Last summer, after a decade of fits and starts, and just minutes before the end of the 2018 legislative session, the Massachusetts legislature finally passed comprehensive non-compete reform, which went into effect on October 1, 2018. It had become almost a sport watching what the legislature would do at the end of each year with that current year’s version of non-compete reform, which ranged from all out bans to merely codifying the common law. (For a recap of the many twists and turns over the years, here is just a smattering of blog posts on the topic)
If you assumed that we would get 2019 off, you would be mistaken. As we pointed out in the pages of Massachusetts Lawyers Weekly and Law360, the 2018 law caused as much confusion as it did clarity, and we predicted that amendments and clarifications would be necessary. And it didn’t take long for the first such clarification to be proposed.
Earlier this year, S.1117 (“An Act relative to clarifying legislative intent regarding the non-competition law”) was introduced in the Massachusetts Senate. As currently drafted, the 2018 non-compete law prohibits the enforcement of non-competes against employees “terminated without cause.” As we previously pointed out, however, the law included several loopholes, including that it does not define the term “without cause,” leaving it open to wide interpretation:
Employees who are laid off or terminated “without cause” are also excluded [from the 2018 law]. Although the attempted enforcement of noncompetes against these types of employees is common, the legislature left open several loopholes. For instance, laid off employees are oftentimes offered severance in connection with their termination. As mentioned above, requiring an employee to sign a noncompete in connection with an offer of severance is outside the scope of the new law and remains permissible for all types of employees. The only real change with regard to laid off employees, therefore, will be that employers must now decide whether to offer severance in order to obtain enforceable noncompete restrictions.
A similar loophole exists as to employees terminated “without cause.” The new law does not define the term “cause,” meaning that employers can either include a definition of the term in new noncompete agreements or they can simply rely on the common law. The common law definition of cause in Massachusetts is very broad and employer-friendly. Under the common law, “cause” exists if there is either “(1) a reasonable basis for employer dissatisfaction with a[n] … employee, entertained in good faith, for reasons such as lack of capacity or diligence, failure to conform to usual standards of conduct, or other culpable or inappropriate behavior; or (2) grounds for discharge reasonably related, in the employer’s honest judgment, to the needs of his business.” G & M Employment Services v. Commonwealth, 358 Mass. 430 (1970).
This standard encompasses a wide range of conduct and permits a degree of subjective decision-making. The new law will require employers to consider whether a termination would be with or without cause in advance, and document that determination, but many employers are already making these assessments for other legal or business reasons. The practical import of the exclusion is that it invites employers to characterize a termination for cause when doing so is justifiable. Of course, litigation seeking to enforce a noncompete is likely to lead to ancillary litigation over the cause determination. But courts historically have been unwilling to second-guess personnel decisions based on legitimate business reasons. So long as the reasons for the cause determination are well documented and made in good faith, an employer should be able to enforce the noncompete.
S.1117 proposes to amend the 2018 law “by adding, after the words ‘terminated without cause’, the following:- ‘as defined by the parties in the noncompete agreement’.” Presumably then, an employer can include a specific definition of “cause” in the non-compete agreement, or even simply refer to the common law definition. It is unclear, however, whether a court would revert to the common law if an agreement is silent in that regard, or interpret any silence as meaning that a termination, regardless of the factual circumstances surrounding it, is without cause, and thereby deem the agreement unenforceable. There are certainly some judges in the Commonwealth who are hostile to non-compete agreements and would take the latter approach, so careful drafting will be necessary of S.1117 becomes law.