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On Sept. 26, 2024, the U.S. Court of Appeals for the First Circuit ruled California’s statutory ban of noncompete agreements does not override Massachusetts law permitting noncompete agreements where the subject employee never worked in California.
The Facts
The plaintiff is a Massachusetts-based sports betting and gaming company. Its former employee primarily worked from his New Jersey home, though he frequently traveled to Massachusetts for his job. During his employment, the employee signed a noncompete agreement with a one-year term and a Massachusetts choice of law provision. In early 2024, the employee resigned and took a job with a competing sports betting company. The employee simultaneously relocated to Los Angeles, California.
The plaintiff sued its former employee in Massachusetts federal court. The district enjoined the employee’s continued employment for the competitor, reasoning his new employment violated the Massachusetts noncompete agreement. The former employee filed an interlocutory appeal arguing: (1) the court wrongfully held Massachusetts law applied; and (2) even if it did, the judge should have excluded California from the territorial reach of the injunction because non-compete agreements violate California law.
Massachusetts and California Noncompete Law
The Massachusetts Noncompetition Agreement Act (MNAA) generally permits noncompete agreements for some employees but imposes substantive and procedural limitations on their enforcement. For example, the MNAA generally limits noncompete agreements to a one-year duration and requires the agreement to be supported by a “garden leave” provision or “other mutually agreed upon consideration.” California, by contrast, bans post-employment noncompete agreements, regardless of where the agreement was signed or where employment is carried out, with a narrow list of exceptions.
The Opinion
The primary issue before the court was the conflict of law between Massachusetts and California with respect to enforcement of post-employment noncompete agreements. The parties stipulated that if Massachusetts law applied, the former employee’s employment for the competitor breached the terms of the agreement. If California law applied, however, the former employee’s noncompete agreement was unenforceable. The former employee bore the burden of demonstrating there existed a conflict between Massachusetts and California law, that California had the materially greater interest in the issue, and that California’s law controlled.
In his argument for application of California law, the former employee relied on Oxford Glob. Res., LLC v. Hernandez, a Massachusetts Supreme Judicial Court (SJC) decision that grappled with the same conflict: whether Massachusetts or California law applied to a former employee’s noncompete agreement. Ultimately, however, the First Circuit declined to follow Oxford because its facts were distinguishable from the case at hand. In Oxford, the SJC held California had a materially greater interest because the employee resided, worked, and allegedly breached his noncompete agreement in California. In this case, however, the employee never worked for the former employer in California, and the “subject matter” of the agreement was not related to California. So, the First Circuit declined to follow Oxford, noting further that the MNAA did not apply to the agreement in Oxford because it only applied to contracts entered into on or after Oct. 1, 2018.
The First Circuit ruled the MNAA was the result of a “hard fought compromise” wherein the Massachusetts legislature declined to adopt a California-type total ban on post-employment noncompete agreements. According to the court, there was no public policy basis to override the agreement’s Massachusetts choice of law provision, considering that both California and Massachusetts passed laws “reflecting different but careful balances of conflicting forces in the noncompete area.”
The First Circuit also examined California’s 2024 code amendments, which add additional protections for employees and generally prohibit California courts from enforcing out-of-state noncompete agreements. Here, the court ruled California’s policy against enforcement of post-employment noncompete agreements also do not supersede Massachusetts law. Specifically, the First Circuit found that the drafting committee of California’s 2024 amendments conceded that, while the amendments expressed California’s strong desire to enforce its public policy against post-employment noncompete agreements, they “cannot dictate to courts outside of its jurisdiction.”
Finally, in response to the former employee’s argument that California should be carved out of the injunction’s scope, the court held that doing so would allow him to skirt the agreement, undercutting its effectiveness.
The Takeaway
This decision serves as a reminder that noncompete agreements remain alive and well in much of the United States. Here, the First Circuit ruled an employer could enforce a noncompete agreement against its former employee despite the former employee’s move to California. California’s strong public policy against enforcement of noncompete agreements could not overcome the competing Massachusetts public policy permitting enforcement where the employee had no prior connection to California.
Unless and until federal policy settles on a uniform rule, state law continues to differ regarding the enforcement of post-employment noncompete agreements. While the Federal Trade Commission’s noncompete ban remains tied up in litigation, states continue to experiment with sometimes divergent policies on noncompete reform.
* Special thanks to Law Clerk/JD Kate Barry˘ for contributing to this GT Alert.
˘ Not admitted to the practice of law.