Unequal Bargaining Power and Hardship May Make a Post-Employment Restriction Unenforceable: New Guidance from Massachusetts’ Highest Court
On October 1, 2018, the Massachusetts Non-Competition Act, MGL c. 149, sec. 21, went into effect. Without a doubt, the Act provided a much-needed leveling of the playing field for employees whose employers and prospective employers were using overreaching restrictions to gain an unfair advantage in competition and compensation. For example, the Act prohibits the enforcement of non-competition agreements against employees who are terminated without cause or laid off and, in most circumstances, limits enforceable non-competition restrictions to no more than one year.
However, as Massachusetts employees soon came to realize, the Act is limited to non-competition restrictions and does not cover other anti-competitive restrictions which may be just as harmful. Such restrictions include non-solicitation of customers or co-workers, the latter of which is also known as a “non-raiding restriction.”
On January 14, 2020, in Automile Holdings, LLC v. McGovern, 483 Mass. 797 (2020), the Supreme Judicial Court, Massachusetts’ highest court, issued a decision regarding such a restriction, which upheld the enforceability of the restriction as one arising in the course of the sale of a business, but rejecting the lower court’s extension of the restriction as an equitable remedy for breach. The Court reminded the lower courts (and employers) that, “[a]s a matter of public policy, we strongly disfavor restrictive covenants.”
The Court reiterated the public policy of Massachusetts: “We have long recognized a public interest in the ability of individuals to be able to carry on their trade freely … Out of this concern for an individual’s ability to earn a living, covenants restraining competition are only enforceable to the extent that they are reasonable.” The Court reaffirmed that the public policy against anti-competitive restrictions applied not only to those labeled “non-competes,” and that an anti-competitive restriction “is only reasonable, and thus enforceable, if it is (1) necessary to protect a legitimate business interest, (2) reasonably limited in time and space, and (3) consonant with the public interest.”
Regarding whether a restriction is “reasonable” and enforceable, the Court pointed out that the context in which the restriction arose – in employment versus in the sale of a business – “is relevant to the parties’ relative bargaining power, the hardship to the promisor of abiding by the terms of the restrictive covenant, and thus the overall reasonableness of the restriction.”
As the Court noted, “such post-employment restraints are often the product of unequal bargaining power,” and are entered into without advice of counsel – all of which the Court considered relevant in evaluating reasonableness and, ultimately, enforceability.
If your post-employment opportunities are limited by a restrictive covenant – a pre-October 1, 2018, non-compete, non-solicit or non-raiding clause – you may want to have your rights and options reevaluated by legal counsel in light of this recent Supreme Court decision.