As we previously reported, the Colorado General Assembly passed a bill in May making substantial amendments to Colorado’s noncompete statute, C.R.S. § 8-2-113. Governor Jared Polis signed the bill on June 8, 2022, meaning the amendments will go into effect at 12:01 a.m. on August 10, 2022, which is only four weeks away. That may sound like a long time, but it will go by quickly.
When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, some commentators suggested that the statute reflected an anti-employer tilt in public policy. But, we advised that sophisticated employers advised by knowledgeable counsel could navigate the restrictions set forth in the MNCA. As reported here, the May 2019 decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019) (Nuvasive I) supported our initial reading of the MNCA. The First Circuit’s April 8, 2020 decision in Nuvasive, Inc. v. Day, No. 19-1611 (1st Cir. April 8, 2020) (Nuvasive II), which upheld the District Court’s decision, provides further evidence that Massachusetts courts will still enforce contractual choice of law provisions when considering requests to enforce certain restrictive covenants in employment contracts. Indeed, in Nuvasive II, the First Circuit concluded that the MNCA, by its terms, does not apply to non-solicitation agreements, and that the Massachusetts employee, Day, had not demonstrated a legal basis for the District Court to ignore the Delaware choice of law clause in his employment agreement.
Nuvasive II, like Nuvasive I, presented the question of whether an employer incorporated in Delaware could enforce a non-solicitation agreement, which was governed by Delaware law, against a former employee, who was a Massachusetts resident. Massachusetts law, like the law of most states, generally requires courts to enforce a contractual choice of law provisions. Nonetheless, in Nuvasive II, the former employee argued that the District Court erred in enforcing a Delaware choice of law clause because: (1) Delaware had no “substantial relationship” to the parties or the transaction; and (2) Delaware law was contrary to the fundamental policy of Massachusetts. The First Circuit, like the District Court, rejected both arguments.
The First Circuit summarily rejected the employee’s argument that the choice of law clause was unenforceable because Delaware lacked the requisite relationship to the contract and the parties. The Court noted that the employer was incorporated in Delaware and held that this was a sufficient basis on which to apply Delaware law to the restrictive covenant. Indeed, the First Circuit emphasized that the Restatement of Contracts generally recognizes the validity of choice of law clauses that require application of the law of the state where one of the parties resides or maintains its principal place of business. Thus, Nuvasive II recognizes the employer’s right to include a choice of law clause that requires application of the law of the state where it is incorporated or maintains its principal place of business.
Similarly, the First Circuit did not linger too long over the employee’s argument that the application of Delaware law would be contrary to the fundamental public policy of Massachusetts. Citing the Massachusetts Supreme Court’s 2020 opinion in Automile Holdings, LLC v. McGovern, 136 N.E. 1207, 1271 n. 15, (Mass. 2020), the Court quickly concluded the MNCA was not applicable to the dispute at all, because it does not apply to agreements executed before October 1, 2018 and because it “does not apply to non-solicitation agreements.” Further, the Court concluded that Massachusetts’ material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, did not bar the application of Delaware law to the parties’ dispute. In reaching this conclusion, the First Circuit defined the types of events that qualified as “material changes” as employer-initiated changes to the employment relationship, such as pay cuts, demotions, and material breaches of an employment contract by the employer. Notably, the First Circuit rejected the contention that “an employee’s own choice to terminate” his employment by accepting a different position with his employer could be “a ‘qualifying’ change under Massachusetts’ ‘material change’ doctrine.” Thus, as we initially predicted, the enactment of the MNCA does not bar out of state employers from enforcing reasonable restrictive covenants against Massachusetts employees.
The First Circuit expressly declined to consider whether either the MNCA or the material change doctrine embodied a “fundamental policy” of Massachusetts, because it found that the application of Delaware law did not violate either the MNCA or the material change doctrine. Thus, out-of-state employers can expect Massachusetts employees seeking to avoid restrictive covenants governed by the laws of other states to continue to argue that the MNCA or the material change doctrine reflect fundamental policies of Massachusetts, which invalidate choice of law clauses. Accordingly, out-of-state employers with Massachusetts employees should review the guidance in Nuvasive I and Nuvasive II and consult counsel when drafting restrictive covenants in employment contracts with Massachusetts employees.
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).