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Enforceability of Noncompetition and Non-Solicitation Agreements

BY STEPHEN M. PERRY, ESQ., Casner & Edwards, LLP

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.

How it Works

Under a noncompetition 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 nonsolicitation 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 nonsolicitation 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, but 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 noncompetition 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 .

Notes from the MAR Legal Hotline

BY JUSTIN DAVIDSON, ESQ., Government Affairs Director & General Counsel CATHERINE TAYLOR, ESQ., Associate Counsel JONATHAN SCHREIBER, ESQ., Legislative & Regulatory Counsel Attorney

Q. Is a landlord required to screen prospective tenants?

A: No, Landlords have no affirmative duty requiring them to screen prospective tenants. However, it is in a landlord’s and their other tenants’ best interests to do so. Landlords may be liable for tenant violations of local bylaws and ordinances regarding noise or other disturbances, as well as for damages or injuries to other tenants and neighbors caused by problem tenants. A landlord may face legal liability if: s/he failed to discharge a duty of care owed to the victim, the harm was reasonably foreseeable, and the negligence was the proximate or legal cause of the victim’s injury. A best practice is to begin the rental process by having prospective tenants complete a rental application containing basic, non-discriminatory personal information. This form can be found in the MAR Forms Library. Landlords may also choose to complete other screenings such as credit, criminal background, and sex offender registry checks, as well as requesting references from past landlords. A landlord should make sure to get the appropriate consent from a prospective tenant prior to performing any screening. When all screenings are complete, a landlord must assess each prospective tenant individually. For example, a landlord cannot automatically disqualify all applicants with criminal records. If a landlord intends to deny a prospective tenant because of their criminal record, they must provide them with certain information about the denial and an opportunity to correct errors in their record. Prior to undertaking any policy regarding tenant screening, it is advisable that the landlord and/or property manager consult with an attorney to mitigate the risk of liability.

Q. A tenant has offered to pay a full year’s worth of rent at the time the lease is signed – is this legal?

A. No, pre-paid rent is a violation of Massachusetts General Laws Chapter 186, Section 15B. The statute states that a lessor may not require a tenant to pay any amount in excess of the following: 1. First month’s rent;

2. Last month’s rent at the same rate as first month’s rent; 3. Security deposit equal to first month’s rent; and

4. The cost to change the lock and key. The question hinges on the word “require.” If the tenant offers to pre-pay rent, the landlord is not requiring the tenant to pay any sums in excess of what is statutorily permitted. However, you must look at why the prospective tenant is making such an offer. Generally, the reason is that the tenant would not otherwise be accepted as an applicant for the unit. In this situation, although the landlord is not asking for the rent to be pre-paid, the end result is the same if the prospective tenant’s application would not be approved but for the offer of pre-paid rent. To stay within the parameters of the law, Massachusetts landlords should never accept rent in advance, regardless of whether the tenant offers or the landlord demands it.

Q. What are some of the main concerns to be aware of with escrow accounts?

A: Three of the most common escrow account pitfalls our members encounter are: 1. Commingling of Funds. Funds cannot be transferred from the escrow account to an operating account until the transaction has closed. We often hear of members who preemptively transfer funds from their escrow to their operating account so that they can bring a check for the co-broker at closing. Even if it is a near certainty that the transaction will close as scheduled, this is an impermissible commingling of funds. There is nothing in 254 CMR 3.10(a) that would prohibit the disbursement of funds directly from the escrow account after the closing has occurred.

2. Having Non-Broker Signatories. The Board interprets 254 CMR 3.10(a) as allowing for only brokers to keep and maintain escrow accounts. Neither salespeople nor unlicensed individuals, such as a bookkeeper, may have check signing authority. A broker may give escrow check signing authority to associate brokers within the same brokerage. 3. Escrow Accounting: The broker is responsible for keeping a proper account of the escrow account. This requires not only tracking all deposits and distributions, but also maintaining copies of each check deposited into and withdrawn from the escrow account for a period of

three (3) years from the date of issuance. The check register must be kept for a period of ten (10) years.

Q. Am I permitted to pay a referral fee to someone with an “inactive” license? A: Yes, you may pay a referral fee to someone with an inactive salesperson’s license. Massachusetts General Laws Chapter 112, Section 87XX ½ created an “inactive” license status for those licensees who have not completed the required continuing education credits. As inactive licensees are prohibited from affiliating with a broker, a referral fee may be paid to them directly. This is the only instance where a salesperson can receive a referral fee directly. Massachusetts General Laws Chapter 112, Section 87RR requires that an active salesperson’s referral fee must be paid to the broker with which they are affiliated. Q. There is a discrepancy between the town’s field card and the septic rating for my listing. What number of bedrooms can I use in my advertisements?

A. As a best practice, any advertisements should state the smaller of the two numbers when listing the number of bedrooms in the property. The property description may include language that highlights the discrepancy between the two sources, and note the potential for additional bedrooms. Including the smaller number in the field that will be used for search purposes protects the listing agent from potential claims of misrepresenting the property. Both Article 12 of the Realtor® Code of Ethics and Massachusetts regulations (254 CMR 3) prohibit false or misleading advertisements. A listing that uses the larger number of bedrooms likely runs afoul of both the Code of Ethics and Massachusetts regulations because it is not presenting a true picture. Q. I am selling a home that has a failed Title 5 inspection. What are my seller’s options?

A. Aside from very limited circumstances, a property must have a passing Title 5 inspection within 2 years before a transfer takes place. An inspection is not required before a transfer in the following situations: 1. Refinancing or any situation where no new parties are introduced; 2. a transfer between spouses; 3. a transfer between parents and child(ren); 4. a transfer between full siblings; and 5. where the property is held in a trust. If a property has a failed inspection, the system must be repaired or replaced within 2 years. The current owner or buyer of a property with a failed inspection may enter into an enforceable agreement with the Board of Health requiring them to upgrade the system or connect to the public sewer within 2 years following the transfer of title. If a property owner has entered into this type of agreement, they must disclose it to prospective buyers, and it must be binding on subsequent owners. The most straightforward option available to sellers with a failed Title 5 inspection is to repair or replace the system prior to transfer as a failed Title 5 can make conventional financing very difficult. However, this may not be a viable option for all sellers because of the expense involved. In these situations, the seller and buyer may negotiate a resolution that satisfies both the requirements of the law as well as the financial well-being of all parties involved.

Written by: by Justin Davidson, General Counsel; Catherine Taylor, Associate Counsel; and Jonathan Schreiber, Legislative & Regulatory Counsel. Service provided through the Massachusetts Association of Realtors® is intended for informational purposes and does not constitute legal advice, nor does it establish an attorneyclient relationship. The Massachusetts Association of Realtors®, by providing this service, assumes no actual or implied responsibility for any improper use of responses to questions through this service. The Massachusetts Association of Realtors® will not be legally responsible for any potential misrepresentations or errors made by providing this service. For more information regarding these topics, authorized callers should contact the MAR legal hotline at 800-370-5342 or e-mail at legalhotline@marealtor.com.

Driving Homelessness Away

BY SABRINA LAPOINTE, Senior Communications Coordinator

If you see a new license plate around Medway that says, ‘Welcome Home’ you will see that the proud owner of that car is President of Patriot Real Estate, Paul Yorkis. What you won’t see is the blood sweat and tears it took to bring that vanity plate to life.

The Idea

It was at the National Association of Realtors® midyear meeting several years ago when Yorkis saw a license plate with the Realtor® ‘R’ on it. He then asked around to find out that the plate was a fundraiser. His next step was to dig up information on the process of charity plates in Massachusetts. Yorkis collaborated with people like broker/owner of The North Shore Realty Group, Frank Bertolino. Bertolino became a member of the Charitable Foundation around 2015 and immediately began working with Yorkis visiting associations, attending Board of Directors meetings, attending trade shows encouraging members to purchase license plates. “We all worked diligently. We also sold bracelets and pins while chasing commitments for plates,” said Bertolino. Once his homework was done and he had enough information, he presented the idea to the MAR Charitable Foundation Board of Trustees explaining that it would serve as a sustainable source of income for the foundation. At a May 18, 2011 Board of Directors meeting, it was moved, seconded, and voted to develop the Charitable Foundation’s Realtor® Vanity License Plate Fundraiser. Yorkis and other Realtors® were given permission to fully explore the idea and ran with it. Meeting with Representatives

“The late Steve Ryan, MAR Counsel and Director of Government Affairs [at the time] and I met with representatives of the Registry of Motor Vehicles to discuss the idea and how the program would really work.” They learned that it was a lengthy process and that they weren’t alone. Several other organizations were trying to establish charity plates. The biggest roadblock they faced was the minimum resale requirement of 1,500 plates. “I thought since MAR had at the time, about 23,000 members we should be able to sell 1,500 plates pretty quickly. Boy, was I mistaken. People in Massachusetts love their license plates and are very hesitant to give up a plate they have had for a long time. Some Realtors® have commercial plates and since a charity plate cannot also be a commercial plate, we lost that group of potential buyers. We had a good initial response but getting past 500 applications was a real challenge,” said Yorkis. Realizing that they would not meet the required number of 1,500 plates as quickly as they would like, Yorkis met with State Representative Jeff Roy, his State Representative, and State Senator Karen Spilka (now President of the Senate). They eventually came to the agreement of introducing legislation to lower the required number of plates to 500. Yorkis and Ryan then met with members of the House and Senate Transportation Committees, RMV officials where they came to the 750 plate compromise. “Unfortunately, the bill did not get out of the committee, so Senator Spilka who was chair of the Senate Ways and Means Committee added the provision to a state budget bill and the budget bill passed with the provision and it was signed into law by the governor,” said Yorkis. Applications Reach the RMV

Fast forward to November 2019 and there were approximately 800 applications and checks sitting at the RMV. Two months later, after dealing with issues with the application forms, the RMV was finally able to process and verify each application. The next step was for the RMV to order the materials for the plates to be manufactured. Delaying the process even further, the ‘Welcome Home’ went to the end of the production line, as other charity plates were being made first. Finally, the manufacturing was complete, and the plates needed to be distributed to each full service RMV office ready for their long-awaited pick up. 875 letters now

needed to be prepared and mailed out to each individual who ordered a plate. RMV regulations required that the Charitable Foundation post a bond with the RMV to guarantee that 3,000 plates be purchased. Some Realtors® like Yorkis himself are getting creative in their efforts to increase the number of plates. Yorkis is offering ‘Welcome Home’ plates as closing gifts which he shares have been very well-received.

Who it Benefits

The Charitable Foundation provides funding for housing, homelessness, hunger and disaster relief in Massachusetts. Purchasing a ‘Welcome Home’ plate is just one of the many ways to get involved and make a difference in the life of someone in need of help. Realtors® and members of the general public alike who have an interest in helping the less fortunate can purchase a plate for the small price of an extra $40 paid every two years. Their contributions will benefit Massachusetts charities located all over the state that provide services for homeless individuals, veterans, and hungry families among other deserving people. To apply for a plate, visit your nearest full-service RMV, after obtaining a registration and title application from your current insurance carrier. Bring both the form from your insurance carrier, and your current registration with you when you apply in person. The plate typically becomes available in five to ten business days and you will receive a letter with instructions to pick up the plate. Coming around July 2020, folks will be able to apply online. “I cannot speak for Paul but I am sure he feels just as strongly as I do. We would do it again," said Bertolino.

Medway Realtor ® Paul Yorkis poses in front of his 'Welcome Home' License Plate

To apply for a plate, visit your nearest full service RMV, after obtaining a registration and title application from your current insurance carrier .

This could not have been possible without the help from companies like MLS Pin, Wells Fargo, and Landy Insurance who all made contributions to the foundation. “It took a long time as there were many steps but with the support of many Realtors®, members of the general public, RMV staff, individuals, and organizations that donated funds for plates so they could be given away, we reached the goal. I was honored to be given plate number 1 by the foundation trustees and for that act of kindness I will be forever grateful,” Yorkis said.

BY JUSTIN DAVIDSON – MAR General Counsel

What happens when a town converts a once buildable lot to a non-buildable lot but allows for the property owner to at least put up a swing set? Is that a taking that requires the town to compensate the landowner?

Most people have a general understanding that the government cannot take an individual’s property without paying compensation for the taking. But what happens when a taking is not a complete and total taking? What happens when the government only takes 91.5% of the value of the property? Massachusetts and federal courts seemed to be headed in different directions when it comes to private property rights. In Massachusetts the courts ruled that leaving a property owner with land valued at 8.5% of its previous value does not constitute a taking. Meanwhile, the federal courts flung open the once locked doors of federal court just a bit to private property claims that used to require state court action.

The Takings Clause

The Fifth Amendment to the US Constitution contains what is referred to as the Takings Clause. The Clause provides, “nor shall private property be taken for public use without just compensation.” It further requires the payment of compensation whenever the government acquires private property for a public purpose. Courts at both the state and federal level have struggled with applying the Takings Clause and inconsistent court holdings have made it difficult for property owners to know when a taking is really a taking. The Massachusetts Case:

In 1975, Janice Smyth’s parents purchased oceanfront property in Falmouth, Massachusetts. They hoped to one day build a retirement home on the lot. Although the lot was considered buildable in 1975, the town of Falmouth passed a “no disturbance zone” zoning bylaw amendment in 2008 that reduced the developable part of the lot to a small 115 square foot section. By this time Janice Smyth had inherited the lot from her parents and applied for the necessary variances to build a home on the lot. The town denied her application, which resulted the assessed value of her lot dropping from $700,000 to just $60,000—a 91.5 percent drop in value Mrs. Smyth took her appeal to the Massachusetts trial court and argued that the 2008 bylaw change and the resulting decrease in the value of her property effected a taking. After trial, a jury found that the bylaw did result in a regulatory taking of Mrs. Smyth’s property, and awarded damages in the amount of $640,000. The Town of Falmouth appealed the trial court’s decision to the Massachusetts Court of Appeals, which ruled in favor of the town, reversing the trial court’s judgment for Mrs. Smyth. The appellate court found that even though Mrs. Smyth’s lot was no longer buildable, it could still possibly be used for something like a “park or playground” and therefore the property still had value. In this way, the Massachusetts appellate court brought further confusion to the Takings Clause analysis in Massachusetts.

The Federal Case

It is not very often that private property cases make their way to the US Supreme Court, but in 2019 the Court ruled on a case, Knick v township of Scott, Pennsylvania, that might just provide a glimmer of hope for property owners such as Mrs. Smyth. The Knick case centers on a 2012 ordinance affecting private properties that contained cemeteries. The ordinance required that all cemeteries within the Township be kept open and accessible to the general public during daylight hours and no owner could unreasonably restrict access to the cemetery. Rose Mary Knick owns property in the Township of Scott, and, in 2013, a Township officer entered her property and identified certain stones as grave markers. Knick was then cited for violating the ordinance and filed a lawsuit to challenge the ordinance. Knick appealed the district court decision denying her claims to the United States Court of Appeals for the Third Circuit. The Third Circuit held that Knick’s Fifth Amendment claims were not proper because she had not sought and been denied just compensation using state procedures as required by previous Court rulings. The US Supreme Court ultimately found that a government violates the Takings Clause when it takes property without compensation, and specifically, that a property owner may bring a Fifth Amendment claim to federal court at that time, overruling the state litigation requirement previously set forth. This is important for property owners because prior to Knick, a property owner was barred from federal court unless he had exhausted all claims at the state level. Many also view the more removed federal court as potentially friendlier to private property rights claims than state courts. Smyth began her legal journey in Falmouth in 2016, three years before Knick sprung opened the doors of federal court to private property claims. Had Knick been decided three years earlier, Janice Smyth would have had the option to bring her claim in federal court where she may have encountered a different application of the Takings Clause test. At the close of 2019, The US Supreme Court declined to hear Smyth’s appeal so we will need to wait for another aggrieved property owner to take a claim to federal court to see whether or not federal courts are going to continue in a private property rights-friendly direction.