The Massachusetts Legislature passed non-compete reform in the final days of the 2018 session which will take effect on October 1, 2018. A non-compete clause, or covenant not to compete, is a clause under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). The purpose of these clauses is to protect employers against an employee who may exploit confidential information, trade secrets, or sensitive information, such as customer/client lists, business practices, etc., to gain a competitive edge when working for a competitor or starting a business. These types of clauses are sometimes referred to as "restrictive covenants."
Massachusetts has long debated non-compete reform. This reform will not only affect biotech and pharma employers in Boston, but other employers in Massachusetts as well. While employers will still be able to use non-compete agreements for most workers under the new law, employers will have to adopt a new approach to drafting, implementing, and enforcing these agreements. Some key components of the new law, known as “An Act relative to the judicial enforcement of noncompetition agreements,” (the “Act”) are provided below:
Employer need to pay during the restricted period: The Act requires employers to pay employees “garden leave pay” or some “other mutually-agreed upon consideration” during the restricted period. The Act imposes no specific requirements on the value or timing of any “other” consideration the employer and employee may agree upon as an alternative to garden leave.
The new law only applies to agreements entered into on or after October 1, 2018: Older agreements are not voided, but employers should consider revisiting the existing agreements and determining whether they should be updated or amended.
Continued employment is not sufficient consideration: Employers must provide “fair and reasonable consideration independent from the continuation of employment.” Therefore, for non-compete agreements signed after employment has commenced, continued employment is not sufficient consideration.
Non-competes must be reasonably tailored to protect a legitimate business interest: The Act recognizes three “legitimate business interests”: (a) the employer’s trade secrets; (b) the employer’s confidential information that otherwise would not qualify as a trade secret; and (c) the employer’s goodwill. Under the Act, the non-compete covenant will be presumed to satisfy this element if the employer can demonstrate that no other type of restrictive covenant (e.g., a non-solicitation or non-disclosure covenant) would be sufficient to protect the legitimate business interest at issue.
Non-competes must be limited in duration and geographical scope: Non-competes cannot last more than one year and must be limited to the area where the employee actually worked or had a material presence in the prior two years.
Non-competes include both employees and independent contractors: Under the Act, the definition of a covered “employee” includes independent contractors.
Not all employees are covered by the Act: Employers cannot enforce non-competes for non-exempt employees, college or graduate students, short-term employees, or anyone under the age of 18.
Non-competes may not always be enforceable: If an employee is terminated without cause, a non-compete will be void.
The new law does not apply to all agreements with restrictive covenants: The law does not cover certain types of agreements, including non-solicitation, non-disclosure, and certain separation agreements. These agreements will continue to be analyzed under Massachusetts common law, but now against the backdrop of the new public policy on non-compete restrictions.
The new non-compete law has wide-ranging legal and practical implications for employers in Boston and Massachusetts in general. Employers will now have to evaluate their overall non-compete strategy and human resources processes to ensure compliance with the new law. Moreover, employers will have to review their existing non-compete agreements and update their agreements, if necessary, to ensure compliance. Given the stakes involved, and how widely applicable it is, disputes over the new law will likely take place. We will keep you updated on any developments.
BioPharma Law Blog posts updates and analyses on IP topics, FDA regulatory issues, emerging legal developments, and other news in the constantly evolving world of biotech, pharma, and medical devices.