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Under The Noncompetition Agreement Act, Judges May Refuse To Enforce Unreasonable

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In Massachusetts, employee noncompetition agreements entered into before October 1, 2018 are enforceable only if the restrictions in the agreement are reasonable. And the law requires that judges reform any unreasonably restrictive provisions of a noncompetition agreement to make them reasonable and, therefore, enforceable. However, for agreements entered into on or after October 1, 2018, under the new Massachusetts Noncompete Act, judges are given discretion as to whether to reform – or simply reject as unenforceable – unreasonable restrictions. Courts addressing noncompetes governed by the Noncompete Act should not only assess the egregiousness of any unreasonable provisions, but also consider whether the provisions were inserted into the agreement in good faith. 

In All Stainless, Inc. v. Colby, 364 Mass. 773 (1974), a Massachusetts Superior Court judge initially found that a former employee’s noncompetition agreement was unenforceable and void because the geographic restriction contained in the agreement was broader than necessary to protect the employer’s legitimate interests. The Supreme Judicial Court held that the trial court committed an error of law when it failed to enforce the noncompetition agreement “to the extent that was it reasonable,” namely by narrowing the geographic reach of the restriction set forth in the agreement. “[I]f we were now dealing with the form of a final decree enjoining [defendant] from certain activities, we would conclude that he should be restrained from competing against [plaintiff] within his former sales territory for [plaintiff]. Such a restraint would on the facts be reasonable and, therefore, the restrictive covenant should have been enforced to that extent.” Id. at 781. 

The Massachusetts Noncompetition Agreement Act (the “Noncompete Act”), which governs employee noncompetition agreements entered into on or after October 1, 2018, makes a subtle, but potentially significant, change in the law as it relates to judicial reformation of unreasonable provisions in employee noncompetition agreements.

The Noncompete Act provides that: “To be valid and enforceable, a noncompetition agreement must . . . be no broader than necessary to protect one or more of the following legitimate business interests of the employer: (A) the employer’s trade secrets . . .; (B) the employer’s confidential information that otherwise would not qualify as a trade secret; or (C) the employer’s goodwill.” M.G.L. c. 149 § 24L(b)(iii). Presumably, the use of the term “broader” here means “restrictive.” Thus, to be enforceable, the durational, geographic, and scope limitations on the employee’s post-employment conduct must be no more restrictive than necessary to protect the employer’s trade secrets, confidential information, or goodwill. 

In fact, the Noncompete Act specifically states that to be enforceable, the noncompetition agreement must be “reasonable in geographic reach in relation to the interests protected,” and “reasonable in the scope of proscribed activities in relation to the interests protected,” and also provides that “[i]n no event may the stated restricted period exceed 12 months from the date of cessation of employment, unless the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment.” M.G.L. c. 149 § 24L(b)(iv-vi).

However, the Noncompete Act also permits courts to reform noncompetition agreements. “A court may, in its discretion, reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests.” M.G.L. c. 149 § 24L(d). Under this provision, a court may reform a noncompetition agreement if its duration, geographic reach or scope is unreasonable, at least in relation to the business interest purportedly protected by the agreement. 

The subtle change in Massachusetts law is that judges are not required to reform unreasonable restrictions in employee noncompetition agreements; rather, judges have discretion to do so, and may choose not to do so. That judges have discretion not to reform unreasonable noncompetition agreements is clear from the “permissive” language of the Noncompete Act. Beach Associates, Inc. v. Fauser, 9 Mass. App. Ct. 386 (1980) is instructive. In that case, the Appeals Court construed the following Massachusetts usury statute: “Any loan at a rate of interest proscribed under the provisions of paragraph (a) may be declared void by the supreme judicial or superior court in equity upon petition by the person to whom the loan was made.” M.G.L. c. 271, § 49(c). Rejecting the view that the statute mandates voiding the loan, the Appeals Court held that “this equitable remedy, statutorily expressed in permissive terms, allows a judge to exercise discretion in granting relief, which can include reformation to reduce the excessive rate charged to one that is legally permissible.” Beach Associates, Inc., 9 Mass. App. Ct. at 389. However, the Appeals Court emphasized the wide range of options the permissive language of the statute left open to judges when faced with any loan agreement providing an illegal interest rate: “Section 49(c) is specifically an equitable remedy. It was within the discretion of the judge, based upon all the facts, circumstances, and conditions surrounding the loan, to void it, to rescind it, to refund, to credit any excessive interest paid, to reform the contract, or to provide any other relief consistent with equitable principles.” Id. at 393-94.

The change permitting, but not requiring, judges to reform unreasonable noncompetition agreements brings Massachusetts in line with most other states. However, the Noncompete Act does not directly address a common limitation on the discretion of judges to revise unreasonable provisions of noncompetition agreements. In a number of states where judges have discretion to revise unreasonable provisions in employee noncompetition agreements, the law prohibits the exercise of that discretion where the employer inserted the unreasonable provision in the agreement in bad faith. And in some of those states, the burden lies with the employer to show that it inserted the unreasonable provision in the agreement in good faith. 

The rule in New Hampshire is that “[c]ourts have the power to reform overly broad restrictive covenants if the employer shows that it acted in good faith in the execution of the employment contract.” Merrimack Valley Wood Prods., Inc. v. Near, 152 N.H. 192, 200 (2005). Alaska, New York, and Rhode Island also adopted this approach.

In other states, particularly in Illinois, while courts have discretion to reform unreasonable provisions of employee noncompetition agreements, they are unlikely to do so where the provisions are “blatantly unreasonable.”

“[E]xtensive judicial reformation of blatantly unreasonable posttermination restrictive covenants may be against public policy, because of the potentially severe effect it could have on the employees who are subject to such covenants. Such reformation, if permitted by courts, would give employers an incentive to draft restrictive covenants as broadly as possible, since the courts would automatically amend and enforce them to the extent that they were reasonable in the particular circumstances of each case. This could have a severe chilling effect on employee posttermination activities; an employee unschooled in the law cannot be expected to know to what extent such a covenant is enforceable, particularly since courts apply a multifactor reasonableness standard instead of a bright-line rule. Thus it is possible that under such a regime, an intentionally overbroad covenant could end up tying an employee’s hands for years although a majority of courts would find it unreasonable on its face.” Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill. App. 3d 437, 456 (2007).

The Noncompete Act certainly permits judicial reformation of unreasonable noncompetes. However, at a minimum, a Massachusetts judge now has discretion to refuse to reform an unreasonable provision that an employer included in a noncompetition agreement where the employer fails to articulate some good faith basis for including the provision or where the provision is so obviously or blatantly unreasonable that reformation would encourage the same employer or others to insert comparably unreasonable, and therefore chilling, terms in their employee noncompetition agreements.

If you need advice or representation concerning a noncompetition agreement, please contact me to see how I can help. Lawson & Weitzen, LLP is a full-service law firm that regularly is involved in employment law matters.

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