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The New Mass Noncompetition Legislation: Old Wine in New Bottles? An Employer’s Perspective

September 6, 2018 Leave a comment

JMH Headshot Photo 2015 (M0846571xB1386)By: John Hession

Our Republican governor, Charlie Baker, recently signed into law a boon and a blessing for the average hourly worker, the minimum wage Walmart employee, or the lower level service industry employee. But for venture capitalists, angel investors, entrepreneurs, senior executives and key employees, nothing much may have changed in the landscape of noncompetition covenants. After years of deliberation and failed or stalled legislation, the new Massachusetts legislation regarding noncompetition covenants remains generally intact for the technology and life science industries – unlike California, where noncompetition covenants are unenforceable as a matter of law in the context of employment. While the law’s changes may seem an alteration of the landscape, many contours remain unchanged. First, noncompetition covenants entered into prior to October 2018 remain in effect and continue to be enforceable. Investors can continue to take comfort that existing noncompetition agreements cannot be frustrated or circumvented by the new law. Even noncompetition covenants that might have been longer than one year, if signed prior to October 1, 2018, will continue to be honored, but subject to the customary attacks of unreasonable scope and duration.

Second, after October 1, 2018, a venture-backed company can continue to require noncompetition covenants as part of initial or continuing employment. These covenants can last one year in duration, as long as the employer offers a payment of 50% of the annual base salary or other “mutually agreed upon consideration”. The principle of “mutually agreed upon consideration” will invariably become the topic of much debate and contention under the new law, resulting in extensive negotiation (and certainly renegotiation) of new and previous noncompetition covenants, with either existing employees or new hires.

One aspect of the revised law that is a dramatic change in the noncompetition landscape is that, when an employee is fired without cause, even a valid noncompetition covenant will be void or voidable. Of course, the legislature did not define “without cause”.  Hence, the parties will need to negotiate the definition of “cause”.  Caution is suggested whether it may be in a party’s best interest to employ the standard “cause” definitions contained in employment agreements with senior executives.

The new law offers opportunities for “creative combinations” of consideration. For example, as it has been an immutable principle of the past, the grant of a stock option or restricted stock award can certainly constitute adequate consideration to support the enforceability of a noncompetition covenant, if extracted contemporaneously with the equity award. As a result of the new law, employers would be prudent to ensure that any new option grants for current employees (or for that matter, consultants) are tied and tailored to the creation of an enforceable noncompetition covenant. Indeed, one could even consider installing the noncompetition covenant inside the option agreement, so the grant and the covenant are inextricably linked.

However, a critical procedural rule applies under the new law, requiring employers to be careful on installing noncompetition covenants as part of the hiring process. Under the new law, employers must provide to new employees the form of noncompetition agreement prior to the earlier of ten business days before the commencement of employment or before the delivery of a formal offer of employment. To avoid the headache of inadvertently violating this procedural rule, the process rules will require some thoughtful planning with your labor lawyer. You can guarantee that there will be plenty of unintended headaches and heartaches in this area – and the risk that a failure to comply with this procedural rule can result in many an employee’s noncompetition agreement rendered unenforceable – and sadly, after the fact. Consider the impact of such a failure when the reality of adherence to this procedural rule of timing is revealed – usually years later during the diligence process by a buyer in an acquisition. You can bet that acquirers will extract a pound of flesh — and price concessions – for prior inadvertent timing mistakes. Hence, careful planning and logistical practices in this area are very crucial.

So, despite the much-heralded proclamations that the landscape has been altered in the noncompetition arena, the more things change in Massachusetts noncompetition law, perhaps the more they remain the same for technology and life science companies, at least for the senior executives and key employees. After October 1, 2018, prudence – and sensible practice — demand that employers seeking to protect their goodwill, business operations and proprietary technology advantages continue to employ noncompetition covenants for senior executives, as long as adequate consideration supports the bargain of the noncompetition covenant, and the new rules on timing and notice are strictly and carefully adhered. While there may be old wine in the new bottles, however, it makes continued sense to have your “sommelier sniff the cork” before serving the libation – that is, consult with your local labor lawyer.

John Hession is a business and legal advisor to emerging life science, medical device, healthcare software and service companies, from cradle to culmination. John recommends that you chat with his labor “sommelier,” Susan Sampson, to learn more about the new Massachusetts legislation on noncompetition covenants.