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Recent Federal Court Decision Addresses Massachusetts Non-Compete Act

Friday, November 12, 2021
Recent Federal Court Decision Addresses Massachusetts Non-Compete Act

By Hannah Schindler Spinelli and Scott M. Zanolli

The 2018 enactment of the Massachusetts Noncompetition Agreement Act, G.L. c. 149, § 24L (the “Act”), changed the Massachusetts noncompete landscape by setting forth certain specific minimum conditions which must be included in any noncompete agreement in order for the agreement to be deemed valid and enforceable. One such requirement mandates that every noncompete agreement be supported by a “garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement.”

The Act defines “garden leave” as post-separation compensation paid to the former employee on a pro rata basis in the amount of fifty (50%) percent of the former employee’s highest annualized base salary over the 2 years preceding the employee’s termination. The Act requires “garden leave” payments to continue for the entire duration of the restricted period set forth in the noncompete agreement.

Many Massachusetts employers are simply not positioned to provide post-termination pay to their former employees. Thus, many employers choose to seek shelter in the portion of the Act that allows them to come to terms with their employees on “other mutually-agreed upon consideration” to support their proposed noncompetition agreements. However, Massachusetts Courts have yet to interpret the meaning of “other mutually-agreed upon consideration,” and employers have been largely left to guess as to what may constitute sufficient consideration to satisfy this portion of the Act.

A recent decision from the U.S. District Court for the District of Massachusetts shed new light on what may not qualify as “other mutually-agreed upon consideration” sufficient to satisfy the “garden leave” clause of the Act. In KPM Analytics North America Corporation v. Blue Sun Scientific, LLC, et al., 2021 U.S. Dist. LEXIS 132167, *96-97 (D. Mass. 2021), the Court held that a noncompetition agreement which did not contain a “garden leave” clause or specifically articulate the “other mutually-agreed upon consideration between the employer and employee” violated the Act and was not legally binding on the employee. The implication of this decision is that the employment relationship on its own does not constitute sufficient “mutually-agreed upon consideration” to establish an enforceable noncompete agreement under the Act.

While the Federal Court’s decision is not binding on state courts, it holds persuasive authority and provides some insight on how Massachusetts courts may approach this issue in the future. It will take Massachusetts courts time to outline the minimum boundaries of what may constitute “other mutually agreed-upon consideration,” but employers are on notice that it must be more than employment and should be stated clearly in the agreement.

A noncompete agreement is merely one of a variety of restrictive covenants that an employer may use to protect its business interests. Non-solicitation clauses, forfeiture clauses, and, in the medical and dental context, agreements not to treat, are examples of other types of restrictive covenants that employers may enlist which do not fall under the strict new guidelines of the Act. Employers should consult with legal counsel to discuss the best ways to utilize these tools within the context of their specific business and industry.

Pierce & Mandell, P.C.’s experienced employment and health law attorneys routinely assist clients with drafting and negotiating restrictive covenants and represent both employers and employees in litigation concerning noncompete agreements or other restrictive covenants post-termination.

If you have any questions about how this developing area of law impacts your business or employment relationship, please contact Bill Mandell, Esq. at bill@piercemandell.com, Hannah Schindler Spinelli, Esq. at hannah@piercemandell.com, or Scott Zanolli, Esq. at scott@piercemandell.com for more information.