The Massachusetts Noncompetition Agreement Act (the “Noncompete Act”) significantly altered the law governing the enforcement of noncompetition agreements in the Commonwealth. But until ambiguities in the Noncompete Act are resolved by courts, we cannot be confident as to just how sweeping the changes are. Even the seemingly simple question of whether an agreement is governed by the Noncompete Act may prove difficult to answer because of its ambiguities.
The simple answer is that the Noncompete Act applies to every (1) noncompetition agreement (2) governed by Massachusetts law, (3) between an employer and an employee or independent contractor, (4) which the parties signed on or after October 1, 2018. But the simple answer masks several ambiguities that courts will have to address and resolve.
The Noncompete Act is fairly clear as to what constitutes a noncompetition agreement, which it defines 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.” M.G.L. c. 149, § 24L(a). The Noncompete Act specifies that the following agreements are not noncompetition agreements:
(i) . . . covenants not to solicit or hire employees of the employer;
(ii) covenants not to solicit or transact business with customers, clients, or vendors of the employer;
(iii) noncompetition agreements made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal;
(iv) noncompetition agreements outside of an employment relationship;
(v) forfeiture agreements;
(vi) nondisclosure or confidentiality agreements;
(vii) invention assignment agreements;
(viii) garden leave clauses;
(ix) noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance; or
(x) agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.
Parties that fail to follow the letter of the statute but believe that the agreement falls into one of these exceptions may be surprised to find out that their agreement is ultimately subject to the Noncompete Act. For example, the Noncompete Act appears to exempt noncompetition provisions in separation or severance agreements. But does the statutory exemption only apply if the employee is “expressly given seven business days to rescind the agreement”? Presumably, but not necessarily, this means that if the severance or separation agreement does not state on its face the employee has seven business days to rescind acceptance, the agreement is a noncompetition agreement subject to the Noncompete Act, or at least certain provisions of the statute. For example, to be enforceable, the noncompetition agreement would have to be supported by a garden leave clause or other mutually agreed-upon consideration recited in the agreement, but the requirement that the agreement be supported by “fair and reasonable consideration” would not be applicable. The reasonableness requirements would apply, as would the prohibition against enforcing noncompetes against various categories of workers, but the notice requirements and the requirements that the agreement be in writing and signed by the employer and employee would not apply.
Governed by Massachusetts Law
A noncompetition agreement is subject to the Noncompete Act only if it is governed by Massachusetts law, that is, if in litigation a court would apply Massachusetts law, as opposed to that of some other state, to determine whether the agreement is enforceable. Whether the suit is brought in a Massachusetts court or a court outside Massachusetts may prove to be determinative, but here I focus only on lawsuits pending in Massachusetts, and assume that the agreement was entered into on or after October 1, 2018, and therefore might be subject to the Noncompete Act. There are three possible postures to consider.
The agreement contains a Massachusetts choice of law provision. A Massachusetts court will apply Massachusetts law to a noncompetition agreement that contains a Massachusetts choice of law provision, “‘as long as the result is not contrary to public policy.’” Oxford Global Resources, LLC v. Hernandez, 480 Mass. 462, 468 (2018) (quoting Hodas v. Morin, 442 Mass. 544, 549-550 (2004)). However, Massachusetts courts “will not honor the parties' choice of law where ‘(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) [where] application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state [in the determination of the particular issue]’ and is the State whose law would apply . . . ‘in the absence of an effective choice of law by the parties.’” Id. at 468-49 (quoting Hodas v. Morin, 442 Mass at 550). Applying this standard, and because of the fundamental policy in California against the enforcement of employment noncompetition agreements, the Supreme Judicial Court held that, notwithstanding a Massachusetts choice of law provision, it was proper to apply California law to the noncompetition agreement of a California resident working for a Massachusetts employer. Id. at 467-72. It seems likely, however, that except in the situation at issue in Hernandez, i.e., a California employee working for a Massachusetts employer, Massachusetts courts will enforce a Massachusetts choice of law provision in an employee noncompetition agreement.
The agreement contains a provision selecting the law of another state. Where a noncompetition agreement contains a choice of law provision specifying the law of a state other than Massachusetts, and the employee worked for the employer or resided in Massachusetts, Massachusetts courts are bound by the Noncompete Act to ignore the choice of law provision and apply Massachusetts law. The Noncompete Act provides: “No choice of law provision that would have the effect of avoiding the requirements of this section will be enforceable if the employee is, and has been for at least 30 days immediately preceding his or her cessation of employment, a resident of or employed in Massachusetts at the time of his or her termination of employment.” M.G.L. c. 149, § 24L(e). However, if the employee did not work or reside in Massachusetts during the statutory period, § 24L(e) would not apply and the Massachusetts court would enforce the choice of law provision as long as it is not contrary to public policy.
The agreement contains no choice of law provision. Massachusetts courts also will apply Massachusetts law to a noncompetition agreement if the agreement is silent as to choice of law and the court finds that Massachusetts “has the most significant relationship to the transaction and the parties.” Bushkin Assocs., Inc. v. Raytheon Co., 393 Mass. 622, 632 (1985) (quoting Restatement (Second) of Conflict of Laws § 188(1) (1971)). There is no simple formula for determining which state has the most significant relationship to the agreement or the parties. The court first will consider: the place of contracting, negotiation, and performance, the location of the contract’s subject matter, and the parties’ physical presence. Id. (quoting Restatement (Second) of Conflict of Laws § 188(2) (1971)). However, the court also will consider the following factors, which arguably are more significant: “‘(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.’” Id. (quoting Restatement (Second) of Conflict of Laws § 6(2) (1971)). Clearly, whether Massachusetts law will govern a specific agreement depends on the specific circumstances of the case.
Between an employer and an employee or independent contractor
As noted above, the definition of “noncompetition agreement” in the Noncompete Act limits the term to agreements between employers and employees. M.G.L. c. 149, § 24L(a). However, the Noncompete Act defines “employees” as including both employees and independent contractors, as defined at M.G.L. c. 149, § 148B. Although unlikely to be an issue often, this ambiguity is worth flagging.
Signed on or After October 1, 2018
The Noncompete Act only applies to noncompetition agreements entered into on or after October 1, 2018. This seems simple enough. But it raises a question: if a noncompetition agreement is originally signed prior to October 1, 2018, but amended by the employee and employee after October 1, 2018, is it subject to the Noncompete Act? If the amendment changes material terms of the noncompetition agreement or is signed in connection with a material change in employment, including a significant promotion or other change in job responsibilities, courts may well conclude the amendment constitutes a new agreement. The new agreement would be subject to the Noncompete Act, and thus the enforceability of the noncompetition agreement would be determined by the considerably more stringent factors set forth in the statute than the pre-statute common law.
All of these factors underscore that the Noncompete Act is not as clear as it could be, and its future impact and import will be governed by the litigation that is sure to come. If you need assistance with negotiating or litigating about a noncompete agreement, contact John Bauer for assistance.