbreviated year in review).

For anyone interested in a more detailed review of the trade secrets developments in 2012, I have provided here my (quite lengthy) materials for the trade secrets portion of this year’s Boston Bar Association’s annual IP Law Year in Review CLE. In addition, both Ken Vanko (here) and John Marsh (starting here) have excellent posts covering similar issues.

The second episode covers the recent prosecution of internet activist and Reddit founder, Aaron Swartz, under the Computer Fraud and Abuse Act (CFAA). We discuss the forces that shaped this tragic case, consider whether changes to the CFAA are needed, and debate whether Silicon Valley Congresswoman Zoe Lofgren’s proposed amendment to the CFAA goes far enough.

The third episode will cover recent and proposed noncompete legislation around the country.

To subscribe to our podcast on iTune, click here.

We hope you will listen and enjoy them as much as we do!

Unfair Competition Basics… Boundless Noncompete Restrictions

With some exceptions (most notably California, Oklahoma, and North Dakota) properly-drafted, properly-executed employee noncompete agreements are generally enforceable around the country, as long as, based on the attendant facts, they satisfy the applicable standards. Most often the standards require that the agreement be limited in time (duration of the restriction), space (geographic reach), and scope of restricted activities (although scope is frequently not expressly stated as a part of the test).

So, what happens when a noncompete is not self-limiting geographically?

In states that follow a red-pencil/all-or-nothing approach or blue-pencil approach, the answer is easy: The noncompete will almost certainly fail. (Few rules are absolute in the world of noncometes, however, and this is no different; for example, in some states, if the agreement is limited to specified customers, the need for a geographic restriction may be obviated.)

In states that follow the reformation approach (even when they mistakenly refer to it as “blue penciling”), the question is more difficult. In those states, in theory at least, courts have the ability to, essentially, rewrite the agreement to fit it within the particular state’s rules. And, this is just what the Kentucky Court of Appeals said in a recent case, Charles T. Creech Inc. v. Brown. (The court also has an excellent discussion of Kentucky noncompete law in general.)

In that case, the court remanded the matter back to the trial court to consider the various factors under Kentucky noncompete law. So, we don’t know what the end result will be.

The takeaway, however, is that whether enforcing or defending in a reformation state, you should not assume that absence of a stated geographic limitation – or any of the requirements of the applicable test, for that matter – will be fatal to the enforceability of the agreement. (For which states are reformation states, see our 50-State Noncompete Chart.)

IP Law in 60 Seconds

There are basically four types of intellectual property: patents, copyrights, trademarks, and trade secrets.

Here is a very brief summary of each:

A patent is the right “to exclude others from making, using, offering for sale, or selling the invention throughout the [particular country by which the patent is granted] or importing the invention into [that country]” for a limited time in exchange for public disclosure of the invention when the patent is granted. See United States Patent and Trademark Office. The purpose of this power is to promote the public disclosure of inventions, and consequently, the advancement of science. There are different types of patents, but most often people think of patents as protecting a physical invention, such as the motorized ice cream cone (in the above image).

A copyright is the right to prevent others for a limited time from reproducing, publicly performing, publicly displaying, distributing, and making “derivative works” (i.e., a work based on an existing work) of “original works of authorship fixed in a tangible medium of expression . . . including, literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed.” See United States Copyright Office FAQs. Although copyrights exist from the moment the work is fixed in a tangible medium, registration provides additional protections, most notably, the possibility of “statutory damages” (a way to obtain damages without proof of actual loss) and attorneys’ fees. This blog post is an example of something that is copyrighted, as is the photograph above.

A trademark is any word, symbol, or combination of words and symbols used to identify the source of goods or products in commerce (read, “your brand”). See Mark My Words . . . Trademark Basics. Trademark law (the Lanham Act, as well as state laws) protects trademarks – whether they are registered or not (registration provides additional protections) – so that consumers are free from confusion about what they are buying. As a federal judge, quoting Neil Young’s “Hey, Hey, My, My” once described trademark law, “You pay for this but they give you that.” In short, trademark law prevents anyone from using any word, symbol, or combination of words and symbols, that is confusingly similar to someone else’s trademark. For that reason, trademarks can last forever. Example of trademarks are Ebay’s logo (above) and the Coca Cola logo (see the can below).

A trade secret is any information with commercial or economic value that is not widely known and is kept secret. It can be virtually any type of information, including customer lists, business strategies, technical data, computer programs, and other things, and can last forever. See Terms of Art . . . What is a Trade Secret? Given that trade secrets must be confidential, they are not registered anywhere. The classic example is the secret formula to Coca Cola.

Unfair Competition Basics: Forfeiture-for-Competition

While most people think of noncompete agreements as the traditional, “you can’t work there” type, there is another type of agreement that can create financial incentives so great that, as a practical matter, they have substantially the same effect. They are known as forfeiture-for-competition agreements.

Typically, forfeiture-for-competition agreements impose a penalty for working for a competitor, generally, the forfeiture of the restricted party’s unvested benefits, such as severance pay or stock options or unvested stock. In a variant on the theme (called a “compensation-for-competition” clause), the penalty for working for a competitor would be an obligation to pay money, typically tied to the competitive activities. For example, the restricted party might be required to disgorge some or all – or even some multiple – of the profits or revenues derived from any competitive activities.

Although the specifics of the source of the payment vary between these two types of clauses, they are conceptually the same: a financial penalty for engaging in competitive activities.

Typically, forfeiture-for-competition clauses are subject to the standard noncompete analysis (i.e., reasonable in time, space, and scope, and necessary to protect a legitimate business interest – or whatever variation on the theme may exist in the particular state). That said, forfeiture-for-competition clauses are generally afforded somewhat more latitude than noncompetition agreements, primarily because they don’t (as a matter of law) prohibit someone from working in whatever job they wish; rather, they only impose a cost for doing so.

Even if enforceable, however, a court may still modify a forfeiture-for-competition agreement (assuming the particular state permits modification of restrictive covenants), including in the amount of the forfeiture, so as to render it reasonable.