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The Latest on Non-Competition Agreement Legislation

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12.19.2013 | Advisory

In the current Massachusetts legislative session, we are witnessing yet another run at statutorily imposed restrictions on employee non-competition agreements. Once again, bills invalidating all employee non-competition agreements have been offered, but those bills have failed to gain any momentum on Beacon Hill. As in past years, there is no consensus supporting such a monumental shift in the non-compete laws of the Commonwealth. Most in the Legislature seem to acknowledge that reasonably tailored non-competition agreements play a vital role in protecting legitimate business interests and attracting jobs to Massachusetts.

However, a less sweeping bill proposing presumptive limits on the appropriate duration of an employee non-competition agreement is gaining significant attention and support, including from the Governor’s office. House Bill 1715, a copy of which can be found here, is currently before the Joint Committee on Labor and Workforce Development. The Bill seeks to place a presumptive six-month durational limit on certain employee non-competes. With the Bill gaining more traction than previous efforts, Massachusetts businesses should consider whether to voice their support for or opposition to a piece of legislation that would dramatically affect both the enforceability of non-competition agreements and an employer’s ability to protect confidential information, trade secrets and key customer relationships. In weighing the proposed legislation, businesses may wish to consider the following: 

The Bill declares that a non-compete that restricts an employee’s mobility for longer than six months shall be presumed unreasonable in duration. This would be a fundamental change in the law, as for decades, Massachusetts courts have enforced non-competes as long as two years or even more. In many industries, a six month restriction may not be long enough to protect confidential information, vital trade secrets or legitimate customer relationships. It is for this reason that currently the vast majority of businesses that utilize non-competition agreements throughout the country include durational limits longer than six months. 

Under the proposed law, a non-compete of six months or less shall be presumed reasonable in duration. This does not mean that a short non-compete would be automatically enforceable, but only that it would be presumed reasonable on the issue of duration. A non-compete still would have to meet other longstanding, judicially crafted requirements, including appropriate limitations on geographic scope, consideration, and protection of a legitimate business interest such as customer goodwill or confidential information. The proposed legislation does not address any of these other recognized requirements. 

The Bill offers three exceptions that permit the enforcement of a non-compete even where the court finds it otherwise would be unreasonable in duration: (1) cases involving an employee’s breach of fiduciary duty; (2) cases involving the employee’s theft of employer property; and (3) cases involving an employee whose annual compensation equals or exceeds $250,000. 

Significantly, the Bill does not apply to limit the enforceability of agreements that prohibit the solicitation of an employer’s customers or other employees, or that were executed in connection with the sale of a business. 

The Bill states that it applies only to non-competes executed on or after January 1, 2014, which may complicate an employer’s administration or enforcement of agreements entered before and after the passage of the law. 

Unlike other proposals, the Bill does not address the use of provisions that would compensate the former employee during the restricted period, and whether such provisions would impact the reasonableness of a non-compete’s duration.

While the proposed legislation ostensibly is intended to be a compromise resolution, the Bill would displace longstanding common law precedent establishing non-compete durational standards, and likely would lead to increased litigation about the permissible scope of non-competition agreements. The full impact of the Bill, if passed, cannot readily be predicted and its meaning and effect will only be understood through litigation. Despite the narrow focus of the Bill, courts may look at this legislation as demonstrating a general public policy against restrictive covenants, making it generally more difficult to enforce such agreements. On the other hand, courts may construe the legislative intent behind the Bill as expressly endorsing certain types of restrictive covenants, such as customer or employee non-solicits.

Should Massachusetts employers have questions or concerns about this proposed legislation, they should speak to their Representative or Senator, or work with business groups such as Associated Industries of Massachusetts, to communicate their views. Employers should engage in the ongoing dialogue now, while the Bill remains subject to debate and revision at the committee level, especially since the Bill may be the subject of amendments over the next few months.

This advisory was prepared by Christopher H. Lindstrom, a member of the Labor, Employment and Benefits practice group at Nutter McClennen & Fish LLP. For more information, please contact Christopher at 617.439.2698 or your Nutter attorney at 617.439.2000.

This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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