If you have ever signed an employment contract, there’s a good chance that it included a “non-compete” or “non-competition” clause. The purpose of a non-compete clause is to prevent you from taking another job in the same field as your employer’s or otherwise competing with your employer after you leave. Employers often use these clauses to gain leverage over employees, but not all non-compete agreements are valid and enforceable.
The Legal Standard
A court will only enforce a non-compete if it is: (1) necessary to protect a legitimate business interest; (2) reasonably limited in time and space; and (3) consonant with the public interest. Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635 (2004). The burden of proving enforceability is on the employer. Ultimately, the reasonableness of a non-compete clause turns on the specific facts of each case.
If a court finds that a non-compete is partially unenforceable, it is empowered to essentially rewrite the unenforceable portions of the agreement. For example, if the geographic area defined by the non-compete is too large, the court can shrink the area and leave the remainder of the non-compete in place.
Legitimate Business Interests
To be enforceable, a non-compete clause must be tailored towards protecting a legitimate business interest. Courts have recognized a number of legitimate business interests, including: protecting trade secrets, confidential information, and an employer’s goodwill (Goodwill is “the value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology,” Investopedia). While simply preventing employees from engaging in “run-of-the-mill business competition” is not a legitimate business interest, courts have cited protection of an employer’s “good will” as a reason for enforcing a non-compete clause. See, e.g., Darwin Partners, Inc. v. Signature Consultants, LLC, No. 00-0277, 2000 WL 33159238, at *4 (Mass.Super. 2000) (Burnes, J.) (“Soliciting a potential client company whose relationship has been developed by the [former employer], while under the employ of [the former employer], certainly would constitute an invasion of [the former employer’s] good will”). However, if the employee is responsible for developing the good will, courts may not find a legitimate business interest. See, e.g., First E. Mortgage Corp. v. Gallagher, Civil No.1994-3727, 1994 WL 879546, at *1 (Mass.Super.Ct. July 21, 1994) (finding that good will “was the [employee’s] own making, which he had developed with customers as a result of his own enthusiasm, personality and abilities,” and therefore not a legitimate business interest).
Generally, where an employer’s purported business interest is dubious, or the non-compete clause is not drafted with an eye toward protecting the cited business interest, courts will not enforce, or will rewrite, the non-compete.
Reasonably Limited To Time And Space
A non-compete can only restrict an employee’s post-employment activities for a reasonable period of time and only within a reasonable geographic area. However, Courts have often approved non-competes that last two years. And geographic restrictions can be similarly significant, as the Supreme Judicial Court has approved a non-compete barring competition within 100 miles of the employer’s business.
However, permanent restrictions on conducting business within a geographic area are regularly found to be unreasonable. And whether the restrictions are otherwise reasonable turns on the circumstances of the case, including the type of employment at issue. For example, restricting a hairdresser from competing for two years has been found to be unreasonable given the nature of the business – the infrequency with which customers receive services (monthly intervals) does not necessarily warrant such a lengthy restriction. And where an employer attempts to restrict an employee from performing competing work in an area in which it does not conduct business, courts generally refuse to enforce such provisions.
The Public Interest
The public interest part of the three-part test requires a court to balance the benefit of enforcing contracts meant to protect an employer’s business interests with an employee’s interest in earning a living. To that end, courts generally only refuse enforcement if doing so would result in the employee being unable to work, or if doing so would harm the public interest in some tangible way. For example, a court found a negative impact on the public interest where enforcement of a non-compete would result in a community being deprived of a “fast service automobile lubrication service.” Grease Monkey Intern., Inc. v. Ralco Lubrication Services, Inc., 24 F.Supp.2d 120, 126 (D. Mass. 1998)
How To Handle A Non-Compete Lawsuit
A non-compete lawsuit begins when you receives a summons and complaint alleging that you violated your agreement. Under Massachusetts law, after you are served with a complaint, you have 20 days to file and serve a written response. If you fail to respond, you can be “defaulted,” meaning your employer can win the lawsuit based on your lack of a response. Moreover, if you file a response on your own, you may make a mistake that can harm your defense of the lawsuit and even your current employment. It is best to hire an attorney to defend you.
Once your attorney files and serves an answer, he or she can engage in discovery (seeking information and documents from your employer) and take additional steps to help defend you in the lawsuit. In non-compete lawsuits, the employer often seeks “injunctive relief” – an order from the court stopping you from engaging in the activity, like working, that they believe violates your non-compete agreement. To that end, it is common for employers to seek a preliminary injunction early in the litigation to preclude you from engaging in the business activities right away. It is very important to fight smart and hard early in the case to prevent a preliminary injunction from entering.
Most people weren’t paying attention, but in July 2016 the Massachusetts House Of Representatives passed a bill making significant changes to non-compete law. That same month, the Massachusetts Senate followed the House by passing an even more sweeping reform bill. The changes in both bills were significant and include: (i) limiting the length of the duration of non-competes (3 months in the Senate bill or 12 months in the House bill); (ii) prohibiting non-compete agreements for employees who are not exempt from overtime and who are terminated without cause or are laid off; (iii) requiring employers to pay “Garden leave pay” – meaning the employer is required to pay all (Senate bill) or half (House bill) of an employee’s salary during their post-employment, non-compete period; and (iv) prohibiting courts from reforming unenforceable non-competes (Senate bill).
The legislative session ended on July 31, 2016, and non-compete reform was left on the cutting room floor due to political maneuverings and compromise. There remains strong interest in non-compete reform, for reasons of fairness to employees and for promoting fluidity of labor movement to support growth in the tech industry, so when legislators reconvene in January 2017, they may take another shot at it.