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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 writing altogether.

Certain requirements must be met before a non-compete agreement can be enforced in Massachusetts. 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 consult with an experienced Massachusetts attorney.

Elements of a Valid Non-Compete Agreement

A non-compete agreement is a contractual promise which prohibits one of the contracting parties, typically an employee, from engaging in conduct which is competitive with the other contracting party, typically an employer. Non-compete agreements are enforceable in Massachusetts but to be enforceable they must meet certain requirements.

Non-compete agreements are enforceable if they are:

  1. Reasonable in duration, geographic area, and scope;
  2. Necessary to protect a legitimate business interest; and
  3. The agreement is consonant with public policy.

1. Reasonableness

Only an agreement which 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, that is, an employee may not be barred from competing against his or her employee for an indefinite or overly lengthy period of time.

The test of reasonableness also applies to the geographic area the agreement is to cover. For example, a court may decide that it is unreasonable to prevent competition country-wide when the business only operates in Massachusetts. The reasonableness of the geographic area will depend on the specific facts of the case.

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 restriction 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;
  • 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.

Professions Where Non-Competes are Common

While non-compete agreements may be found in a variety of situations, there are certain professions where these agreements are more common.

  • 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 which 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.

Increasingly, the use of non-compete agreements has spread to lower paid and non-specialized positions, even reaching as far as hourly fast food restaurant workers.

Where Non-Competes are Prohibited

As a matter of public policy, Massachusetts has enacted legislation which bars the use of non-compete agreements for certain professions:

  • Physicians;
  • Nurses;
  • Social Workers;
  • Broadcasters;
  • Lawyers.

It is against public policy in Massachusetts to allow for non-compete agreements with these specific professions. This is to protect the 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.

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.

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 which result from the breach.

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;
  • 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 him or herself 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 the employee has a weaker bargaining position.

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, and as such contractual defenses also apply.

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 unreasonable provisions are transformed to become reasonable. This may include the reformation of the geographical area covered by the agreement or the duration of the agreement.

Knowing the Law

Non-compete agreements are subject to very specific legal requirements. If your company intends to use non-compete agreements in contracts, wish to enforce an agreement, or you are an employee who is the subject of a lawsuit you should contact an experienced Massachusetts attorney for help.

The attorneys with the Katz Law Group 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.

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