Massachusetts Legislature Passes Comprehensive Noncompetition and Trade-Secrets Reform
The Massachusetts General Court has passed legislation that, if signed by the governor, will comprehensively reform the law governing employee noncompetition agreements and trade-secret misappropriation. If enacted, these laws will become effective October 1, 2018, giving Massachusetts employers only two months to assess their current practices and adapt to the new laws.
Under the new legislation, noncompetition agreements must be written, signed by both the employer and the employee, and expressly state that the employee has the right to consult with counsel prior to signing. Additionally, agreements entered into while the employee is already working for an employer must be supported by “fair and reasonable consideration independent from the continuation of employment.”
Limits on Noncompetition Agreements
The legislation also codifies certain limits on the scope of noncompetition agreements. Noncompetition agreements can only be used to protect an employer’s trade secrets, confidential information, and goodwill. The noncompetition period cannot extend more than one year beyond the employee’s departure. The period, however, can extend to two years if the employee has breached a fiduciary duty owed to the employer or has misappropriated the employer’s property. In geographic terms, a noncompetition agreement will be presumed reasonable if it is limited to the area in which the employee provided services or had a “material presence or influence” in the two years prior to her or his termination. An agreement must also be reasonable in “the scope of the proscribed activities in relation to the interests protected,” which appears to invite courts analyzing noncompetition agreements to conduct an agreement-specific balancing test.
Requirement to Compensate Employees While the Agreement Is in Effect
Of particular note, noncompetition agreements must provide for compensation, even to a departed employee, while the noncompetition period is in effect. The new law appears to contemplate that employees will generally be entitled to a pro rata portion of at least 50 percent of their highest annualized base salary within the two years preceding their termination.
The legislation specifically empowers courts to “blue pencil” or revise an unenforceable noncompetition agreement. And an unenforceable noncompetition provision will not void the broader contract or agreement of which it is a part.
Contractual choice-of-law provisions will not likely shield employers from the effects of this Massachusetts legislation. A choice-of-law provision that would have the effect of circumventing this statute will be void if the employee was a resident of or employed within Massachusetts the day of her or his termination and at least 30 days immediately prior.
Importantly, this legislation is limited to noncompetition agreements; it does not apply to other types of restrictive covenants, such as non-solicitation agreements and nondisclosure agreements, among others.
Also, the legislation does not address the so-called “material change” doctrine, which has been used by some courts applying Massachusetts law to invalidate noncompetition agreements because an employee’s job duties and compensation materially changed after she or he executed a noncompetition agreement.
Misappropriation of Trade Secrets
Massachusetts’ trade-secrets law has largely been a common-law creature. With the new legislation, however, Massachusetts will join virtually every other jurisdiction in the country and adopt a statutory scheme modeled on the Uniform Trade Secrets Act. Among other things, the determination of whether information is a trade secret would likely no longer depend upon courts conducting a six-factor balancing test. And the adoption of the Uniform Trade Secrets Act should dispel any lingering controversy as to whether a trade secret must remain in “continuous use” to warrant protection in Massachusetts, as such a requirement is specifically rejected in the Uniform Trade Secrets Act.
This legislation potentially marks an important development in Massachusetts labor and employment law and could change the legal landscape regarding noncompetition agreements and trade-secret misappropriation for years to come. Many of the new provisions are consistent with existing common law and should be of little surprise. Nevertheless, with the potential effective date only two months away, time is of the essence. The law will only apply to noncompetition agreements entered into on or after October 1, 2018. Still, employers should assess their current practices and noncompetition agreements and determine whether any changes need or should be made. Employers in other states should stay alert to see if this new law starts a trend in other states.