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Employmentnon competition agreementsRestrictive Covenants


By November 8, 2010No Comments

There has been significant recent debate regarding whether or not restrictive covenants, such as non-compete agreements between an employer and employee, should be enforceable in Massachusetts.  Proponents of narrowing (or eliminating) the applicability of such covenants point to, among other arguments, the free market benefits of allowing employees to move fluidly between employers.  Those favoring the current application of non-competition restrictions point to a company’s need to protect its investment in human capital.

Although non-compete agreements between an employer and employee are generally unenforceable in some states, such as California, these agreements are permitted in many other states, including Massachusetts.  In Massachusetts, non-compete agreement are generally enforceable if  they are: 1) supported by consideration; 2) reasonable in scope and duration, and 3) serve a legitimate business interest in protecting the employer.  All Stainless, Inc. v. Colby, 364 Mass. 773 (1974), citing National Hearing Aid Centers, Inc. v. Avers,  2 Mass.App.Ct. 285 (1974).

Massachusetts courts will look at several factors in order to determine whether or not a restrictive covenant, such as a non-compete or non-solicitation agreement, seeks to protect a legitimate business interest of a former employer, as opposed to a restraint that is merely anti-competitive in nature.  In deciding whether to enforce restrictive covenants, courts frequently review the nature of the employee’s duties and any unique training he or she may have, the degree of specialization the employee possesses, and the employee’s access to confidential and proprietary information.

Disputes regarding restrictive covenants between an employer and former employee are often resolved early on in litigation by means of preliminary equitable relief, such as a temporary restraining order or injunction.  In such a circumstance, an employer may file suit against the former employee together with a motion for a preliminary injunction, asking the Court to prevent the former employee from being employed by a competitor, or to prevent the former employee from soliciting customers of the former employer.  As one might imagine, these suits are sometimes used as a ‘sword’ to inhibit fair competition, to punish a ‘disloyal’ former employee, to cause a competitor (who may defend their new employee) to spend significant resources on litigation, or as a means of discovery into a competitor’s trade secrets.  When a court grants a motion for a preliminary injunction, preventing a former employee from working (for a competitor), it often induces the enjoined party to settle, even though it is very early in the ‘life’ of the case.  This is because the enjoined employee will likely continue to be prohibited from working for the competitor for the pendency of the litigation, which could potentially last for years.

The Massachusetts Legislature recently considered a bill authored by Representatives, Lori Ehrlich and William Brownsberger, that would have significantly limited the availability of non-compete agreements in Massachusetts.  A few of the highlights of the proposed legislation are as follows:

  • Only non-compete agreements signed during employment would be enforceable unless supported by additional consideration.  If a non-compete agreement were entered into post- employment, additional consideration of at least 10% of annual compensation would be required in order to be enforceable.
  • $75,000.00 annual compensation threshold for enforcement.  Only employees whose average gross income is at least $75,000 would be subjected to enforcement of non-competition agreements.
  • Attorneys’ fees.  A court would be required to award attorney’s fees to an employee in the event that: a) the court declined to enforce a material restriction or reforms a restriction in material respect; or b) if the court determines that the employer acted in bad faith in attempting to enforce the restriction.  On the other hand, an enforcing employer would only be able to recover its attorney’s fees in the event the agreement was enforced “as is,” and the court found that the employee engaged in bad faith conduct.  (to see the full text of the bill, click here)

Recently, this proposed legislation was dropped from consideration.  However, stay tuned – New, re-drafted non-compete-related legislation is bound to resurface in the near future.