The most ambiguous provisions of the Massachusetts Noncompetition Agreement Act (the “Noncompete Act”) concern the consideration employers must provide to employees in exchange for covenants not to compete. The Legislature’s failure to define key terms and to set forth in plain language how the statutory scheme relates to the common law requirements governing consideration effectively leave to the judiciary the task of articulating new rules governing enforcement of employee noncompetition agreements. In this post, I set forth what I believe are reasonable interpretations of the Noncompete Act’s dictate that, to be enforceable, an employee noncompetition agreement must be supported by a “garden leave clause” or “other mutually-agreed upon consideration.” Though this provision applies to both noncompetition agreements entered into at the commencement of employment and those entered into after the commencement of employment, the latter are also subject to a separate and more demanding consideration requirement, namely “fair and reasonable consideration independent from the continuation of employment.” Accordingly, it is likely courts will focus on the “garden leave” and “mutually-agreed upon consideration” options only when considering the enforceability of noncompetes entered into in connection with the commencement of employment. Focusing on noncompetes entered into at the commencement of employment, I consider each of the two options in turn.
The Noncompete Act provides: “To be valid and enforceable, a noncompetition agreement . . . shall 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.” M.G.L. c. 149, § 24L(b)(vii).
The Noncompete Act defines a “garden leave clause,” as “a provision within a noncompetition agreement by which an employer agrees to pay the employee during the restricted period, provided that such provision shall become effective upon termination of employment unless the restriction upon post-employment activities are waived by the employer or ineffective under subsection (c)(iii).” M.G.L. c. 149, § 24L(a). Thus, a provision constitutes a “garden leave clause” if:
(1) the provision is contained within a noncompetition agreement; and
(2) the provision requires that the employer pay the employee during the post-employment period in which the employee has covenanted not to compete, unless
(a) the employer waives the employee’s post-employment restrictions, or
(b) the employee’s post-employment restrictions are not binding or enforceable because the employer laid off or terminated the employee without cause.
Not every garden leave clause satisfies the consideration requirement. To satisfy the consideration requirement, a garden leave clause must “(i) provide for the 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; and (ii) except in the event of a breach by the employee, not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments.” M.G.L. c. 149, § 24L(b)(vii). Thus, the garden leave clause must contain (a) a payment provision that satisfies the statutory formula and (b) a prohibition against the employer’s failure or refusal to make the payments or the employer’s unilateral discontinuation of payments, unless the employee breaches the covenant not to compete.
Obviously, garden leave is a potentially expensive option for satisfying the consideration requirement, though the employer may waive the noncompete, presumably at or before the termination of employment. Garden leave also carries significant risk because the Noncompete Act appears to mandate that courts treat payments due under a garden leave clause as “wages” under the Massachusetts Wage Act, M.G.L. c. 149, § 148. The failure to make garden leave payments may subject the employer to treble damages (i.e., three times the unpaid wages) and require that the employer reimburse the former employee for reasonable attorney’s fees the former employee incurred. M.G.L. c. 149, § 150.
The Noncompete Act provides a second option for satisfying the consideration requirement, namely “mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement.” M.G.L. c. 149, § 24L(b)(vii). The Noncompete Act does not define “mutually-agreed upon consideration.”
On its face, “mutually-agreed upon consideration” would appear to include any consideration, including the employer’s hiring of the employee. Generally, consideration can consist of “either a benefit to the promisor or a detriment to the promisee.” Marine Contractors Co., Inc. v. Hurley, 365 Mass. 280, 285 (1974). Thus, courts may conclude that the “mutually-agreed upon consideration” option is satisfied simply because the employer hired the employee, so long as that consideration is recited in the agreement. Under this interpretation of “mutually-agreed upon consideration,” as it applies to agreements entered into at the commencement of employment, “mutually-agreed upon consideration” is indistinguishable from the consideration requirement under Massachusetts common law, which typically is satisfied by the employer’s hiring of the employee. The strongest argument in favor of this interpretation of “mutually-agreed upon consideration” is the plain and arguably unambiguous language of the phrase, which references only “consideration” and does not set forth any minimum level of consideration. Courts likely will not impose any such minimum requirement because the statutory language is clear and unambiguous. Deutsche Bank Nat’l Trust Co. v. Fitchburg Capital, LLC, 471 Mass. 248, 253 (2015).
If courts accept this view of “mutually-agreed upon consideration,” the gulf between the garden leave and “mutually-agreed upon consideration” options is wide. Unless the employer waives the noncompete, the garden leave option will require the employer to make potentially significant payments to the former employee during the restricted period. The “mutually-agreed upon consideration” requirement is satisfied simply by hiring the employee. No reasonable employer will select the garden leave option unless the employee demands it at the commencement of employment and has significant bargaining power. The insertion of “other mutually-agreed upon consideration” in the Noncompete Act does not quite render the “garden leave” option surplusage, but because a garden leave clause likely always will be “mutually-agreed upon consideration,” it certainly comes close.
In multiple respects, including the consideration requirement for noncompetes entered into after the commencement of employment, the Noncompete Act makes the enforcement of employee noncompetition agreements more difficult than was the case at common law. Clearly, this was the impetus for the Noncompete Act. Thus, one could argue that the phrase “other mutually-agreed upon consideration” should be construed as requiring more than the consideration required at common law and, specifically, more than the employer’s mere hiring of the employee. The application of certain well-known canons of statutory construction, noscitur a sociis (“it is known by its associates”) and ejusdem generis (“of the same kind or class”), certainly suggest that “other mutually-agreed upon consideration” should not be read as mirroring the common law.
“[T]he canon of noscitur a sociis . . . counsels that ‘ordinarily the coupling of words denotes an intention that they should be understood in the same general sense.’” People for the Ethical Treatment of Animals, Inc. v. Dept. of Agricultural Resources, 477 Mass. 280, 287 (2017). The related canon, ejusdem generis, limits “general terms which follow specific ones to matters similar to those specified.” Commonwealth v. Escobar, 479 Mass. 225, 228 (2018) (citations and internal quotation marks omitted). “‘Where general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words.’” Banushi v. Dorfman, 438 Mass. 242, 244 (2002) (quoting 2A N.J. Singer, Sutherland Statutory Construction § 47.17, at 273–274 (6th ed. rev. 2000)).
For example, in Boston Ass’n of Sch. Adm’rs & Sup. v. Boston Ret. Bd., 383 Mass. 336 (1981), the Supreme Judicial Court applied noscitur a sociis to interpret a statute governing retirement benefits for certain public employees. The statute provided that the calculation of benefits would be based on a measure of the employee’s “the average annual rate of regular compensation,” which the statute defined as “the salary, wages or other compensation in whatever form, lawfully determined for the individual service of the employee by the employing authority, not including bonus or overtime. . . .” Applying noscitur a sociis, the Court determined that “other compensation in whatever form” did not include early retirement payments received by the employees because they were not, like salary and wages, “remuneration geared to work or services performed.” Id. at 341. Thus, the Court determined that the general phrase, “other compensation in whatever form,” should not be read literally, but rather must be interpreted as similar in nature to the specific terms that preceded it.
Similarly, in Hodgerney v. Baker, 324 Mass. 703 (1949), the Supreme Judicial Court construed a by-law of the town of Spencer which read: “No person shall place or cause to be placed in any of the public streets or squares any dirt, rubbish, wood, timber or other material of any kind tending to obstruct streets without a written license from the superintendent of streets.” The Court held that a car parked on a street next to a gasoline pump that was filling the car’s tank, did not constitute “other material of any kind tending to obstruct streets” under the by-law. “The words ‘or other material’ must be read in conjunction with the words immediately preceding, and must be construed to mean material of a similar nature.” Id. at 706. Again, the Court construed the general term as being necessarily of a similar nature as the specific terms that preceded it in the statute. “A general term in a statute or ordinance takes meaning from the setting in which it is employed. The literal meaning of a general term in an enactment must be limited so as not to include matters that, although within the letter of the enactment, do not fairly come within its spirit and intent.” Id. (citation and internal quotation marks omitted).
Applying these canons of construction to the Noncompete Act, and keeping in mind the motivation behind the reforms embodied in the Noncompete Act, courts might well conclude that in light of its association with “garden leave clause,” “other mutually-agreed upon consideration” should be construed as requiring consideration similar in some nature to what is required by the “garden leave” option, and certainly more than merely hiring the employee. “Mutually-agreed upon consideration” is a general term that, read literally, includes any consideration, including merely hiring the employee. However, the canons of noscitur a sociis and ejusdem generis require that the general term, “other mutually-agreed upon consideration,” be read narrowly and construed to mean consideration of a nature similar to that of the garden leave option.
That this construction in some sense conflicts with the literal meaning of “mutually-agreed upon consideration” is not preclusive. “Nor may a court accept the literal meaning of the words of a statute without regard for that statute's purpose and history. . . . On the contrary, if a court concludes that the general meaning and object of the statute should be found inconsistent with the literal import of any particular clause or section, such clause or section must, if possible, be construed according to the spirit of the act.” Wolfe v. Gormally, 440 Mass. 699, 704 (2004).
We do not yet know whether Massachusetts trial and appellate courts will interpret “mutually-agreed upon consideration” to require more than simply employment and there are strong arguments on both sides. If you find yourself faced with this issue, or any other employment law or non-compete matter, please do not hesitate to contact John Bauer or any member of the Lawson & Weitzen labor and employment law team.