On August 10th, Governor Charlie Baker signed an economic development bill that made significant changes to Massachusetts trade secret laws and set new limitations on noncompetition agreements. Companies need to be aware of the requirements for protecting trade secrets and avoiding misappropriation of trade secrets under the new law and should be prepared to examine and potentially amend their employment agreements to take these changes into account.
The Uniform Trade Secrets Act, M.G.L. ch. 93L, defines a trade secret as information, whether fixed in a tangible form or not, that provides an actual or potential economic advantage from not being generally known or readily ascertainable at the time of the misappropriation and that was the subject of reasonable efforts to protect against misappropriation. This is broader than Massachusetts’ prior iteration, which required the information to be in continuous use and to have actual, as opposed to potential, economic value. The new law makes it illegal to acquire, disclose or use a trade secret that was obtained by improper means, either directly or from another whom one knows or has reason to know acquired it improperly. It also prohibits use of a trade secret that, while acquired properly, was acquired under circumstances giving rise to a duty to limit its further dissemination or use, such as a non-disclosure agreement.
Claims of misappropriation must be brought no more than three years after the misappropriation was or should reasonably have been discovered. Courts are authorized to take steps necessary to protect the trade secret during litigation, including sealing court records and conducting in camera hearings. In addition to damages, actual or threatened misappropriation can be enjoined by a court, but upon subsequent request an injunction must be terminated when the trade secret ceases to exist. Damages may be doubled where the misappropriation is found to be willful and malicious, and attorneys’ fees may be awarded to the prevailing party where a claim of misappropriation or a motion to enter or terminate an injunction is made or defended in bad faith, or where willful misappropriation is found
The new law also set forth limitations on non-competition clauses in employment agreements. Mass. G.L. ch. 149 applies to agreements entered into on or after October 1, 2018 and covers independent contractors as well as traditional employees. A noncompetition agreement will not be enforceable unless it is in writing, is signed by both the employer and employee, expressly states that the employee has the right to consult with counsel prior to signing, and is provided to the employee before the earlier of a formal offer of employment being made or ten days prior to commencement of employment. This applies to direct restrictions on competition and to financial forfeitures, such as loss of a benefit, upon engaging in competition. In addition to these general requirements, noncompetition agreements entered into after the employment begins (but not connected with separation from employment) are not effective unless they are supported by consideration beyond continued employment.
For all noncompetition clauses, the terms must be no broader than necessary to protect an employer’s trade secrets, confidential information, or goodwill. The restricted period must not exceed one year from cessation of employment, unless the employee breached a fiduciary duty or unlawfully took property or information belonging to the employer, in which case the period can be extended to no more than a total of two years. The geographical reach and the scope of prohibited activities must be reasonable in light of the interests being protected, with clauses limited to the area and activities that the employee worked in over the last two years of employment being presumptively reasonable. For any noncompetition clause in an employment agreement to be valid and enforceable, the agreement must include a “garden leave clause” by which the ex-employee must be paid a minimum of 50% of the highest annualized base salary he or she received within the previous two years during the restricted period, unless the employee breached the agreement. Choice of law provisions that would avoid these requirements are unenforceable if the employee was either a resident of or employed in Massachusetts for at least 30 days immediately prior to cessation of employment. This clause is of particular note for out-of-state companies located near enough to Massachusetts to have Massachusetts residents in their employ, as noncompete clauses could be struck down despite the company having no operations in the Commonwealth.
Noncompete clauses will be entirely unenforceable against nonexempt employees, interns who are enrolled in college or graduate school, employees who are laid off or otherwise terminated without cause, or employees who are 18 years old or younger. Also, these restrictions will not affect:
- covenants not to solicit or hire employees of the employer or solicit or transact with customers, clients, or vendors of the employer;
- agreements made in connection with the sale of a business where the restricted person was a significant owner of the business being sold;
- agreements outside of an employment agreement;
- nondisclosure agreements or invention disclosure agreements;
- garden leave clauses, provided they meet the above criteria;
- an agreement made in connection with cessation of employment if the employee is expressly given 7 days to rescind acceptance; or
- an agreement prohibiting an employee from reapplying to the same employer.
If a noncompetition clause is deemed unenforceable, a court may rewrite the clause to bring it within compliance. Courts need not do so, however – they may instead sever the clause, leaving the ex-employee free to compete without restriction.
It is important that companies review their policies with respect to protection of trade secrets and employment agreements, with an eye towards these new laws.