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Federal ruling highlights importance of strict compliance with Mass. noncompete statute

A recent decision by a U.S. District Court judge has the distinction of being the first reported court holding directly applying the Massachusetts Non-Competition Agreement Act of 2018.

In a ruling in July, Judge Timothy S. Hillman declined to enforce a non-competition agreement between a Massachusetts employer and a former employee, on the basis that the noncompete failed to meet two of the MNAA’s specific requirements.

Hillman’s decision thus serves as an important indicator to employers that Massachusetts courts are likely to interpret and apply the requirements of the MNAA in a strict fashion.

Background to MNAA

Non-competition agreements are used by employers in a variety of fields to try to ensure that former employees will not improperly use proprietary information they acquired during the course of their employment. Noncompetes typically proscribe a former employee from working for a competitor for a set amount of time after the individual’s separation from employment.

Legal standards governing the enforceability of noncompetes vary from state to state. While a few states (such as California) flatly prohibit noncompetes, many other states apply common-law reasonability standards in determining whether to enforce them.

Massachusetts was one such common-law state until 2018, when the MNAA was enacted to establish new requirements for noncompetes entered into after Oct. 1, 2018.

MNAA’s requirements

Under the MNAA, G.L.c. 149, §24L, in order to be valid and enforceable, a non-competition agreement must be consistent with public policy and, at a minimum, meet the following specific requirements:

Duration. The MNAA sets a one-year limit on the period of time over which an employer can require a former employee to refrain from competition.

A noncompete clause will be valid for, at most, one year after an employee’s departure, except where the employee misappropriates trade secrets or otherwise breaches a fiduciary duty to his or her former employer, in which case the noncompete may be enforced for up to two years after the employee’s departure.

Scope. In line with established common-law principles, the statute provides that a noncompete can be only so broad as is necessary to protect the employer’s legitimate business interests. In particular, a noncompete must be “reasonable” in temporal and geographic scope, as well as in the scope of activities prohibited.

The statute specifies that a noncompete will be considered presumptively valid if it is limited to (a) those locations where an employee provided services or otherwise had a “material presence or influence” within his or her final two years of employment, or (b) the specific types of services provided by the employee during those final two years.

Garden leave and independent consideration. Perhaps the most significant change brought about by the MNAA is a requirement that an employer pay a former employee during any post-employment restricted period.

Specifically, an employer must pay a former employee either (a) at least 50 percent of his or her annual salary for the duration of the restricted period (so-called “garden leave”), or (b) “some other mutually agreed upon consideration.” In either event, the post-employment consideration must be specified in the non-competition agreement.

Additionally, a noncompete entered into after the start of the individual’s employment is valid only if it provides for “fair and reasonable” independent consideration at the inception of the agreement, beyond mere continued employment. This new requirement overturned longstanding Massachusetts court precedents under which continued employment was deemed sufficient consideration for a noncompete.

Categories of employees subject to non-competes. The statute provides that noncompetes may not be enforced against (a) employees who are non-exempt (i.e., overtime-eligible) under the FLSA, (b) employees age 18 or younger, (c) undergraduate and graduate students working part time, and (d) employees who are laid off or terminated “without cause” (notably, the term “cause” is not defined in the statute).

Review periods. The MNAA mandates that an employer allow a minimum time period for an employee to review a non-competition agreement before being required to sign and return it.

For a new employee, a noncompete must be provided either (a) with the formal offer of employment, or (b) at least 10 business days before the employee’s first day of work, whichever occurs first.

For an existing employee, a noncompete must be presented to the employee at least 10 business days before the agreement is to become effective.

Right to counsel. Finally, for both new and existing employees, a noncompete must state that the employee has the right to consult with counsel before signing the agreement, and the noncompete must be signed by both the employee and the employer.

Court decision

The case at issue, KPM Analytics N. Am. Corp. v. Blue Sun Scientific, LLC, et al., involved various claims asserted by KPM, a scientific instruments manufacturer, against a competitor, Blue Sun Scientific, and certain former KPM employees who had gone to work for Blue Sun.

Judge Hillman’s decision involved, in part, a noncompete that KPM sought to enforce against a former employee, Phillip Ossowski, who had become employed by Blue Sun. Because Ossowski had signed the noncompete after Oct. 1, 2018, it was subject to the requirements of the MNAA.

Hillman granted Ossowski’s motion to dismiss KPM’s claim against him for breach of his non-competition agreement, finding that the agreement failed to comply with two of the express requirements of the MNAA.

gibbings-jesse-webWhile the decision does not explicitly state this, it can be interpreted as suggesting that failing to comply with even one of the specific requirements of the MNAA will automatically render a non-competition agreement unenforceable.

First, Hillman noted that the noncompete did not “expressly state that the employee has the right to consult with counsel prior to signing” the agreement.

Second, and even more importantly, the noncompete did not include any post-termination “garden leave” provision, or otherwise provide for the employee to receive any special consideration aside from the employment itself.

Those omissions, Hillman concluded, were fatal to KPM’s efforts to enforce Ossowski’s non-competition agreement. While the decision does not explicitly state this, it can be interpreted as suggesting that failing to comply with even one of the specific requirements of the MNAA will automatically render a non-competition agreement unenforceable.

Implications for employers

As Hillman’s decision highlights, it is critical that Massachusetts employers ensure that noncompetes entered into since the MNAA went into effect in October 2018 comply with all of the requirements of the statute. Overlooking even a single one of those requirements may cause an otherwise valid noncompete to be struck down entirely.

Additionally, various important issues remain unresolved under the MNAA — for instance, (i) what constitutes “cause” for termination of employment; (ii) whether there are any limits to what qualifies as mutually agreed-upon post-employment consideration for a noncompete; and (iii) whether a non-competition agreement that violates any of the requirements of the MNAA will automatically be struck down, regardless of how minor or technical the violation might be.

Massachusetts employers should remain alert for future court holdings addressing such issues.

Jesse R. Gibbings practices at Schwartz Hannum in Andover, Massachusetts, which represents businesses and educational institutions in labor, employment, litigation and counseling matters.

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