New Guidance for Massachusetts Employers Using Noncompete Agreements

February 16, 2023 Advisory

A recent Massachusetts federal court decision provides much-needed guidance to employers, and some reassurance to all parties, regarding what consideration may support an enforceable noncompetition agreement governed by Massachusetts law. In its November 2022 decision in Cynosure LLC v. Reveal Lasers LLC, the U.S. District Court for the District of Massachusetts held that a stock option grant could satisfy the requirements of the Massachusetts Noncompetition Agreement Act (MNAA) relating to consideration.

Since it went into effect on Oct. 1, 2018, the MNAA has imposed a number of requirements on noncompetition agreements entered into in Massachusetts or with Massachusetts workers. While some are straightforward—like the requirements that the agreement “be in writing and signed by both the employer and employee and expressly state that the employee has the right to consult with counsel prior to signing”—others are more ambiguous. In particular, the MNAA requires all noncompetition agreements to “be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee.” In addition, agreements entered into during the course of employment (but not in connection with a separation) must be supported by “fair and reasonable consideration.” While a “garden leave” clause is defined in the statute to mean a clause that requires “payment . . . on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination,” the terms “other mutually-agreed upon consideration” and “fair and reasonable consideration” have been left completely undefined.

In the years since the enactment of the MNAA, few court decisions have reached the issue of what consideration the statute requires, leading to substantial debate and confusion over whether the consideration for the noncompete could be anything the parties agreed to in writing, or whether the inclusion of “garden leave” meant that employers had to offer payments of a similar size in order to have enforceable noncompetes. The Cynosure decision provides support for the former position, as the Court found that the stock options granted to an employee in an equity agreement in exchange for a noncompete constituted “other mutually-agreed upon consideration” and “fair and reasonable consideration” for purposes of the MNAA.

However, the decision also serves as an important reminder that to be enforceable, a noncompete clause must also adhere to each of the other detailed requirements of the MNNA. First, as to the equity agreement, the Court found that the worldwide scope was overbroad, despite the employer’s claim of a national and international customer base, and reformed the agreement to enforce a narrower geographic scope. Second, in the same decision, the Court held that a different noncompetition agreement signed by another employee at the start of employment was unenforceable altogether because it failed to advise the employee of their right to consult with counsel before signing the agreement. 

While it remains to be seen whether the Massachusetts state courts or any appellate-level courts will adhere to the plain meaning of the text and interpret the statute the same way as in the Cynosure case, for now, this decision gives Massachusetts employers some comfort that they may offer and negotiate over whatever consideration they deem appropriate, and may enforce existing noncompetition agreements that provided for consideration other than garden leave, so long as the agreements adhere to the other exacting requirements of the MNAA. More generally, noncompete law continues to evolve on the state and national level, most notably with the Federal Trade Commission’s recent notice of proposed rulemaking that, if finalized as drafted, would ban noncompetes for nearly all workers, as discussed in our recent advisory.

Our Employment and Labor lawyers will continue to monitor developments relating to noncompete law in the state and across the country. Please contact your regular AT lawyer or the author listed below with questions.

Law Clerk Emily Balzano contributed to this client advisory.

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