On October 1, 2018, a new non-compete law went into effect in Massachusetts that concerns a business’s employees and independent contractors. For any non-competition agreement entered into on or after that date, certain statutory conditions must be met for a court to find the agreement enforceable. Franchisors and franchisees alike must be vigilant to examine their non-competition restrictions in light of the new law.
As is often the case when a new law is passed, there are areas of ambiguity surrounding terminology in the statute and exactly how this new law will be enforced.
Still, there are a few things that all businesses, including those in the franchise world, should be aware of. Here are several key points to understand.
- The Law Does Not Impact Non-Competition Agreements Upon The Sale Of A Franchise And Does Not Impact Non-Solicitation and Non-Disclosure Agreements
The law only applies to non-competition agreements in employment and independent contractor scenarios. It does not apply to the sale of a business. This point is useful for franchisors and franchisees who typically will include non-competition clauses upon the sale or transfer of a franchise unit. However, a point of caution is in order (and will be subject to a follow-up post from us): if a franchisee is stated in a franchise agreement to be an independent contractor, does this beg the question of whether the law, which applies to independent contractor non-competes, actually does apply? In other words, is the clause more akin to an independent contractor non-compete clause, or a sale of a business clause.
The non-compete law does not apply to non-solicitation agreements, non-disclosure or confidentiality agreements, or invention assignment agreements. In other words, companies’ current clauses on those subjects remain intact.
- Non-Compete Agreements Must Meet Certain Criteria to Be Valid
There are certain statutory requirements that must be met for a non-competition agreement to be found valid and enforceable. Those requirements include, but are not limited to, the following:
- The agreement needs to be in writing and signed by both the business and employee/independent contractor.
- The agreement must state that the employee/independent contractor can consult with counsel before signing it.
- The agreement must be provided to a prospective employee before a formal offer of employment is made, or at least 10 business days before the employee begins work, whichever comes first.
- The duration of the agreement must not exceed 1 year following the employee’s termination. However, if the employee breaches his or her fiduciary duty to the business or steals from the employer, the non-compete may last 2 years from date of termination.
- The non-compete agreement must be supported by a “garden leave” protection clause (e., payment of 50% of the employee’s peak salary over the last two years) during the period of non-competition or an express provision related to some other form of “mutually-agreed upon consideration.”
- The agreement should be reasonable in terms of geography and scope of activity.
- Your “Choice of Law” Or “Jurisdictional” Provisions May Be of No Consequence
It is not uncommon for “choice of law” and “jurisdiction selection” (a/k/a “choice of forum”) provisions to be included in dispute resolution clauses in franchise agreements.
Under the new Massachusetts non-compete statute, all non-compete agreements are to be construed under Massachusetts law regardless of whether an agreement contains a “choice of law” provision providing for another state’s law. Further, to enforce such an agreement, the business must commence suit in the former employee’s/independent contractor’s county of residence, or upon mutual agreement, in the Business Litigation Section of the Superior Court of Suffolk County (MA).
Legal counsel should be retained to review your non-compete agreements to ensure that statutory requirements are meet. Also, along with businesses, we will be keeping an eye on how courts interpret and enforce the law; as they do, additional modifications to businesses’ non-compete agreements may need to be made.