Guide: Non-compete and Non-solicitation agreements in France vs. the US, Massachusetts and New York
During discussions with French entrepreneurs who are expanding their business in the US and hiring local talent, the question of whether to require employees to adhere to a non-compete and/or non-solicitation agreement often arises. The answer is not black and white and will depend upon the jurisdiction where the employee works. The policy behind laws on these agreements will always involve a balancing test between promoting the right of the employee to find work and a fluid employment market versus protection of a legitimate business interest of the employer. However, jurisdictions in France and various states in the US will approach the balancing test differently. Axelia Partners asked Patricia Washienko, a Partner at Freiberger & Washienko in Boston, to shed some light on the legal framework of non-compete and non-solicitation agreements in the US, and more specifically in Massachusetts where she practices. This article also includes a succinct summary of the law governing these agreements in New York State, where many of Axelia Partners’ clients operate, as well as in France.
I. Non-compete agreement
Overview of the non-compete agreement in France – There is no EU wide rule governing non-compete agreements. In France, the French Labor Code requires the employee to be loyal during the employment relationship, and French case law governs non-competes after termination. The non-compete must be in writing in the employment contract or inserted later by mutual agreement. The non-compete must also be essential to protect employer’s legitimate interest, take into account the specificities of the duties performed by the employee, be limited in territory (usually a region in France) and time (24 months maximum) and provide financial compensation to employee (30-50% of gross salary is considered reasonable).
Axelia Partners: Patricia, there is a specific legal framework at a national level governing non-compete agreements in France. Could you please explain the legal framework in the US in general, and in Massachusetts where you practice?
Patricia Washienko: In the United States there is no overarching national law regarding covenants not to compete; each state has its own law. As a general matter, most states permit non-compete covenants so long as they are “reasonable” in scope – i.e., reasonable as to duration (generally one year or less, but in any event rarely more than two years) and as to geographic scope. A few states (California chief among them), however, ban non-compete agreements entirely or prohibit them except in very limited circumstances, like the sale of a business. Given the variations in state laws, it is important that a company have counsel familiar with the law of the jurisdiction (state) in which it is issuing or hoping to enforce a non-compete agreement.
The law in Massachusetts regarding non-compete agreements has recently changed. Prior to October 1, 2018, non-competition agreements were generally enforceable so long as they were reasonable in duration and geographic scope. The new law, which applies not only to employees but also to independent contractors, significantly limits non-compete agreements and imposes strict conditions on their enforceability. Now, under the new law, a non-compete agreement must adhere to the following restrictions to be enforceable in Massachusetts:
- The employer must provide advance notice to the employee that the employer will require that the employee sign a non-competition agreement and must advise the employee of his/her right to seek counsel. If the employer requires an employee to sign a non-compete at the beginning of employment, the employer must give notice either ten days before the employee starts work or before making a formal offer – whichever is earlier; if the employer requires an employee to sign a non-compete during employment, the employer must provide not less than ten business days’ notice before the agreement becomes effective.
- A non-competition agreement must be in writing and be signed by both the employee and employer to be enforceable.
- Continued employment is no longer sufficient consideration for a non-compete entered into during employment: an employer must provide independent (additional) consideration.
- A non-compete agreement will be enforceable only for one year (or less) unless the employee breaches his/her fiduciary duty to the company or steals the employer’s property, in which event the non-compete restrictions can be enforced for up to two years.
- The non-compete must be limited to the geographic areas in which the employee provided services in the final two years of her/his employment, and it must be limited to the specific types of services the employee provided to the company during that period.
- A non-competition agreement must also provide the employee with “garden leave” (i.e., pay the employee at least 50% of the employee’s highest salary within the final two years of employ) or other “fair and reasonable” compensation.
The non-compete is not enforceable if an employee is terminated without cause or is laid off. Finally, the new Massachusetts law bans entirely non-compete agreements with low wage employees.
The law specifically applies to contracts entered into on or after October 1, 2018. Practitioners suspect, however, that the public policies underlying the new law will impact courts’ assessments of the enforceability of agreements executed before October 1, 2018.
Axelia Partners: That new Massachusetts statute does indeed substantially restrict non-competes, both in terms of procedure and of the substance of the law. In New York, where Axelia Partners also has a significant number of clients, the law seems more similar to the old Massachusetts statute. New York law requires that the non-compete be reasonable in time and space and be no broader than is required for the protection of the legitimate interest of the employer. The non-compete cannot impose an undue hardship on the employee or harm the public interest. Finally, continued employment is sufficient consideration, and the non-compete can sometimes be enforced against an employee terminated without cause.
II. Non-solicitation agreement
Overview of the non- solicitation agreement in France: French Courts have found that a covenant that prevents an employee from contacting employees, clients or suppliers of a former employer, or of a former employer’s group, is a restriction of the freedom to work and, as such, should be analyzed similarly to a non-compete agreement. Non-solicitation agreements, when limited in scope, are usually found to be valid. Indeed, French Courts have recently shown a willingness to uphold such agreements in favor of employers when competitors try to poach entire teams of employees. A period of 12-18 months after termination is generally upheld by the French Labor Court.
Axelia Partners: Patricia, reasonable non-solicitation agreements tend to be valid in France. In comparison, what is the legal framework in the US in general and in Massachusetts where you practice?
Patricia Washienko: As is the case with non-competes, there is no overarching national law governing non-solicitation agreements in the United States; each state has its own law. As a general matter, however (and subject to a number of exceptions again, including California), non-solicitation agreements are enforceable as to clients (including prospective clients) so long as they are narrowly tailored to protect a legitimate business interest; they are also generally (and often more readily) enforceable as to employees (including former employees). Non-solicitation covenants that specify that a former employee cannot solicit its suppliers to divert resources and/or to stop doing business with the former employer are analyzed as non-interference provisions and are also generally permissible. Again, however, given the variations in state laws, it is important that a company have counsel familiar with the law of the jurisdiction (state) in which it is issuing or hoping to enforce a non-solicitation agreement.
The new Massachusetts non-compete law does not cover non-solicitation agreements, which means that these agreements will continue to be analyzed under Massachusetts’ common law principles: whether the non-solicitation covenant protects a legitimate business interest and is supported by valid consideration. Courts have consistently recognized that the employer’s “goodwill” – i.e., its relationship with its customers – is a legitimate business interest.
The duration of non-solicitation restrictions typically mirrors the duration of a non-competition covenant in any employment agreement; twelve months is quite common. Non-solicitation covenants do not, however, need to be as narrowly tailored as non-competition agreements, and courts have enforced non-solicitation covenants of longer duration. It is not clear if the public policy that underlies the new non-competition law will affect the enforceability of longer-term non-solicitation covenants.
As for what constitutes solicitation, Massachusetts courts have held that merely updating a social media profile (LinkedIn or Facebook, for instance) to announce a new job, in and of itself, does not constitute solicitation. More targeted action (like an email to all clients announcing a move to a competitor), on the other hand, has been found to constitute solicitation.
Axelia Partners: With respect to soliciting customers, like Massachusetts Courts that recognize an employer’s “goodwill”, New York Courts focus on protecting, for the benefit of the employer, the customer relationships that were developed and nurtured by the employee during the course of employment. New York case law provides that non-solicitation agreements are enforceable only if the restriction imposed:
- is no greater than necessary to protect the legitimate business interests of the employee;
- does not impose due hardship on the employee; and
- does not harm the public.
With respect to soliciting employees, New York Courts provide that an employee can solicit employees from a former employer as long as it does not result in the disclosure of employer’s trade secrets or confidential information. However, New York Courts could enforce a non-solicitation provision where the solicited employee has unique skills that were developed while working for employer.
There are significant differences between the French and the American legal frameworks of non-compete and non-solicitation agreements. French entrepreneurs expanding their business in the US should understand these differences to adjust their practices at the time they hire US employees. Axelia Partners strongly recommends that they seek legal advice in the state where they are hiring.
Disclaimer: The information in this article is provided for general information purposes only. No statement herein should be construed, interpreted or relied upon as legal advice, or is intended to be a substitute for legal counsel. No reader of this article should act or refrain from acting on the basis of any information included in or accessible through this article without seeking appropriate legal or other professional advice on the particular facts and circumstances at issue from legal counsel licensed in the recipient’s state, country or other appropriate licensing jurisdiction.