Legal Updates

SJC Finds Non-Compete Statute Inapplicable To Non-Solicitation Covenant With Forfeiture Clause

In a recent decision, Miele v. Foundation Medicine, Inc., the Massachusetts Supreme Judicial Court (the “SJC”) held that the Massachusetts Non-Competition Agreement Act (“MNAA”) does not apply to employee non-solicitation agreements, even if they contain forfeiture provisions. This decision thus affirms that employers may enforce such non-solicitation covenants without having to comply with the strict requirements of the MNAA.

Background

A non-competition covenant (often referred to a “noncompete”) is an agreement between an employer and an employee obligating the employee not to work in a similar role for a competitor of the employer for a defined period of time after his or her employment ends.

The MNAA, enacted in 2018, limits the use of noncompete agreements in Massachusetts, and requires such agreements to meet specific minimum requirements. For instance, only employees who are classified as exempt for overtime-pay purposes can be asked to sign noncompetes, and a noncompete cannot extend for more than one year after the employee’s termination date.

Significant to the Miele holding, the MNAA defines a “noncompetition agreement” to include “forfeiture for competition agreements,” under which an employee’s post-employment competition results in his or her forfeiture of a financial benefit. However, the MNAA specifically excludes from its reach “covenants not to solicit or hire employees of the employer.”

The Miele Case

When Foundation Medicine, Inc. hired Susan Miele as its Chief People Officer, in 2017, she signed a restrictive covenant agreement containing an employee non-solicitation covenant.

In 2020, when Miele left her employment with Foundation Medicine, she entered into a Transition Agreement whereby she would receive transition benefits of approximately $1.2 million. In the Transition Agreement, Miele reaffirmed her obligations under the 2017 restrictive covenant agreement, and further agreed to forfeit her transition benefits if she breached the Transition Agreement.

Soon after her departure from Foundation Medicine, Miele commenced employment with Ginkgo Bioworks as its Chief People Officer. Subsequently, several other former Foundation Medicine employees also began working at Ginkgo Bioworks. In response, Foundation Medicine halted payment of the transition benefits to Miele, alleging that she had violated the Transition Agreement. Foundation Medicine also demanded a return of all the transition benefits Miele had received.

Miele filed suit against Foundation Medicine for breach of contract, demanding payment of her full transition benefits. Foundation Medicine counterclaimed for breach of contract and declaratory judgment. Both parties eventually filed dispositive motions.

The Superior Court granted partial judgment on the pleadings for Miele, holding that, under the MNAA, Foundation Medicine could not enforce the forfeiture clause of the Transition Agreement. The Superior Court further held, however, the Foundation Medicine could raise Miele’s alleged breach of the restrictive covenant agreement as a defense to her breach-of-contract claim.

On appeal to the SJC, Miele asserted that the MNAA applied to the non-solicitation covenant due to the inclusion of a forfeiture clause, even though the MNAA specifies that it does not apply to non-solicitation agreements. Thus, because the non-solicitation agreement did not meet the requirements of the MNAA, Miele contended that the agreement was invalid. Foundation Medicine, in turn, argued that the legislature specifically excluded non-solicitation agreements from the definition of non-competition agreements with an intent to also exclude them from the definition of forfeiture-for-competition agreements.

Supreme Judicial Court’s Decision

The SJC reversed and remanded the matter for trial. Rejecting Miele’s arguments, the SJC focused closely on the legislative history and plain language of the MNAA. Noting that the MNAA expressly states that non-competition agreements do not include non-solicitation agreements, the SJC further explained that “forfeiture for competition agreements are a subset of noncompetition agreements.”

The SJC thus reasoned that a non-solicitation agreement does not become a non-competition agreement simply because its specified remedy for a breach involves a forfeiture of benefits. The court stated that a “nonsolicitation covenant remains just that – regardless of whether the remedy for breach involves forfeiture of benefits.”

The SJC also rejected Miele’s argument that the definition of “forfeiture for competition” should be interpreted broadly enough to encompass non-solicitation agreements. The SJC, once again relying on a plain reading of the MNAA text, reasoned that because non-solicitation agreements are expressly excluded from the definition of non-competition agreements, solicitation could not be “reintroduced through the back door … without rendering the statute internally contradictory.”

Implications For Employers

The Miele decision affirms that non-solicitation agreements are not subject to the MNAA’s strict requirements, even if they contain forfeiture provisions. In other words, the MNAA applies only to non-competition agreements.

Nonetheless, employers are reminded to carefully craft non-solicitation agreements so they are not overly broad or unreasonable in scope or duration. Non-solicitation agreements should also be drafted to avoid straying too closely into the realm of non-competition.

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If you have any questions about the SJC’s Miele v. Foundation Medicine decision or any related issues concerning drafting non-solicitation or non-competition agreements, please feel free to reach out to one of our experienced employment attorneys.