Background

Ten years ago, a friend in Belmont told me how her career had been derailed by an unfair contract. She asked for a legislative remedy — not for herself, but to protect others.

I agreed to work with her. The project became a central focus for me across five sessions of the legislature. Finally, last week, the Governor signed legislation limiting the use of “non-competition agreements.” The legislation is not the complete remedy she sought ten years ago, but it is a big step forward.

She had earned a prestigious advanced degree in a specialized engineering field. In one of her first jobs as a young engineer, she had felt compelled to sign a non-competition agreement with her employer. That agreement prevented her from working in her chosen field for two years. She felt that the gap put her career on the “slow track” which it ultimately never left.

Working with an employment attorney, Robert Mantell, we developed legislation modeled on the 19th-century law in California that outright prohibits the use of non-competition agreements. In Massachusetts, as in the majority of other states, there was no statutory regulation of non-compete agreements — they were regulated entirely by the common law evolved by judges.

When I filed the outright ban proposal in January 2009, it generated a lot of positive interest from other engineers who resented the limitations that their employers had imposed on them.

It also generated interest from some in the venture capital community who argued that non-competition agreements limited their ability to form teams for new ventures. They suggested that California’s prohibition of non-competition agreements was a major reason for California’s dominance in technology entrepreneurship.

I began to feel that my friend had led me to a wonderful proposal — one that would benefit workers and the economy generally at the same time. But then I met with the board of the Small Business Association of New England. Some of the board members were literally shaking with anger as they explained how my legislation would put all that they had worked to build at risk.

They felt that non-competition agreements were an essential device for protecting the ideas that they had developed through great effort. They promised to leave the state if my legislation passed. Their concerns were echoed by some of the larger business organizations — the Associated Industries of Massachusetts and the Greater Boston Chamber of Commerce.

I soon discovered that another colleague, State Representative Lori Ehrlich, had developed legislation working with her own constituent, Russell Beck an attorney and expert on non-competition agreements. That legislation codified the common law of non-competition agreements — allowing them, but regulating them: They should be limited in term and scope and should be only as broad as necessary to reasonably protect legitimate business interests in confidential information, trade secrets or client relationships.

Lori and I began working together to develop a shared approach and met with workers and leaders in many different industries. Over the years of conversation and debate that followed, my conviction deepened that non-competition agreements were being overused in Massachusetts to the detriment of workers and the economy broadly.

But I also learned that non-competition agreements have very different implications in different business settings and are not always unfair. They are a relatively efficient mechanism for protecting business interests as compared to alternative mechanisms like non-solicitation and non-disclosure agreements which can lead to very expensive litigation.

The legislation that became law last week is a hard fought compromise, banning non-competes for lower level workers, limiting them for higher level workers and providing procedural protections to assure that workers know what they are getting into when they sign them.

Overview of the Legislation as Passed

Here are the specifics of the legislation. It is section 21 of the economic development bill and adds a new section 24L to Chapter 149 of the General Laws.

It defines a “non-competition agreement” as

“an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended. . . .

It makes clear that non-disclosure agreements, non-solicitation agreements and agreements in the context of the sale of a business are not included.

Independent contractors are treated as employees for the purposes of this law and so benefit from all the same new protections.

“Employee”, an individual who is considered an employee under section 148B of this chapter; provided, however, that the term “employee”, as used in this chapter, shall also include independent contractors under section 148B.

It imposes procedural requirements to give employees more opportunity to negotiate about them. If they are to be enforceable, they must:

be in writing

be signed by both the employer and the employee

expressly state that the employee has the right to counsel before signing

be provided to the employee when or before employment is offered.

It codifies the basic common law of when non-competition agreements may be used:

The agreement must be no broader than necessary to protect one or more of the following legitimate business interests of the employer: (A) the employer’s trade secrets, as that term is defined in section 1 of chapter 93L; (B) the employer’s confidential information that otherwise would not qualify as a trade secret; or (C) the employer’s goodwill.

It limits the scope of non-competition agreements in three dimensions, more or less codifying existing common law, but hopefully moving practice in the direction of narrower agreements.

First, it limits them generally to one year in duration.

In no event may the stated restricted period exceed 12 months from the date of cessation of employment, unless the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment.

Second, it establishes a presumption in favor of limits to geographic areas in which the employee has actually worked in the last two years:

The agreement must be reasonable in geographic reach in relation to the interests protected. A geographic reach that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable.

Third, it establishes a presumption in favor of limits to services the employee has actually provided in the last two years.

The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected. A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable.

It categorically prohibits enforcement of non-competition agreements against several classes of workers. These exclusions speak to some of the most egregious examples of overreach of non-competition agreements

(i) [an hourly worker –] an employee who is classified as nonexempt under the Fair Labor Standards Act, 29 U.S.C. 201-219; (ii) undergraduate or graduate students that partake in an internship or otherwise enter a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution; (iii) employees that have been terminated without cause or laid off; or (iv) employees age 18 or younger.

One of the hardest fought issues over the past few years was the issue of “garden leave” — the concept that employees should be paid during the period of a non-competition agreement. There is a fairness argument for compensation while employment is limited. On the other hand, we do have unemployment insurance and, in practice, non-competition agreements are not disabling; they usually do not actually prevent people from working — they just limit employment options.

Massachusetts would have been unique in requiring garden leave payments. (Oregon does have a garden leave rule for broadcasters.) The compromise language does not really require garden leave compensation. It just requires garden leave or other “mutually agreed open consideration”. This language leaves the door wide-open for simply considering some component of usual employment compensation to be the incremental consideration for entering the non-compete agreement.

The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement.

Another hard fought issue was reformation. If a noncompete agreement is litigated and a court finds that the agreement is unreasonable in scope, what should the court do? The compromise preserves the existing common law, which is the most common rule in other states: The court can trim the agreement to make it reasonable.

A court may, in its discretion, reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests.

My own preference on the issue of reformation would be to make the agreement unenforceable if it is found unreasonable, especially if it appears that no effort was made to make it reasonable by tailoring it to the circumstances of the situation. Some agreements I have seen are terribly broad and under the reformation rule, employers have no real incentive to make agreements reasonable — if they come to court, the worst that will happen is that the agreements will be rewritten. Employers see it differently — they do not feel that they should be at risk to entirely lose protection just because a judge disagrees as to what scope is reasonable. This may be an area for further conversation.

The legislation is prospective, applying only to agreements entered into after October 1, 2018.

Section 24L of chapter 149 of the General Laws may be referred to as the Massachusetts Noncompetition Agreement Act and shall apply to employee noncompetition agreements entered into on or after October 1, 2018.

Next Steps and Summary

I’m well aware that some feel that this legislation did not go far enough. It is not an absolute ban and will not provide the blank check for employee recruitment that some venture capitalists seek. Nor will it fully liberate young engineers from obligations to their employers.

But only three other states fully prohibit enforcement of non-compete agreements: California, North Dakota and Oklahoma. Our legislation does prohibit enforcement of non-compete agreements against a great many workers — lower level workers and those actually laid off, certainly the workers most in need.

It will also raise the profile of the decision to sign a non-compete and encourage scrutiny of the reasonability of the terms of the agreements. It may influence hiring practices for higher-level workers. We will need to live into the new law to find out how it actually works. It may be that we have continuing problems or it may be that the soft changes we impose have a greater impact than some expect.

Certainly, no one should underestimate the significance of creating a statutory framework where none previously existed. We now have a framework that we can modify if necessary. The hardest challenge was to create the framework. Adjusting it materially in the future will engage all the same political forces, but the issues will be much narrower.

I’m terribly grateful to a number of my colleagues in both the House and Senate who worked together over the past session to carry the legislation across the goal line — Speaker Deleo and Representatives Wagner and Brodeur, Senate President Karen Spilka and Senators Lewis and Lesser all had critical roles in getting the job done. I am also grateful to Governor Baker for choosing to sign it into law.