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Non-Compete Agreements - When are they Enforceable?

A number of companies require that employees sign agreements promising they will not compete with their employer after they have left their job. These agreements are often in the form of a provision within a larger employment contract or may constitute a separate document altogether.

Certain requirements must be met before a non-compete agreement can be enforced in Massachusetts. These requirements have changed significantly in the past few years. If you are an employer who wishes to include a non-compete agreement in your employment contracts, or you are a person subject to one yourself, you should seek out an experienced employment litigation attorney to help you through this complicated form of employment contract dispute.

What is a Non-Compete Agreement?

A non-compete agreement is a contractual promise that prohibits one of the contracting parties, typically an employee, from engaging in conduct that would compete with the other contracting party, typically an employer.

These agreements are generally banned in Massachusetts unless they meet certain strict requirements. Many of those requirements have been developed by Massachusetts courts. However, a new state law that went into effect on October 1, 2018, codified some of these requirements and added new ones.

What are the Current Requirements for a Valid Non-Compete?

To be valid and enforceable in Massachusetts, a non-compete agreement has to be meet both procedural and substantive requirements.

To be procedurally valid, the agreement must:

  • be in writing,
  • be signed by both the employer and the employee, and
  • state that the employee has a right to consult a lawyer before signing the agreement.

The employer is also required to provide notice of the agreement to the employee. The notice requirements change depending on when the employee is asked to sign the agreement:

  • Beginning of Employment: When an employee is asked to sign the agreement at the beginning of his or her employment, the employer must provide a copy of the agreement to him or her before making a formal offer, or ten days before the employee starts, whichever is first.
  • During Employment: When an employee is required to sign a non-compete in the middle of his or her employment, the employer must give notice of the agreement no less than ten business days before the agreement would become effective.

Additionally, when an employer wants a current employee to sign a non-compete agreement, the worker has to be compensated in some way. Their continued employment is not enough legal consideration to make the agreement binding.

The substance of the non-compete agreement also has to meet certain requirements. Non-compete agreements are only enforceable if they:

  1. are reasonable in duration, geographic area, and scope,
  2. are necessary to protect a legitimate business interest,
  3. are consonant with public policy, and
  4. contain a "garden leave" clause.

1. REASONABLENESS

Only an agreement that is reasonable will be enforced by Massachusetts courts. Reasonableness is tested on a factual basis and takes into account the circumstances of the parties and the public interest. Non-compete agreements must not exceed a reasonable duration, which is defined by statute as no greater than 1 year following the termination of the employee's employment. One exception to this exists in cases where an employee breaches a fiduciary duty, in which case the time duration becomes 2 years.

The agreement must also be reasonable in terms of the geographic area it covers. It will be presumed geographically reasonable if it is limited to the:

  • geographic areas in which the employee provided services or had a material presence or influence within the last 2 years of employment, and
  • specific types of services the employee provided during the last 2 years of employment.

The scope of the agreement relates to the conduct prohibited. The scope should not exceed the activities the employee participated in during the employment period or other reasonable restrictions to protect a legitimate business interest.

2. LEGITIMATE BUSINESS INTEREST

In Massachusetts, a non-compete is only enforceable to protect a legitimate business interest. Certain recognized interests include:

  • the protection of trade secrets,
  • confidential information such as client lists, computer data, and business plans, and
  • customer goodwill.

Non-compete agreements may not be used to prevent ordinary competition or deprive the employee of the right to use skills acquired during employment that do not fit within a protected interest.

3. PUBLIC POLICY CONCERNS

The conduct which the agreement seeks to prevent must not violate the public interest. Generally, public policy favors an employee's ability to move from one job to another without restriction. Only a narrowly tailored agreement to protect a legitimate business interest will fit within public policy.

4. "GARDEN LEAVE" CLAUSE

Non-compete agreements must also contain a "garden leave" clause or some other form of mutually agreed-to consideration. This type of clause requires the employer to pay the employee at least 50 percent of his or her highest salary within the last 2 years during the duration of the non-compete period.

This requirement is relieved if the employee breaches the non-compete agreement.

When are Non-Competes Prohibited?

Massachusetts law bars the use of non-compete agreements for certain professions:

  • Physicians,
  • Nurses,
  • Social Workers,
  • Broadcasters, and
  • Lawyers.

It is against public policy in Massachusetts to allow for non-compete agreements with these specific professions. This is to protect public health and the free flow of information and ideas. A non-compete agreement in any of these areas is unenforceable as a matter of law.

Additionally, a non-compete agreement is not valid against a low-wage employee. The law states that employees who are classified as "non-exempt" under the federal Fair Labor Standards Act (FLSA) may not be required to sign a non-compete agreement.

Non-competes are also prohibited or unenforceable when an employee is terminated without cause or laid off. These workers are not bound by the terms of any non-compete agreement that they have already signed with their employer.

What are the Recent Changes in the Law?

Before 2018, most of the law surrounding non-compete agreements was “common law,” or rules that judges had crafted over the course of decades of resolving hundreds of disputes. While binding, common law is often meant as a temporary solution until the legislature can pass a law. Finally, in 2018, the Massachusetts legislature stepped in and passed the Massachusetts Noncompetition Agreement Act, codified at M.G.L. c. 149, § 24L.

This law went into effect on October 1, 2018, and contributed to many of the current rules governing non-compete agreements that are mentioned above. Some of the most important changes that it made included:

  • Prohibiting non-compete agreements on non-exempt workers,
  • Not enforcing non-competes when the worker was laid off or terminated without cause,
  • Requiring a garden leave provision,
  • Laying out the procedural requirements necessary to make a non-compete valid and enforceable,
  • Requiring notice to the employee of the agreement, and consideration if the agreement is to be signed after the employee was hired,
  • Setting the potential duration, scope, and geographical reach for non-compete agreements, and
  • Naming the potential business interests that can be protected by a non-compete provision.

Some of these changes merely tweaked the existing common law requirements for non-compete provisions. For example, Massachusetts courts used to enforce non-compete agreements if their duration was “reasonable.” Thanks to the new law, there is now a number – the agreements can last for 1 year after termination, or 2 years if the employee breached a fiduciary duty. This eliminates a significant amount of uncertainty that could only be resolved through a complicated lawsuit and an expensive trip to court.

Other changes are entirely new. The prohibition against non-competes for non-exempt workers or for workers who have been terminated without cause were significant deviations from the existing state law regarding non-competes. Additionally, the requirement that employers make “garden leave” payments in order to enforce their non-compete agreement is a huge change and extremely rare in the U.S.

Professions Where Non-Competes are Common

Some professions rely more heavily on non-compete agreements than others. These include:

  • Sales jobs,
  • Executives,
  • Software development,
  • Marketing, and
  • Media.

There are also several situations and circumstances where non-competes are useful and heavily relied upon, like:

  • Sale of a Business: After the sale of a business, it is common for a provision of the sale contract to prohibit the seller from competing with the buyer for a certain period of time.
  • Tech Companies: Companies that develop and sell technology and software commonly include non-competes to protect trade secrets.
  • Executives: Higher level executives for companies are often subject to a non-compete agreement because of their specialized and in-depth knowledge of the company for which they work.
  • Franchise Agreements: Franchise agreements commonly include non-compete provisions because of the trade secrets and business plans the franchisee has access to.

To Fight or Enforce – The Legal Process

If an employee violates the terms of a non-compete agreement, an employer can file a lawsuit to enforce the agreement. The burden of proof rests with the employer in such a lawsuit. This means that the employer must prove that the non-compete satisfies the elements listed above and that the employee signed the non-compete agreement.

The lawsuit must be brought in the county where the employee resides, or in Suffolk County if the employer and employee mutually agree to litigate the case there.

Remedies

If an employee breaches a non-compete, and the employer has satisfied its burden of proof as to the elements, an employer may receive money damages or possibly an injunction. Money damages may include lost profits, out-of-pocket expenses, or other financial damages that result from this type of breach of contract.

An injunction is a court order that prevents a person from engaging in a specific act or compels that person to engage in a specific act. In the non-compete context, the typical injunction is to prevent the employee from working for a new employer.

To obtain an injunction, an employer must prove:

  • The likelihood of success on the merits,
  • That irreparable harm will occur if the injunction is not granted, and/or
  • That there is a risk of irreparable harm to the employer.

Injunctions are equitable remedies and are common in non-compete cases so long as the requisite requirements are proven.

Possible Defenses

An employee who is the subject of a lawsuit may defend themselves from the agreement in certain ways. Non-compete agreements are interpreted in favor of the employee because courts do not wish to take away an employee's livelihood, and because the employee had a weaker bargaining position than their employer during the negotiation process.

First, an employee may show that the non-compete does not meet the elements of a valid agreement. If the non-compete agreement violates any of the essential elements, Massachusetts courts will not enforce the agreement. Non-competes are contracts: Contractual defenses can be used to prevent them from being enforced.

Another possible remedy is the use of the "blue pencil," or the power of a Massachusetts court to reform the terms of the non-compete agreement so that the unreasonable provisions are rewritten to become reasonable and enforceable. This may include the reformation of the geographical area covered by the agreement, the duration of the agreement, or the terms of the garden leave clause. However, employers should not rely on this "blue pencil" option as this is completely within the court's discretion. If the judge does not want to amend the agreement to make it enforceable, it will get thrown out, completely.

Crafting an enforceable agreement from the start is a much better option.

The Katz Law Group: Business Litigation in Massachusetts

Non-compete agreements are subject to very specific legal requirements. If your company intends to use non-compete agreements in contracts or wishes to enforce an agreement, or if you are an employee who feels overly restricted by a non-compete or are being accused of violating one, you should contact an experienced Massachusetts attorney for help.

At the Katz Law Groupwe can ensure compliance with Massachusetts law and protect your rights in non-compete agreements. Please feel free to call us at (508) 480-8202 or contact us on our website. We serve clients throughout Massachusetts, including in WorcesterFramingham, and Marlborough.

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