New Massachusetts Laws Governing Trade Secrets and Noncompete Agreements
New Massachusetts laws govern the protection of trade secrets and the enforceability of noncompete agreements. Massachusetts Gov. Charlie Baker recently signed into law the state's version of the Uniform Trade Secrets Act (UTSA) and a law imposing strict requirements concerning noncompetes. The laws are effective Oct. 1, 2018.
Trade Secret Law
Massachusetts had been one of the only states that had not yet adopted UTSA, relying instead on common law and other statutory protections. While the law is generally consistent with prior law in Massachusetts, it includes three critical changes.
- Potential Economic Value: The law protects information that provides "economic advantage, actual or potential." Consequently, information that has only a potential value may qualify as a trade secret. Previously, information with only "potential value" would have been more challenging to protect as a trade secret under Massachusetts law.
- Threatened Misappropriation: Actual or threatened misappropriation may be enjoined by a court. Threatened misappropriation is sometimes used as a basis to enjoin "inevitable disclosure." Inevitable disclosure means an employee will make an unavoidable disclosure of trade secrets in his or her position with a new employer, and may support an injunction without evidence of actual disclosure. Some jurisdictions do not recognize inevitable disclosure but reach a similar result to stop threatened misappropriation. For more on this, read a previous post on our Trade Secrets Blog.
- Recovery of Attorney's Fees and Costs: The trade secrets law addresses the recovery of attorney's fees and costs for both plaintiffs and defendants in a trade secret action. The law provides that a prevailing party may recover attorney's fees and costs if a claim is made or defended in "bad faith," if a motion to enter or end an injunction is "made or resisted in bad faith," or if "willful and malicious misappropriation exists."
While it remains to be seen how Massachusetts courts will address these issues, the new law is expected to prove useful to those seeking to protect trade secrets.
The Massachusetts Noncompetition Agreement Act (Noncompete Act) applies to noncompete agreements signed by employees who work or reside in Massachusetts. The law does not apply to other common post-employment restrictions, such as agreements to not solicit or transact business with clients, to not solicit employees, and to not use or disclose confidential information.
Some key takeaways of the Noncompete Act include:
- Requirements: A noncompete agreement must be in writing, signed by the employer and employee, and "expressly state that the employee has the right to consult with counsel prior to signing." An employer cannot avoid application of the Noncompete Act through use of a choice-of-law provision if the employee is living or working in Massachusetts (or had been for at least 30 days preceding termination of employment).
- Timing to Present Agreement to Employee: A noncompete agreement provided to an employee at the start of employment must be provided to the employee at the time of the offer of employment or 10 business days prior to starting employment, whichever is earlier. Additionally, a noncompete agreement presented to an employee during employment must be provided to the employee 10 business days prior to taking effect and must be supported by "fair and reasonable consideration independent from the continuation of employment."
- One-Year Duration: A noncompete agreement may not exceed one year from the termination of employment, unless the employee has breached fiduciary duties or has taken property belonging to the employer, in which case the agreement may extend to two years.
- Restricted Activities: The restriction must be reasonable, and "[a] restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable."
- Geographic Scope: The geographic scope must be reasonable, and "[a] geographic reach that is limited to only the geographic areas in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence is presumptively reasonable."
- "Garden Leave" or Other Consideration Required: A unique requirement is that a noncompete agreement must include a "garden leave" clause or "other mutually agreed-upon consideration." Garden leave is a payment of at least 50 percent of the employee's highest base salary during the preceding two years for the duration of the restricted period. The employer may avoid paying the garden leave only if the employee breaches the noncompete, or if the noncompete is extended beyond 12 months because the employee took the employer's property. The Noncompete Act does not provide guidance on what constitutes "other mutually agreed-upon consideration."
- Reason for Termination Affects Enforceability: An employer cannot enforce a noncompete agreement against an employee who is terminated without cause or laid off. The Noncompete Act does not define "cause."
- Noncompetes Prohibited for Certain Workers: The Noncompete Act prohibits an employer from entering into a noncompete agreement with: employees who are nonexempt under the Fair Labor Standards Act; undergraduate or graduate students who are in an internship program or other short-term employment relationship with an employer (whether paid or unpaid) while enrolled in a full-time or part-time undergraduate or graduate educational institution; employees under age 18.
Holland & Knight's recent client alert provides further information on the Massachusetts Noncompetition Agreement Act.