The More Things Change, the More They Stay the Same: Court Holds That All Those New Non-Compete Rules Under Massachusetts Act Do Not Supplant Old Public Policies Applicable to Pre-Existing Agreements

When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, many suggested then and thereafter that such statutes reflected an anti-employer tilt in public policy. But we advised at that time that the MNCA in fact appeared to present manageable options for sophisticated employers advised by knowledgeable counsel.   A recent federal court decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019), supports our earlier read, and belies the notion that Massachusetts courts see the Commonwealth’s policy requiring application of its own law to pre-existing non-competes.  So despite the fear that the statute would eliminate multi-state employers’ ability to rely on more favorable non-Massachusetts law when enforcing restrictive covenants, the Nuvasive court’s result and analysis gives employers hope that such fears were overblown.

In Nuvasive, the court enforced a contractual choice of law clause requiring the application of Delaware law.  In reaching this conclusion, the court noted that Massachusetts law generally gives effect to contractual choice of law clauses unless “the chosen state has no substantial relationship” with the parties or transaction or the application of the chosen law is contrary to the “fundamental public policy of a state” with a materially greater interest.  The court found that Delaware had a substantial relationship with the parties because Nuvasive is incorporated in Delaware.  The court also found that the application of Delaware law would not be contrary to any fundamental public policy of Massachusetts, notwithstanding the changes enacted last year and some existing elements of Massachusetts common law.

In reaching this conclusion, the court, as noted, did not buy the hype.  For instance, the court rejected the argument that the material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, constituted a fundamental public policy of the Commonwealth.  In addition, the court concluded that applying Delaware law would not violate the MNCA. Although the contract at issue was executed prior to the October 1, 2018 effective date of the MNCA, and hence, not subject to the MNCA, the court assumed that the MNCA reflected the fundamental policy of the Commonwealth.  The court nonetheless found that applying Delaware law would not violate the MNCA. The court emphasized that Delaware law, like the MNCA, required that any restrictive covenant contain reasonable temporal and geographic restrictions, reasonable restrictions on “the scope of prohibited activities” and be “no broader than necessary” to protect trade secrets, confidential information and goodwill.  The court also noted that the agreement at issue was in writing, stated that the employee could consult counsel, and contained a restrictive period that lasted only twelve months after the termination of employment and was no broader than necessary to protect Nuvasive’s legitimate business interests.  Although the agreement did not contain a garden-leave provision obligating the employer to pay the employee during the restricted period, the court found that the agreement was supported by “mutually agreed upon consideration.”  Significantly, the court did not describe the “mutually agreed upon consideration” that supported the agreement, and the agreement itself referenced only compensation and access to Nuvasive’s good will and proprietary information.

So, in the end, despite a new statute that seemed to change significantly the lay of land in the non-compete area, the court did not view it as changing the public policy of Massachusetts.  Public policy in Massachusetts, at least according to the Nuvasive court, does not require garden leave, provided there is some indicia of consideration, and in fact does not even require application of the law of the Commonwealth, provided that the law chosen had some nexus to the parties and is not glaringly inconsistent with the MNCA. Thus, despite the enactment of the MNCA, the court followed standard choice of law rules and applied Delaware law, just as it would have done before last summer.  It is not clear if the court would have applied Massachusetts law, rather than Delaware law, if the contract had been executed after October 1, 2018, or that the application of Massachusetts law would have led to a different result.   So, the more things change (in the statute), the more they stay the same (in the enforcement of pre-existing contracts and application of choice of law rules).