In today’s tight employment market, competition is intense for highly skilled professionals. Real estate brokerage firms seeking to grow, actively recruit licensed agents at other firms. In turn, many businesses that have invested time and money hiring and training agents and supporting their growth have tried to protect themselves by including non-competition or non-solicitation provisions in their employment or independent contractor agreements. In today’s column we look at the enforceability of these provisions under Massachusetts law, as well as the ethical rules that may restrict the competitive activities of Realtors® who change their brokerage affiliations.
Under a non-competition agreement, individuals agree that within a certain geographic area and for a certain period of time following their disassociation with their firm, they will not go to work for a competitor. Under a non-solicitation agreement, agents are allowed to join a competitor but are barred from soliciting or in some cases from doing business with those that were clients of the prior firm. Many agreements also contain so-called anti-raiding provisions in which an agent agrees to refrain from hiring away a firm’s other agents after leaving the firm. As an aside, please note that mutual non-raiding agreements between two firms, where each agrees not to solicit or hire the other’s employees, should be avoided. These agreements are generally unlawful under the civil and criminal provisions of the antitrust laws and could lead to substantial penalties.
Historically, depending on the facts of the case, the Massachusetts courts enforced non-competition agreements if they were reasonable in time and geographic scope and were determined to be necessary to protect a legitimate business interest, such as the employing firm’s good will with its customers. A significant change took place in 2018, when the legislature enacted the Massachusetts Noncompetition Agreement Act, M.G.L. c. 149 § 24B. This statute is applicable only to non-competition clauses entered into on or after October 1, 2018. Also, it does not affect non-solicitation clauses or non-raiding clauses.
The Noncompetition Agreement Act applies to both those who are employees and those who are independent contractors under the terms of M.G.L. c. 149 § 148B. This statutory definition is technically flawed when applied to the real estate brokerage industry because under Monell v. Boston Pads, LLC, real estate agents are not governed at all by c. 149 § 148B. Nonetheless, a court would likely conclude that the legislature intended to include real estate agents under the Act along with everyone else.
The Act makes noncompetition agreements entered into after October 1, 2018 unenforceable unless certain procedural and substantive requirements are met. The most important of these requirements is that non-compete agreements entered into after October 1, 2018 must provide the restricted individual with something in return for the restriction. This can be either “garden leave,” which the Act defines as pay at the rate of 50% for not working during the restricted period, or it can be “other mutually agreed upon consideration.”
As real estate agents are typically paid on a commission basis, paying them garden leave at 50% pay of their regular compensation, in return for not joining a competitor, is likely to be a non-starter. The statute provides no guidance on what type of “other mutually agreed upon consideration” in return for a non-compete would suffice. While some would argue that this “other consideration” could be just about anything that is agreed to in the contract, this does not seem to comport with the statutory intent. In order for the statute to have any teeth, the alternative “agreed upon consideration” would likely have to be something significant and not just part of the standard compensation package.
Non-competition agreements that were signed before the Act’s October 1, 2018 effective date are theoretically still enforceable under Massachusetts common law, b however, in view of the public policy statement made by the new legislation, opposing these provisions, older agreements are likely to be examined more closely than ever.
The Supreme Judicial Court signaled the changing tide earlier this year, in Automile Holdings, LLC v McGovern, when it addressed an anti-raiding clause that arose in the context of the sale of a business. This is a context where restrictive covenants are freely enforced, and the Court upheld the provision. Yet the Court went out of its way to state that restrictive covenants that affect an individual’s ability to make a living are “strongly disfavored” and emphasized that courts will pare back not only non-competition clauses, but also non-solicitation and non-raiding clauses, if they are any broader than what is necessary to protect a legitimate interest. In view of this guidance, a court confronted with a non-compete that predates the new Noncompetition Agreement Act may elect not to enforce it, or to pare it down, for example by allowing the agent to join a new firm, but barring the agent from soliciting the brokerage firm’s clients.
As noted above the Noncompetition Agreement Act exempts from its scope agreements that an agent will not solicit the firm’s clients after leaving. An issue that can arise here is that the clients the firm is seeking to protect may frequently have a stronger relationship with the agent than with the brokerage firm. A court will be more likely to enforce a non-solicitation of clients provision as to clients and contacts that were developed during the agents’ affiliation with the firm than it would with respect to those that were already doing business with the agent prior to becoming affiliated with the broker.
Finally, regardless of whether a brokerage firm utilizes restrictive covenants in its agency agreements, the NAR Code of Ethics imposes limitations on what a departing agent can do after the agency relationship ends. Standard of Practice 16-4 prohibits Realtors® from soliciting a listing that is currently listed exclusively with another broker. As all listing agreements are made in the name of the principal broker, departing agents are accordingly barred from seeking, without the firm’s consent, to take away even those listings that they themselves brought in through their own contacts and efforts. A similar rule applies under Standard of Practice 16-5 with respect to buyer agreements between the firm and the agent’s customers.
Standard of Practice 16-20 is most explicit of all in stating the restrictions that apply to agents whose relationship with the brokerage firm is terminated: “Realtors®, prior to or after their relationship with their current firm is terminated, shall not induce clients of their current firm to cancel exclusive contractual agreements between the client and that firm.”
Or course, these provisions of the Code of Ethics only prevent a departing agent from soliciting business that is the subject of an existing and active exclusive representation agreement. A brokerage firm that wishes to protect its business relationship with recent clients, or potential new business from current clients, would need to have in place an enforceable non-solicitation provision in its agency agreement.