The federal district court in Massachusetts recently weighed in on the Massachusetts Noncompetition Agreement Act and what has to be done to make a non-compete agreement binding in the state. In spite of the short treatment that the Act gets in the case, the ramifications of the ruling are significant.
District Court Briefly Touches on Non-Compete Agreements
The case is KPM Analytics North America Corp. v. Blue Sun Scientific. The 71-page ruling covered a litany of claims and counterclaims against a host of parties. In short, KPM Analytics sued Blue Sun for unfair trade practices, as well as a bunch of KPM's former employees for allegedly stealing trade secrets.
Many of those employees had non-compete agreements.
One of them fell under the Massachusetts Noncompetition Agreement Act at M.G.L. c. 149, §24L.
In a short paragraph at the end of the ruling, the court noted that the Act sets out 8 requirements for a binding non-compete clause. 2 of those requirements were missing in this particular agreement:
- A statement that the employee has a right to counsel before signing the agreement, and
- A garden leave clause or other consideration to support the non-compete clause.
Without those provisions, the court found the non-compete agreement to be unenforceable. It dismissed the breach of contract claim against the former employee.
The Job Is Not Adequate Consideration
The short paragraph at the end of KPM Analytics is the first time a Massachusetts court has said anything binding about what amounts to adequate consideration to support a non-compete agreement.
Recall that “consideration” is a legal term of art in contract law. It refers to the act of each party agreeing to give up something in order to receive something else.
Since the Noncompetition Agreement Act was passed in 2018, business and contract litigation lawyers have been unsure how much consideration was enough to make a non-compete agreement enforceable under the Act: Does the employer have to offer some additional incentive, like a cash bonus, for the employee to sign the non-compete? Or does the mere fact that the employer is hiring the employee suffice?
The short paragraph in KPM Analytics suggests that the job, alone, is not adequate consideration for a non-compete agreement. Instead, employers have to offer something more.
Why Employers Should Consult With a Massachusetts Employment Lawyer
First, employers hiring someone new to the company and who want the new hire to sign a non-competition agreement will have to offer something up in exchange for the promise not to compete. The non-compete agreement in KPM Analytics failed because it explicitly said that the non-compete was “in consideration for his/her employment by the company.” Now, employers have to offer something else, in addition to the job.
Second, there are current employees who have signed a non-compete agreement since October 1, 2018, when the Act went into effect. If these non-compete agreements do not have a garden leave clause or consideration in addition to employment, they are not binding under KPM Analytics. Employers who want to modify the contract, though, will have to provide “fair and reasonable” consideration to make it binding.