MASSACHUSETTS NONCOMPETITION AGREEMENT ACT: A ROSE OF A DIFFERENT COLOR.

Author:Huang, Helen Yuxuan
 
FREE EXCERPT

"America's competitive advantage lies in its human talent. All of us should be doing everything we can to cultivate and develop our work force." (1)

  1. INTRODUCTION

    A noncompete agreement or a noncompete clause in an employment contract (collectively referred to herein as the "noncompete(s)") is a popular instrument among employers to prevent their employees from working for their rivals post-employment. (2) However, courts across the nation are divided on the enforceability of noncompetes due to the constraints that they impose on employees' post-employment mobility. (3) On one end of the spectrum, states in favor of protecting employees' mobility have completely banned noncompetes. (4) On the other end of the spectrum, states in favor of protecting employers' business interests understand the importance of noncompetes, but historically have been reluctant to enforce them. (5) Massachusetts falls in the latter category. (6)

    In Massachusetts, a state driven by its skilled workforce and technological innovation, noncompetes are popular instruments that employers use to prevent the transfer of skills and knowledge of their employees to competitors. (7) However, there is no clear framework as to how enforceability is determined and thus, for over a decade, the Massachusetts legislature has attempted to pass legislation to regulate noncompetes. (8) After years of debate, Massachusetts passed a bill that not only codified Massachusetts' noncompete law for the first time, but also made Massachusetts the first state in the United States to provide employees with the benefit of getting compensated for refraining from engaging in employment with their employers' competitors, such right is known as garden leave. (9)

  2. HISTORY

    1. The Origin of Garden Leave

      Garden leave is a well-established British phenomenon commonly referred to as being paid "while you tend your garden," or in other words, "being paid while doing nothing." (10) The doctrine is a variation of a traditional notice provision. (11) The employee, instead of continuing his or her work during the notice period, is relieved from his or her duties and responsibilities; however, the employee is employed with his or her employer, and hence, cannot commence work for a competitor. (12) The development of garden leave in Britain was largely in response to judicial hostility toward noncompetes concerning fairness to employees. (13) The garden leave is the product of judicial system's favoritism towards freedom of contract where the British courts want to ensure that employees can freely choose their employers, or for a lack of better word, to compete. (14) Ironically, the concept of garden leave portrays exactly what it is trying to prevent restricting employees' mobility to move from one employer to another. (15) Nevertheless, British courts have enforced garden leave if the undue burden of the restrictions placed on employees are alleviated through some form of monetary compensation. (16) Garden leave in Britain continues to develop through case law and is widely and judicially recognized and enforced through the remedy of an injunction. (17)

    2. Garden Leave In The United States

      Garden leave is relatively new in the United States and thus, there are no precedents explicitly addressing its enforceability. (18) However, some states, such as New York and Delaware, where human capital is highly valued, have enforced similar benefits as garden leave. (19) When disputes arise in the aforementioned courts, enforceability is determined by "weigh[ing] the need to protect the employer's legitimate business interests against the employee's concern regarding the possible loss of livelihood." (20) When restrictions are counterbalanced with some payment of employee's salary and entitlements, such as health and life insurance premiums, courts appear to be more willing to enforce such restrictions. (21)

    3. Massachusetts Noncompetition Agreement Act

      On August 10, 2018, Governor Charlie Baker signed a Massachusetts Noncompete Reform Bill, which codified Massachusetts' noncompete law for the first time. (22) The statute, Massachusetts Noncompetition Agreement Act ("Act"), became effective on October 1, 2018. (23) The Act binds all noncompete contracts or employment contracts containing noncompete clauses entered from that day onwards. (24) The Act maintains aspects of existing law, including the requirement that noncompetes are necessary to protect recognized legitimate business interests, such as trade secrets. (25) Additionally, the Act requires that terms of agreement regarding time, space, and scope are reasonable, noncompetes align with public policy, and courts have the power to amend the terms of noncompete if the terms are deemed overly broad. (26) The Act requires that there must be a garden leave or some "other mutually-agreed upon consideration" provision in order to have a noncompete to be effective. (27)

      Garden leave is defined in two places under the statute. (28) Section 24(L)(a) defines a garden leave clause as: "an employer agrees to pay the employee during the restricted period, provided that such provision shall become effective upon termination of employment unless the restriction upon post-employment activities are waived by the employer or ineffective under subsection (c)(iii)." (29) Section 24(L)(b)(vii) points out that every noncompete must 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 noncompete agreement." (30) Additionally, the statute provides that:

      To constitute a garden leave clause within the meaning of this section, the agreement must (i) provide for the payment, consistent with the requirements for the payment of wages under section 148 of chapter 149 of the general laws, on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee's highest annualized based salary paid by the employer within the 2 years preceding the employee's termination; and (ii) except in the event of a breach by the employee, not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments; provided, however, if the restricted period has been increased beyond 12 months as a result of the employee's breach of a of a fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, the employer shall not be required to provide payments to the employee during the extension of the restricted period. (31) Neither [section] 24(L)(a) nor [section] 24(L)(b)(vii) provides a clear and concise interpretation of what constitutes "mutually-agreed upon consideration," which will later be discussed as a potential slippery slope for employers to choose. (32)

  3. ANALYSIS

    1. Case Law Development

      Caselaw in America involving garden leave or garden leave clauses is sparse because the instrument is relatively new to this country and "is not utilized by many employers in their standard employment contracts." (33) As to the employers that do use it, not many employees affected by such clause would challenge the instrument because it is generally shorter in time and provides adequate compensation to departing employees. (34) Garden leave clauses that are challenged often stem from a noncompete of an employer in the financial services industry "and are thus subject to the Financial Industry Regulator Authority (FINRA)." (35)

      In recent cases involving noncompetes with provisions that resemble the Massachusetts garden leave provisions in the Act, courts across the nation have reached conflicting conclusions on the enforceability of such noncompetes. (36) Massachusetts along with other jurisdictions such as Georgia have been reluctant to enforce garden leave provisions while New York and Delaware generally enforce those same provisions. (37) In McCarron, Bear Stearns sought an injunction in Suffolk Superior Court's Business Litigation Session to enforce a 90-day paid notice provision against three brokers that went to work for a competitor. (38) The court ultimately refused to grant the requested injunction because the notice provision was never signed, and the notice provision was hidden in various deferred compensation plans instead of being clearly stated in an employment contract. (39)

      In Bear Stearns & Co., Inc v. Sharon, Bear Stearns attempted to enforce a similar 90-day notice provision against a senior broker. (40) The notice provision arose from a previous contractual agreement between Bear Stearns and the senior broker where the senior broker agreed to the 90-day notice provision in exchange for a raise. (41) Although Bear Stearns agreed to pay the senior broker his full salary during the notice period, the court still refused to grant an injunction that Bears Stearns requested. (42) The court found the provision to be unenforceable because it required the employee to "continue an at-will employment against his will" by assigning the senior broker to perform during the period. (43)

      However, courts in other states are more willing to enforce noncompetes involving garden leave provisions. (44) In New York, an employer sought to enforce a 30-day notice provision along with a 90-day paid noncompete to stop one of its commodities brokers from resigning and accepting a job offer with its competitor. (45) The court found the provisions reasonable and enforced them because the commodities broker was paid his full salary during the 120-day period. (46)

      Since the Act came into effect in 2018, it has been mentioned in two published decisions. (47) Unfortunately, neither of the decisions directly analyzed an agreement that was subject to the Act. (48) However, the opinions serve instructive purposes to both employers and employees subject to the Act. (49) In Tannatt v. Varonis Sys., Inc., Tannatt sought a declaration that...

To continue reading

FREE SIGN UP