Restrictive Covenants in the First Circuit

Restrictive Covenants in the First Circuit

Restrictive Covenants in the First Circuit

To continue our series on trade secret employee contract clauses, we’ve surveyed the First Circuit for updates to the law relating to restrictive covenants. Such covenants remain predominantly governed by statutes in Maine, Massachusetts, New Hampshire, and Rhode Island, while Puerto Rico continues to govern them by common law. And with no significant updates since 2020, restrictive covenants remain disfavored and under increased scrutiny in the First Circuit. Generally, these courts will only enforce noncompete agreements that are reasonable, no broader than necessary to protect an employer’s legitimate business interests, properly noticed, and in line with public policy. The applicable law for each state is set forth below.

state
Law Governing Restrictive Covenants
Requirements for Enforcement of Restrictive Covenants
Maine 26 MRS § 599-A Noncompete agreements are contrary to public policy and are enforceable only to the extent that they are:

  1. Reasonable; and
  2. No broader than necessary to protect one or more of the following legitimate business interests:
    • The employer’s trade secrets;
    • The employer’s confidential information that does not qualify as a trade secret; or
    • The employer’s goodwill.

An employer must:

  1. Inform a prospective employee prior to offering them employment that a noncompete agreement will be required; and
  2. Provide the employee a copy of the noncompete agreement not less than 3 business days before the agreement is to be signed.

An employer may not require or permit an employee earning wages at or below 400% of the federal poverty level to enter into a noncompete agreement.

Massachusetts Massachusetts Noncompetition Agreement Act, MGL 149 § 24L To be valid and enforceable, noncompetition agreements must be:

  • In writing;
  • Signed by both the employer and employee;
  • State that the employee has the right to consult with counsel prior to signing;
  • Supported by fair and reasonable consideration independent from the continuation of employment;
  • No broader than necessary to protect one or more of the following legitimate business interests of the employer:
    • The employer’s trade secrets;
    • The employer’s confidential information that would otherwise not qualify as a trade secret; or
    • The employer’s good will;
  • Restricted period cannot exceed 12 months from the date of cessation of employment;
    • Unless the employee has breached a fiduciary duty to the employer or stolen employer’s property, in which case the duration may not exceed 2 years post-employment;
  • Reasonable in geographic reach in relation to the interests protected;
    • A geographic reach that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable;
  • Reasonable within the scope of prescribed activities in relation to the interests protected;
    • A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable;
  • Supported by a “garden leave” clause or other mutually agreed upon consideration;
    • A garden leave clause requires the employer to pay the employee for the duration of the noncompete period at least 50 percent of the employee’s highest salary within the last 2 years of employment;
    • The employer’s obligation to pay the garden leave is relieved only if the employee breaches the agreement; and
  • Consistent with public policy.

Regarding the notice requirements,

  • If an agreement is entered into connection with the commencement of employment, the agreement must be provided to the employee either before a formal offer is made, or 10 days before the employee starts working (whichever is earlier); or
  • If an agreement is entered into after the commencement of employment, a notice of agreement must be given to the employee at least 10 business days before the agreement becomes effective.

Non-competition agreements are not enforceable against:

  • Physicians, nurses, psychologists, social workers, broadcasting industry, and lawyers;
  • Employees classified as non-exempt under the federal Fair Labor Standards Act;
  • Undergraduate or graduate students in an internship or short-term employment relationship;
  • Employees who have been terminated without cause or laid off; and
  • Employees who are 18 years of age or younger.
New Hampshire NH Rev. Stats. §§ 275:70, 275:70-a

An employer who requires a potential employee to execute a noncompete agreement must provide a copy of the agreement to the potential employee prior to the employee’s acceptance of an offer for employment.

If a noncompete agreement has not been disclosed, the noncompete will not be enforceable against the employee. However, all other provisions relating to employment, confidentiality, nondisclosure, trade secrets, intellectual property assignment, or any other employment agreement provision will remain in full force and effect.

Post-employment restrictive covenants are valid and enforceable if the restraints are reasonable and:

  1. The restriction may not be greater than necessary to protect the employer’s legitimate interests;
  2. The restriction may not impose an undue hardship on the employee; and
  3. The restriction may not be injurious to the public interest.

Any noncompete agreement between an employer and an employee who makes 200% of the federal minimum wage or less is unenforceable.

New Hampshire courts disfavor and narrowly constrain restrictive covenants.

Rhode Island Rhode Island Noncompetition Agreement Act, RI Gen Laws §§ 28-59-1 to 28-59-3 Noncompetition agreements are prohibited for employees who are:

  • Classified as non-exempt under the federal Fair Labor Standards Act;
  • Undergraduate or graduate students in an internship or short-term employment relationship;
  • Under the age of 18; or
  • Are low-wage earners, defined as earning less than 250% of the federal poverty level.

The Act does not apply to agreements:

  • With independent contractors;
  • Outside of the employment relationship; or
  • Entered into the sale of a business or substantially all of the operating assets of a business.

Rhode Island courts will only enforce a noncompete agreement if:

  1. The restriction is ancillary to an otherwise valid transaction or employment relationship;
  2. Adequate consideration was given for the restriction;
  3. The restriction protects a legitimate interest; and
  4. The restriction is reasonable when comparing the restrictions to the employer’s protective interest.
Puerto Rican Common Law Noncompetition agreements are valid but subject to the following conditions (see Arthur Young & Co. v. Vega III136 DPR 157 (1994)):

  • An agreement must be in writing;
  • The employer must have a legitimate interest to protect, and an agreement must be drafted not to impose any limitations beyond those needed to protect such interest;
  • Restrictions on an employee must be circumscribed to activities similar to those that the employee is engaged in – an agreement that restricts a former employee from working in other capacities is invalid;
  • Restrictions may not exceed 12 months after the employee’s termination date – any additional term is excessive and illegal per se;
  • The geographic scope must be strictly limited to what’s necessary to prevent actual competition between employer and employee;
  • An agreement should only cover clients who were personally served by the employee for a reasonable period of time and still be a client of the employer at the time employment ended;
    • Restrictions applicable to potential clients would be considered excessively broad and, therefore, invalid (see PACIV, Inc. v. Perez Rivera159 DPR 523 (2003);
  • The employer must provide valid and sufficient consideration in exchange;
    • For newly hired employees, an offer of employment is deemed sufficient consideration; and
    • For current employees, additional consideration must be provided, such as a promotion or additional benefits.

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