Covenant Not to Compete Agreements
"PROTECTING YOUR BUSINESS INTERESTS."
In contract law, a non-compete clause in an employment contract is designed to restrict a departing employee from taking a job in the same profession for a defined period of time and in a defined geographical area or territory. On October 5, 2018, a new law took effect in Massachusetts entitled the “Massachusetts Noncompetition Agreement Act” (the “MNAA”). Prior to the enactment of the MNAA, covenant not to compete clauses in employment contracts were governed largely by case law. The MNAA incorporated most of the traditional case law, and in certain respects, tightened the reins to further limit the scope and breadth of a non-competition agreement. For example, the MNAA now explicitly states that, absent certain extraordinary circumstances (breach of fiduciary duty or employee theft), no non-competition agreement may exceed 12 months. Pre-MNAA non-competition agreements frequently extended two years and sometimes even longer.
In addition to limiting the duration of non-competition agreements, the MNAA enumerates seven other requirements which must be met for the agreement to be deemed enforceable. Those requirements deal with timing, execution, fairness of consideration, reasonableness of scope, geographical reach, protection of legitimate business interests, and consonance with public policy. The MNAA also states that 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.” A garden leave clause is defined, absent the same extraordinary circumstances cited above, as requiring payment to the employee during the noncompete period in the amount of at least 50% of the employee’s highest base salary during the prior two years. Employers may substitute “other mutually-agreed upon consideration” for the garden leave, but no guidance has been provided about the form or amount of any alternative consideration. The MNAA also identifies the following categories of employees for whom noncompetition agreements are unenforceable at any time: (a) all nonexempt employees as defined by the Fair Labor Standards Act; (b) undergraduate or graduate students (c) employees that have been terminated without cause or laid off; and (d) employees age 18 or younger. The aforementioned categories add to the list of other professions in Massachusetts for which non-competition agreements are impermissible by statute, namely, physicians, nurses, psychologists, social workers, broadcasters and lawyers.
The MNAA applies to any agreement between an employer and an employee where the employee agrees not to engage in specified activities competitive with the employer after the employment relationship ends. It does not, however, apply to noncompetition agreements made in connection with the sale of a business or business ownership interest. With respect to a sale of a business, the enforceability of a non-competition agreement is still governed by case law. In Massachusetts, courts look less critically at covenants not to compete because they do not implicate an individual's right to employment to the same degree as in the employment context. The MNAA also does not specifically mention non-solicitation clauses in employment contracts. A non-solicitation clause prevents an employee from contacting a former employer’s clients in order to do business with them. Non-solicitation clauses are often considered
As of January 15, 2020, the "Rhode Island Noncompetition Agreement Act” (the “RINAA”) went into effect. The RINAA is an incredibly stripped-down version of the MNAA. Indeed, the RINAA merely itemizes a substantially similar list of categories employees for which employed-related non-competition agreement are banned. Short of that prohibition, the RINAA really offers nothing more by way of regulation. It would seem that Rhode Island will continue to rely upon its own well-developed area of case law on this subject matter.