As a follow up to our recent post on the subject, the Massachusetts legislature failed to enact reform to noncompete agreements by the July 31, 2016 legislative deadline, despite both the House and the Senate passing versions of the bill. The primary point of disagreement between the two legislative houses concerned the “garden leave” provision that would require employers to compensate employees during the restrictive period. State legislators involved in the negotiations reported that the House wanted employers and employees to negotiate the monetary value of the “garden leave” clause when the agreement was initially signed, while the Senate wanted employees to be able to negotiate when leaving the employer in order to provide greater bargaining power to the employees. Although noncompete reform will not happen this year, legislators will likely revive the bill in the next session.
On June 29, 2016, the Massachusetts House of Representatives passed House bill 4434, An Act Relative to the Enforcement of Noncompetition Agreements. Non-compete reform has been brewing in the Massachusetts legislature for several years, but the reform sought by many may finally be here, if the bill is enacted. This bill contains two key provisions: an adoption of a version of the Uniform Trade Secrets Act, and substantial reform of Massachusetts non-competition law, which thus far has been only addressed by the courts. The Uniform Trade Secrets Act section provides for injunctive relief and reasonable attorney’s fees to protect trade secrets, and supersedes any conflicting laws providing for civil remedies for trade secret misappropriation.
The non-compete reform represents significant changes to existing law. The bill provides that a non-compete agreement must comply with seven criteria to be valid and enforceable: (i) if entered into in connection with the commencement of employment, it must be in writing and signed by employer and employee, and state that employees have the right to consult with a lawyer; (ii) if entered into after commencement of employment, it must be supported by fair consideration independent from continued employment; (iii) it must be no broader than necessary to protect trade secrets, other confidential information, or the employer’s goodwill; (iv) it may not exceed a duration of 12 months unless the employee has misappropriated employee property, in which case it may be extended to 2 years; (v) it must be reasonable in geographic scope, defined as where the employee provided services or had a material presence; (vi) it must be reasonable in scope of proscribed activities in relation to the interests it protects; and (vii) it must be supported by a “garden leave clause” or something similar, defined as a payment from the employer to the employee during the restricted period.
Finally, the bill provides that non-competition agreements shall not be enforceable against certain categories of employees, including those classified as nonexempt under the Fair Labor Standards Act, and those terminated without cause or laid off.
While the Uniform Trade Secrets Act provision of the bill is unlikely to draw controversy, as it is generally consistent with current law in the Commonwealth, the House bill 4434 contains significant changes to non-competition law. Should this bill be enacted into law, employers will need to update their non-competition agreements to ensure enforceability.
While the Massachusetts legislature continues to debate whether to ban “non-competition agreements,” support for the protection of trade secrets and confidential information remains strong. Although the Commonwealth has not adopted a version of the Uniform Trade Secrets Act, Massachusetts protects trade secrets in several overlapping ways: state law provides that the theft of a trade secret can lead to double damages for the aggrieved party; the Massachusetts Consumer Protection Act allows for the recovery of double or triple damages and attorney’s fees for misappropriating trade secrets; courts will enforce contracts requiring employees to maintain the confidentiality of secret information learned on the job; and courts will grant injunctions barring the improper use of confidential information in certain circumstances. However, just because a business states that information is confidential does not mean that a court will agree. Massachusetts uses a six-factor test to determine whether information is confidential:
(1) the extent to which the information is known outside of the business;
(2) the extent to which it is known by employees and others involved in the business;
(3) the extent of measures taken by the employer to guard the secrecy of the information;
(4) the value of the information to the employer and to his competitors;
(5) the amount of effort or money expended by the employer in developing the information; and
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Examples of trade secrets can include manufacturing processes, price lists, financial information, sales strategies, and product development plans. The six-factor test emphasizes that the information has to be a secret, and the business had to make a genuine effort to maintain its secrecy. The business does not ordinarily need to employ heroic measure to maintain secrecy, using armed guards and bank vaults. While appropriate efforts to maintain secrecy are a fact-based determination, businesses will often use non-disclosure agreements signed by employees, limit the internal disclosure of information to an as-needed basis, and ensure that no information is made publicly available (such as via the business’s website).
Businesses concerned about preserving information secrecy, or aware of a confidentiality breach, should contact a Massachusetts business attorney to ensure their interests are protected.
We have previously discussed non-competition agreements in the employer/employee context, but non-compete agreements arise in other scenarios. One of the most common events that leads to a non-compete is the sale of a business. The basics are the same as for employers and employees: the non-compete must be reasonable in duration and geographic scope, and for a legitimate business purpose. The difference lies in what is deemed reasonable. A recent Superior Court case, Annunciata v. VPS Services, LLC, et al. (Civil Action No. 15-2985 BLS2) addressed some interesting points on this topic.
The plaintiff, Annunciata, sold her business in return for cash and an equity stake in a new company formed from the sale, known as “VPS LLC.” As part of the sale, Annunciata entered into several agreements. Two of them, the Asset Purchase Agreement governing the sale, and a Service Agreement by which Annunciata was hired to work for VPS LLC, each contained a restrictive non-compete, barring her from competing for five years (which would be reduced to one year if she was terminated by VPS LLC without cause).
Shortly after the sale was completed, Annunciata had disagreements over the direction of the new company with a manager of the company that held the majority of VPS LLC’s shares. The disagreements rose to a point that the other managers (and co-defendants) voted to terminate Annunciata’s employment with VPS LLC. Annunciata filed suit against VPS LLC and the other managers for wrongful termination, who in turn counterclaimed, seeking an injunction to bar Annunciata from competing with VPS LLC, an intention Annunciata had made clear.
The court ruled in favor of the defendants, granting them an injunction. The court reasoned that when a non-compete is negotiated as part of a business sale, the court is inclined to honor such agreements, provided they are reasonable. Here, the plaintiff intended to compete directly with VPS LLC, which would deprive the defendants of a key portion of what they purchased: the good will of the recently purchased business. Further, the plaintiff still owned a portion of VPS LLC, and the specific terms of her non-compete allowed her to work, just not to form a competing company.
The takeaway from this case is that Massachusetts courts will honor non-compete agreements of a longer duration, if such non-competes are negotiated as part of a sale of a business. Any person contemplating buying or selling a business should consult with a qualified Massachusetts business attorney to protect their interests.
In certain circumstances, an effective non-competition agreement can help protect company assets and interests. However, the law recognizes some protections that exist even outside of a signed agreement. A recent Massachusetts appellate court case, AGERO, INC. v. RUBIN, addressed some of these protections. Agero involved a company suing two former employees who were alleged to have taken confidential information from their employer to start a competing business. One of the employer’s claims was that, in the absence of a contractual obligation, the employees still owed the company a “duty of loyalty” that prevented the employees from leaving the company with confidential information to start a competing business.
The law has long recognized that employees occupying positions of confidence and trust owe a duty of loyalty to that employer, which requires the employees to protect the employer’s interests. Employees subject to the duty of loyalty are not mere common employees who are easily replaceable. The courts will only impose such a duty on high-ranking executives and individuals with access to truly sensitive, proprietary information. This includes officers and directors although the individuals in question need not be officers and directors to trigger the duty (corporate directors are also subject to other legally imposed duties beyond the scope of this article).
The duty of loyalty means such employees are bound to act solely for their employer’s benefit during their employ, and among other things are barred from actively competing with the employer during the term of employment. Access to confidential information can also trigger the duty of loyalty, but such confidential information must be of high value and truly confidential, meaning the employer has taken measures to protect the information.
In Agero, the trial court sided with the employees, and that decision was upheld on appeal. Although the courts acknowledged the duty of loyalty argument, the employees in question were not subject to the duty. The two employees were best categorized as “rank and file,” both answering to higher level managers and lacking the authority to move forward on the projects discussed in the suit. Further, the information the employees possessed had minimal value and was not particularly secret.
There are a few takeaways from Agero. Even absent contractual agreements, high-ranking employees are still legally bound to loyalty to their employer. However, only employees occupying positions of trust and confidence will be bound by such a duty, so employers should consider non-competition agreements for lower-ranking but still valuable employees, assuming that employers can demonstrate legitimate business interests. Finally, merely labeling information as “confidential” does not necessarily make it so; the information must be truly valuable and affirmative steps must be taken to preserve its secrecy. Employers should still seek to have non-competition agreements with high-level employees, but even absent such an agreement, employers may still have recourse against a rogue former executive. Under either scenario, employers should contact a Massachusetts employment attorney to maximize their protection.