Many readers of Agency Checklists know that on August 1, 2018, the Massachusetts Legislature passed a bill creating a new restriction on non-competition agreements. Governor Baker signed the bill on August 10, 2018.
What readers may not know is that in the same bill that was part of an omnibus bill entitled, “An Act Relative to Economic Development in the Commonwealth” the Legislature also passed the Massachusetts version of the uniform trade secrets act.
On October 1, 2018, both the non-competition act and the uniform trade secrets act takes effect
These two new pieces of legislation complement each other. After September 30th, insurance agencies and insurance companies will not be able to use covenants not-to-compete as they had prior to that date. However, the efficient use of the new uniform trade secrets act may offer sufficient protections to those agencies and companies to balance off the major changes that have come with the implementation of non-competition agreements.
Companies looking for strong non-competition agreements only have until October 1, 2018
The new non-competition agreement law has a number of restrictions. Until October 1, 2018, an insurance agency or insurance company requiring an employee to enter into a non-competition agreement can restrict that employee from taking a job with a competing employer for a reasonable period that may be measured in years if they leave their employment for any reason.
Under the present law, during that time period, the former employer has no obligation to pay the employee for the period they have to wait out their restriction on working for a competitor.
After October 1st, however, any contract proposed to be entered into with an employee after October 1, 2018, that has a covenant not to compete will have to comply with the following provisions:
- The new employee must receive the non-competition agreement by the earlier of a formal offer of employment or ten business days before the commencement of the employee’s employment;
- The agreement must be in writing and expressly state that the employee has the right to consult with counsel before signing the non-competition agreement: and,
- Both the new employee and the employer must sign the agreement.
Also, for non-competition agreements signed by existing employees to be valid and enforceable:
- The employee must receive the agreement at least ten business days before the agreement is to be effective, and must expressly state that the employee has the right to consult with counsel before signing the non-competition agreement;
- The agreement must be in writing and signed by both the employer and employee; and
- The agreement must be supported by “fair and reasonable consideration independent from the continuation of employment;”
Agreements limited to one year and must provide “garden leave” payments while non-compete is in force
Also, any non-competition agreements made after September 30, 2018, cannot restrict the employee from competing for more than one year from the date of their cessation of employment.
The only exceptions are if the employee has breached their 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 two years from the date of cessation of employment.
The Act also provides for an employee, who is bound by a covenant not to compete, to receive half-pay under a required “garden leave clause.” The Act defines this statutory clause as:
A provision within a non-competition 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…”
A non-competition agreement’s “garden leave” clause will have to:
- provide for the payment of wages, during the entirety of the restricted period under the non-competition agreement, of at least fifty (50 %) percent of the employee’s highest annualized base salary paid by the employer within the two years preceding the employee’s termination; and
- except in the event of a breach of the covenant by the employee, not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments due to the former employee.
The “garden leave” provision of the Act does imply that the employer and the employee might vary the fifty (50%) percent of salary requirement if there is “other mutually-agreed upon consideration.” However, the Act provides no guidance in interpreting that phrase, and its meaning may have to await court decisions.
Also, an employer who had entered into a non-competition agreement with a former employee may avoid paying garden leave by waving the restrictive covenant.
Non-competition agreement unenforceable against employees terminated “without cause” or “laid off”
The Act prohibits the enforcement of covenants not-to-compete against certain workers including undergraduate or graduate students that partake in an internship while enrolled in a full-time or part-time undergraduate or graduate educational institution and an employee age 18 or younger.
However, the act also makes unenforceable a covenant not-to-compete signed by employees that have been terminated without cause or laid off. A number of commentators believe that this provision will result in some unanticipated consequences: The first being the possible increase in the number of terminations “for cause” by employers. The more likely consequence may result from employees actively seeking to be terminated without cause or laid off so as to avoid enforcement of a covenant not-to-compete.
How this provision ultimately will affect the employment relationship can only be determined by the implementation of the law, and the development of court decisions over the course of the next several years.
The new Trade Secrets Act
On October 1, 2018, the Massachusetts version of the Uniform Trade Secrets Act also will take effect
As part of the August 1st omnibus bill, the Legislature also passed a new trade secret law. With the passage of this act, Massachusetts became the 49th state to adopt the provisions of the uniform trade secrets act. Only the state of New York has not enacted some version of this uniform statute.
Extended definition of trade secrets under the Massachusetts uniform trade secrets act
The definition of a trade secret in the act is “specified or specifiable information,” whether or not fixed in tangible form or embodied in any tangible thing. The definition includes a number of items including any “formula, pattern, compilation, program, device, method, technique, process.” The list also includes several defined possible classes of trade secrets applicable to insurance agencies such as “business strategy, customer list, and customer data.”
The criteria for the specified or specifiable information being legally protected from misappropriation is two-fold:
- At the time of the alleged misappropriation, [the trade secret] provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use.”
- At the time of the alleged misappropriation was the subject of efforts that were reasonable under the circumstances, which may include reasonable notice, to protect against it being acquired, disclosed or used without the consent of the person properly asserting rights therein.
Loss of customer information and data to employees leaving a company all too common
A 2013 study by Ponemon Institute, a data protection research group, confirmed an earlier study that 60% of all departing employees will download and take the company’s data with them without authorization. The easy availability for departing employees to connect their laptops or USB drives allowed easy access while they were still authorized to capture customer lists, data, and other trade secrets before exiting their employment and starting with a competitor.
An agency or company questioning whether trade secret agreements are really necessary should only look at this Ponemon Institute report.
For the best protection under the new uniform trade secrets act, an agency or company should consult competent legal counsel for advice. However, at a minimum, they may wish to consider:
- Instituting a program of putting employees on notice that confidential information, making up trade secrets is company property, and taking their property without permission is legally prohibited.
- Have a standard nondisclosure agreement for specifically identified trade secrets signed by employees, and further advise such employees that the nondisclosure agreement will be enforced if they leave the company and take trade secrets with them to a new employer.
- Make clear by way of online education or in-house seminars that taking trade secrets and converting them to the use of a new employer will result in severe consequences to them, and to the new employer if that employer participates in their misappropriating trade secrets;
- Deploy reasonable computer system monitoring programs to obtain immediate reports from their computer systems if an employee, consultant or independent contractor has attempted to access trade secrets improperly on the company’s network.
Remedies for misappropriation include damages, attorney fees, and double damages
If notwithstanding its best efforts, a company has suffered a misappropriation of its trade secrets the new law provides substantial legal remedies provided that the company can “state [to the court] with reasonable particularity the circumstances [of the misappropriation], including the nature of the trade secrets and the basis for their protection.”
If the company overcomes that hurdle in describing the actions attempt to protect the trade secret and why believes there has been a misappropriation, the court has jurisdiction to:
- Enjoin “under principles of equity” any actual or threatened misappropriation of a trade secret;
- Require, “under exceptional circumstances” the future use of the trade secret upon the payment of a reasonable royalty;
- Require affirmative acts under court order to protect the trade secret
Additionally, the court may award damages that include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing the actual loss. Also, instead of damages measured by any other methods, the damages caused by misappropriation may be measured by imposing liability for a reasonable royalty for a defendant’s unauthorized disclosure or use of a trade secret.
Where willful and malicious misappropriation exists, the court may also award punitive damage of up to twice the other damages awarded.
Finally, the court may award reasonable attorney’s fees and costs to the prevailing party if:
(i) a claim of misappropriation is made or defended in bad faith,
(ii) a motion to enter or to terminate an injunction is made or resisted in bad faith, or
(iii) willful and malicious misappropriation exists.
