Sometimes an employer’s greatest legal concerns do not arise until after an employee has left the company. Unfortunately, it may be too late at that point for the employer to adequately protect its interests.
In the absence of a restrictive covenant, former employees may immediately work for a competitor and solicit the former employer’s customers and employees. This freedom may cause significant harm to the former employer, particularly when the employee had strong relationships with customers, vendors, or other employees, or where the employee had access to confidential business information. In short, unless a company requires that its employees execute legally enforceable restrictive covenants the employer will have be helpless to stop former employees who use their training, knowledge, and customer base for the benefit of a direct competitor.
This chapter provides a brief summary of the contractual restrictions that an employer may lawfully place on its employees, as well as an explanation of an employer’s ability to protect its trade secrets and restrict post-employment activity in the absence of an enforceable agreement.
A restrictive covenant is an agreement between an employer and an employee in which the employee agrees that he or she will refrain from competing with employer for a period of time following the termination of his or her employment. Restrictive covenants come in many forms. Sometimes a covenant restricts competition by preventing employees from working or performing certain services for the employer’s competitors during his or her employment and for a period of time thereafter. Other times, the employer will seek to limit solicitation of customers or employees or will require that the employee not disclose certain business information.
Broadly speaking and subject to restrictions summarized herein, Massachusetts law permits an employer to restrict its employees from competing against it and from soliciting its customers or employees after the relationship between the two parties has ended. Indeed, the law recognizes that an employer has a legitimate business interest in preventing former employees from unfair competition with it. However, Massachusetts law also requires that employers narrowly tailor the covenant to accomplish its goals, with the understanding that an employee has a right to be free from undue restraint in its employment opportunities. In the summer of 2018, moreover, the Massachusetts legislature passed (and the governor signed) a law (the "Noncompete Law") that restricts the use of noncompetition agreements (i.e., agreements in which an employee agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended). Therefore, the employer must carefully consider the specific business interest that it seeks to protect. Massachusetts courts balance the competing interests to determine whether to enforce a restrictive covenant, and a noncompetition agreement that fails to comply with all requirements of the Noncompete Law is unenforceable.
An employer may use other methods to discourage its employees from unfair competition. For instance, the employer may use a commission agreement, stock option plan, bonus plan or some other type of direct incentive to encourage the solicitation of customers on behalf of the employer. Some employers use a deferred compensation arrangement where the employee only receives later payments if he or she refrains from competition. These types of agreements must also be reasonably limited in geographic scope and time to be enforceable.
There are several different types of restrictive covenants. The employer must determine the specific interest it seeks to protect, and choose the appropriate covenant to protect that interest.
This type of covenant prohibits a former employee from engaging in any business or activity that is competitive with his or her former employer. Generally, the prohibition exists regardless of whether the new business or activity actually does any harm to the business of the former employer.
Under the Noncompete Law, noncompetition covenants entered into on or after October 1, 2018, are not enforceable unless they comply with all of the law’s requirements. Those requirements include the following:
Under the Noncompete Law, noncompetition restrictions are not enforceable at all against the following categories of employees:
The law does not define the terms "without cause" or "laid off."
The Noncompete Law does not restrict or govern the use of other types of restrictive covenants, including covenants not to solicit or hire the employer’s employees; covenants not to solicit or transact business with the employer’s customers, clients or vendors; agreements made in connection with the sale of a business entity when the party restricted by the noncompetition restrictions is a significant owner of (or member or partner in) the business entity and will receive significant consideration or benefit from the sale; and agreements made at employment separation (provided that the employee is given seven business days to rescind his or her acceptance of the agreement).
Noncompetition agreements entered into before October 1, 2018, are not subject to the Noncompete Law and instead are subject to the common law rules developed by courts to govern the enforceability of such restrictions before the law was enacted. Under those rules, noncompetition agreements were disfavored and were subject to the highest judicial scrutiny; but they were generally enforceable to the extent that they were necessary to protect the employer’s legitimate business interests and were reasonably limited in time and geographic scope.
A non-solicitation agreement does not specifically prohibit the ability of a former employee to engage in competition. Rather, it prohibits the employee’s solicitation of customers (and sometimes vendors, suppliers or similar entities) who have established business relationships with the former employer. Massachusetts courts require that non-solicitation covenants also be reasonably limited in time and geographic scope.
In the absence of a non-solicitation agreement, an employer may still have a claim against a former employee who solicits the employer’s customers because an employee has a duty of loyalty to its former employer. The duty of loyalty does not prevent an employee from merely informing customers that he or she plans to join a competing enterprise; however, if the employee actively solicits clients prior to the termination of his or her employment relationship, the employer may have a legitimate claim.
These covenants are similar to those regarding the non-solicitation of customers, but instead they prohibit the former employee from soliciting or recruiting employees of his or her former employer. Non-recruitment covenants must be reasonably limited in time, and must be necessary to protect the employer's legitimate business interests, i.e., the protection of trade secrets, confidential information and good will.
Similar to the situation of customer solicitation, when an employee recruits fellow employees, the employee may violate a duty of loyalty to the employer, regardless of the existence of an agreement. Specifically, an employee may violate the duty of loyalty where he or she recruits fellow employees (regardless of an agreement) prior to the termination of the employment relationship.
Massachusetts law is unclear concerning the level of inter-employee communication that gives rise to a breach of the duty of loyalty. In one case, a Massachusetts court found that informal communications between employees prior to termination of employment concerning the establishment of a competing business may be lawful if the departing employee does not induce the other employees to join the business.
In a January 2020 decision, the Massachusetts Supreme Judicial Court held that covenants restricting the solicitation and hiring of a company' employees in the context of a sale of a business are enforceable to the extent that they are necessary to protect a legitimate business interest. The court also recognized that the scope of legitimate business interests that may justify an anti-raiding restriction in the context of a sale is broader than the scope of legitimate business interests that apply in the context of an employment relationship.
Nondisclosure covenants limit the former employee’s ability to disclose information that he or she may have about the former employer’s customers, suppliers, pricing or other business information. As with the other covenants, a nondisclosure covenant must be limited in time and scope.
Massachusetts courts interpret restrictive covenants strictly against the employer because of the unequal bargaining power between the parties. The employer has the burden of demonstrating the existence of an enforceable agreement.
To meet this burden, the employer must show that the agreement:
The courts balance the competing interests of the parties in connection with the previous requirements to determine whether the agreement is reasonable. This determination requires an analysis of the specific facts of the case. With respect to noncompetition agreements entered into on or after October 1, 2018, furthermore, the employer has the burden of demonstrating that the agreement complies in all respects with the enforceability requirements of the Noncompete Law.
A court may revise an overbroad covenant to make it enforceable. As a result, a non-solicitation covenant that is unreasonable with respect to one element, such as its geographic scope, may be limited by the court. Similarly, a court may find that in an agreement that contains both a noncompetition clause and a non-solicitation clause, only one of the covenants is enforceable. In such a case, the court will strike the unenforceable covenant or rework it to include reasonable limits.
Following is a summary of the rules that limit and govern the restrictions in restrictive covenant agreements. Please note, however, that with respect to noncompetition covenants entered into on or after October 1, 2018, additional restrictions and limitations apply.
Generally, time limits are required in restrictive covenants. The reasonableness of the duration of a restrictive covenant depends on the facts of the case. To make the determination, the court assesses several factors, including:
Under most circumstances, a time limit of one to two years will be enforced. While the court may enforce covenants with a broader temporal scope, the determination will be made based on the circumstances of the specific employment relationship.
The employer should act promptly when an employee violates a restrictive covenant. Any delays in obtaining judicial relief will not change the timeframe identified in the covenant. Moreover, failure to promptly enforce a covenant may signal to the court that the employer does not truly view the employee’s activity as a threat to its business.
A restrictive covenant has a reasonable geographic scope when it only restricts the employee from operating in an area that would harm the former employer’s business interests – typically, this is the area where the company conducts its business. Although the court has enforced covenants that cover numerous states, the employer should tailor the geographic scope of the covenant to the specific area where the former employer worked. For instance, when a restrictive covenant applies to a salesperson, it should cover the employee’s sales territory, rather than the entire region in which the company has operations.
Fortunately, in Massachusetts, the court may simply limit the geographic scope of an overbroad covenant, rather than automatically striking the clause as it would in some other states. However, an employer who drafts an overbroad covenant does run the risk of it simply not being upheld.
Employers that attempt to enforce non-solicitation covenants that apply to all customers face similar obstacles. The covenant must have a reasonable geographic limitation based on the actual activities of the employee.
Generally, public policy favors allowing an individual mobility in his or her employment and preventing monopolies. Therefore, without a real threat to an employer’s business interests, the court will not enforce a covenant that restrains run of the mill competition. The court carefully considers whether enforcement of the covenant would unfairly restrain the former employee or create a monopoly based on the facts of the case. While a narrow limitation on future employment does not generally conflict with public policy, to the extent the employer substantially reduces the former employee’s future opportunities, the court will find that the covenant is not consonant with public policy.
Certain professionals in Massachusetts may not be the subject to covenants not to compete because of the public policy considerations of the type of work. For instance, attorneys may not be subject to an agreement that restricts the right to practice law after the termination of an employment relationship. The court has held that a strong public policy exists in allowing clients to retain the counsel of their choice. Similarly, a recent law renders unenforceable any covenants not to compete that apply to licensed social workers.
When an employer suspects that a former employee is violating a restrictive covenant, it may go to court to request an order that the former employee comply with the covenant. Alternatively, when an employee or its new employer believes that a covenant executed with a former employer is unreasonable, it may seek a court order to invalidate the covenant, rather than violate it and risk being sued.
The court may also award damages. Generally, an employer may recover lost profits, the amount by which the former employee has been unjustly enriched from his new employment, or the employer’s out-of-pocket expenditures caused by the breach. Sometimes an employer may include a liquidated damages provision in a covenant. This is a provision that fixes the amount an employer may recover if the employee breaches the covenant. Massachusetts courts enforce such provisions when they are reasonable predictions of the actual damages, and are not crafted in a manner that penalizes the employee. An employer may not recover punitive damages on a breach of covenant claim.
A prudent employer seeking to protect its specialized knowledge or customer information will require its employees to sign a nondisclosure agreement as described previously. However, employers that do not secure any restrictive covenants are not necessarily without a remedy if a former employee discloses or uses certain proprietary information. In Massachusetts, an employer may pursue a claim for misappropriation of trade secrets based on the employee’s breach of the duty not to disclose or make unauthorized use of trade secrets or confidential information.
A trade secret is any formula, pattern, device, or compilation of information that is used in a particular business, and that gives the business an opportunity to obtain an advantage over competitors. The trade secret may be, for instance, a formula for a chemical compound, a recipe, a process of manufacturing materials, a pattern for a machine, or a list of customers.
Under Massachusetts law, the court considers six factors to determine whether information qualifies as a trade secret:
A trade secret does not need to be a patentable invention; however, it must give the employer a competitive advantage because it has some level of originality.
In determining whether information is a trade secret, the employer should assess whether the information is merely an abstract idea or general principle that has not yet been embodied in a specific form. In one case, the court found that when a former employee used concepts he had learned from his former employer to develop an invention to use in his new business, he had not misappropriated any information. The court emphasized that the former employer had only provided plaintiff with “mere possibilities” rather than actual commercial products.
In addition, an employer has no right to protect information used in its company that, in fact, belongs to its employees. The court has found that former employees may use their “general knowledge, experience, memory, and skill” in later employment. This rule is particularly true when the former employer hired the employee based on his or her skill and experience. The employer’s interest must be clearly defined to justify restraining an employee whose knowledge and experience may include the trade secret information.
The Massachusetts Trade Secrets Act (MTSA), enacted in 2018, defines "trade secret" to include (among other things) customer data. To qualify as a trade secret under the MTSA, however, the material must comprise "specified or specifiable information." The definition of “trade secret” also requires that, “at the time of the alleged misappropriation,” the owner of the information made reasonable efforts under the circumstances to keep the information protected.
An employer may show misappropriation of trade secrets by establishing all of the following:
The first step in establishing misappropriation is the possession of a trade secret. The employer should show that it has information that meets the definition of trade secret.
To establish a misappropriation of trade secrets claim, the employer must take reasonable efforts to protect the secrecy of its trade secrets. Whether an employer’s efforts are reasonable depends on the circumstances of the case in light of the nature of the information being protected and the conduct of the parties.
The court considers the following factors in this determination:
To satisfy this element, a prudent employer will, at a minimum:
An employer must also show that its former employee used or disclosed the trade secret or that a substantial threat exists that the employee will do so in the future. The employer will satisfy this element if it is able to show substantial similarity between its product and the product being used by its former employee. It may also show this element when the employee immediately works for a competitor, and the competitor begins to produce a product that uses the trade secret in some manner.
When a former employee has misappropriated trade secrets, the employer typically seeks an order from the court to require the former employee to cease its wrongful action. The employer must be limited in the scope of the injunction that it seeks. Similar to restrictive covenants, injunctions must be reasonable in time and geographic scope. Courts have the power to fashion appropriate injunctive relief based on the facts of the case. Under the MTSA, the court may enjoin actual or threatened misappropriation.
An employer may also recover damages. Damages in a trade secrets case typically involve the employer’s lost profits or the profits the employee gained from the wrongful action.
Finally, in trade secrets cases, the employer may seek punitive damages under some circumstances. The law allows a judge or jury to double the damages award where the employer seeks to recover its lost profits. Under the MTSA, the court may award attorneys' fees if the claim was brought or defended in bad faith, or if the misappropriation was willful or malicious.
When a former employee competes with an employer by soliciting its customers or employees or misappropriating its confidential information, the damage to business may be devastating. Employers should carefully draft restrictive covenants and other protective agreements to be enforceable, so that they may limit potential loss from this type of activity.
Most employers think of restrictive covenants and trade secrets as subjects to be considered only in the context of protecting their companies from unfair competition by others. That view of the issues is far too narrow. Consideration should be given in the hiring process to whether or not the applicant might be under any restrictions based upon his or her prior employment. Not only could such restrictions limit the suitability of the individual for the new job, but the failure to address legitimate restrictions could result a lawsuit against the new employer for unlawfully interfering with the prior employer’s contractual rights. While ignorance of such an obligation might protect the new employer from a claim for unlawfully interfering with the prior employer’s contractual rights, the employer may still have to expend time and resources defending a lawsuit and, potentially, hiring and training an employee to take over for the one subject to restrictions.
Additionally, the employer should always take care to ensure that an overly-enthusiastic new hire does not upload onto the new employer’s computer system files or other documents that were wrongly acquired from a prior employer. All new hires should be instructed, in writing if possible, that the employer has no interest in any confidential information or trade secrets that the employee may have acquired from its former employers, that employees may not bring any such information to work or use it in connection with his duties, and that failure to observe those rules will result in discipline up to and including termination.
Employers should review their restrictive covenant agreements, confidentiality agreements, and employment policies to ensure that they define trade secrets in a manner that courts will enforce. It is always wise to review periodically how confidential information is being handled, maintained, and protected to ensure that it does not lose legal protection that may otherwise be available.
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