In Miele v. Foundation Medicine, Inc., the Massachusetts Supreme Judicial Court (SJC) clarified that the Massachusetts Noncompetition Agreement Act (MNAA or the Act) does not apply to a forfeiture clause triggered by a breach of a nonsolicitation agreement. To rule otherwise, the SJC recognized, would have brought nonsolicitation agreements into the MNAA’s scope “through the back door” and rendered the statute internally contradictory.
STATUTORY BACKGROUND
To be valid and enforceable, a noncompetition agreement entered into on or after October 1, 2018 must meet certain minimum requirements set forth in the MNAA.[1] The Act defines a “noncompetition agreement” to include “forfeiture for competition agreements,” which are agreements that impose financial consequences on a former employee if the employee engages in competitive activities. The Act also defines a “noncompetition agreement” to exclude, among other covenants, “covenants not to solicit or hire employees of the employer.”[2]
FACTS
Susan Miele signed a restrictive covenant agreement when she commenced employment with Foundation Medicine, Inc. (FMI). The restrictive covenant agreement included a provision prohibiting Miele, during her employment and for one year after, from soliciting FMI’s employees to leave the company.
When Miele separated from FMI a few years later, she signed a transition agreement. In exchange for certain transition benefits, Miele agreed that if she breached her restrictive covenant agreement she would forfeit any unpaid benefits and have to repay any previously paid benefits.
During the one-year period following her departure from FMI, Miele allegedly recruited several FMI employees to work at her new employer. FMI stopped the transition payments to Miele and demanded repayment of benefits already paid. Miele refused to comply and sued FMI for breach of contract. FMI filed a counterclaim for breach of contract and sought a declaration that it was not obligated to pay Miele any remaining transition benefits.
The Superior Court partially granted Miele’s motion for judgment on the pleadings, ruling that the MNAA precluded FMI from enforcing the transition agreement’s forfeiture provision in connection with Miele’s nonsolicitation agreement. In doing so, the Superior Court concluded that nonsolicitation agreements are excluded from the Act’s scope only if they do not impose forfeiture for breach. The Superior Court allowed FMI to report the interlocutory ruling to the Appeals Court, and the SJC granted FMI’s application for direct appellate review.
DECISION
The SJC reversed the Superior Court’s ruling, holding that the MNAA does not apply to nonsolicitation agreements even when they are subject to a forfeiture-for-breach provision. Put differently, “a forfeiture clause triggered by a breach of a nonsolicitation agreement does not constitute a ‘forfeiture for competition agreement’ subject to the [A]ct.”
The SJC explained that the Act’s plain text makes clear that (1) noncompetition agreements do not include nonsolicitation agreements and (2) forfeiture-for-competition agreements are a subset of noncompetition agreements. As a result, forfeiture-for-competition agreements also exclude nonsolicitation agreements.
A contrary conclusion, the SJC explained, would contradict the Act’s express exclusion of nonsolicitation agreements from the definition of noncompetition agreements. Further, a nonsolicitation agreement does not become a noncompetition agreement when its remedy involves forfeiture of benefits.
The SJC also rejected Miele’s argument that the definition of “forfeiture for competition” was broad enough to apply to nonsolicitation agreements. Again examining the Act’s text, the SJC concluded that because nonsolicitation agreements are expressly excluded from the definition of noncompetition agreements, solicitation could not be “reintroduced through the back door” of the definition of “forfeiture for competition” without making the statute internally contradictory.
KEY TAKEAWAY FOR EMPLOYERS
Nonsolicitation agreements do not fall within the scope of the MNAA regardless of whether they are subject to a forfeiture-for-breach provision.
[1] Mass. Gen. Laws ch. 149, § 24L.
[2] While not relevant in the Miele case, the Act also excludes from the definition of a “noncompetition agreement” another common type of nonsolicitation agreement, “covenants not to solicit or transact business with customers, clients or vendors of the employer.
[View source.]
