Reaffirmation of old noncompete is subject to Massachusetts noncompete statute, forfeiture-for-competition agreements are broader than you think

The Massachusetts noncompete statute (the “Massachusetts Noncompetition Agreement Act” (the “MNAA”)) took effect on October 1, 2018 and applies to noncompetes entered into on or after that date. Yet, despite living under the MNAA for nearly six years, there is scant caselaw interpreting it, much less applying it.

Enter Miele v. Foundation Medicine, Inc. In a decision issued by the Massachusetts Superior Court in Suffolk County on July 17, 2024, the court makes several rulings that are likely to have broad implications.

TL;DR

The MNAA does not apply retroactively. That really should not come as a surprise to anyone.

“Reaffirmation” of an existing noncompete may be considered a new agreement subject to the MNAA. But don’t worry too much.

Forfeiture-for-competition provisions under the MNAA include nonsolicit and no-recruit¹ obligations. That is quite a surprise, given (1) that no Massachusetts case of which I am aware has ever said that and (2) having written the definition in collaboration with various state legislators and others, that broad scope was never discussed or contemplated, as far as I recall.

Bonus case: the Massachusetts Appeals Court holds that a party seeking to have the court reform (i.e., modify and narrow) a noncompete must provide specific reformation options to the court. Oy, but not really.

The facts (as set out in the court’s decision)

The plaintiff, Susan Miele, was Foundation Medicine’s former Chief People Officer.

At the commencement of her employment with Foundation Medicine in 2017, she signed a restrictive covenant agreement containing, among other things, a no-recruit covenant (the “2017 Agreement”).

A few years later, on February 24, 2020, Foundation Medicine notified Miele that her employment was being terminated. The parties agreed that day to a “Transition Agreement.”

Pursuant to the Transition Agreement the parties agreed, among other things, that Miele would stay on through the end of 2020 in exchange for which she would receive “transition benefits.”

Pertinent to the MNAA, “Miele reaffirmed her obligations under the 2017 Agreement” and agreed that if she breached the Transition Agreement, “she would forfeit the transition benefits . . . .”

After Miele left Foundation Medicine, she began working for Ginkgo Bioworks (“Ginkgo”) as its Chief People Officer.

No surprise, some other employees left Foundation Medicine and wound up at Ginkgo. Also no surprise, Foundation Medicine claimed that Miele solicited those former employees in violation of her no-recruit obligations and, as a consequence, Miele forfeited her transition benefits of almost $1.2 million.

And perhaps least surprising, Miele sued for breach of contract (seeking payment of the transition benefits) and Foundation Medicine counterclaimed for “damages for breach of contract and a declaratory judgment that it is not obligated to pay Miele the unpaid portion of the transition benefits set out in the Transition Agreement.”

The legal issues

The parties each filed dispositive motions. The court articulated the relevant legal issues as follows:

Miele contends that she is entitled to judgment as a matter of law as to FMI’s counterclaim because the Transition Agreement – her alleged violation of which is the basis for the counterclaim – is unenforceable by operation of G. L. c. 149, § 24L, the Massachusetts Noncompetition Agreement Act (the “MNAA” or “the Act”). FMI responds that the Act does not bar its counterclaim because: (1) the Transition Agreement is merely a reaffirmation of the 2017 Agreement, which was entered into before the 2018 effective date of the Act; (2) the Act excludes from its scope “noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance”; and (3) the Act also excludes from its scope “covenants not to solicit or hire employees of the employer.” G.L. c. 149, § 24L(a) (definition of “[n]oncompetition agreement”).

Does the MNAA apply retroactively?

The first issue addressed by the court is whether the MNAA applies retroactively.

There is little doubt about the answer. It does not.

The enabling legislation (“An Act Relative to Economic Development in the Commonwealth”) states as follows:

SECTION 71. Section 24L of chapter 149 of the General Laws may be referred to as the Massachusetts Noncompetition Agreement Act and shall apply to employee noncompetition agreements entered into on or after October 1, 2018.

Not surprisingly, multiple cases have reached that very conclusion, refusing to apply the MNAA (or the policies behind it) to pre-October 1, 2018 noncompete agreements.

The court in Miele did not, however, appear to consider the enabling legislation or those earlier cases. Instead, based on statutory interpretation principles, the court concluded that the MNAA lacks a clear intent to apply retroactively and therefore does not.

It is unclear from the opinion why the court went through that process rather than simply citing the language in the enabling statute or any of the prior cases refusing to apply the MNAA or its policy to preexisting noncompete agreements.

Does reaffirmation of an existing agreement create a new agreement?

The second issue is whether by reaffirming her existing 2017 Agreement as part of the broader Transition Agreement, Miele and Foundation Medicine entered into a new restrictive covenant agreement that would potentially be covered by the MNAA.

The court framed the issue by asking whether the Transition Agreement (of which the reaffirmation was just a part) was a new agreement. Of course it was. And framed that way, it’s hard to imagine what reaffirmation would not be a new agreement, making it subject to the MNAA.

As a practical matter, given that the preexisting 2017 Agreement remained in place, the practical impact may be limited to available remedies.

But it certainly serves as a cautionary tale, given that reaffirmations are routine. They are often included in separation agreements, as well as equity grants and other agreements providing benefits to employees. If “reaffirmation” of an existing agreement — as opposed to agreeing to new restrictions — will be viewed as creating new obligations, employers will need to reevaluate whether and how they offer the benefits in the first place, especially in the context of a departing employee. For example, companies may wish to obtain just an acknowledgment (perhaps in the “whereas” clauses) that the existing noncompete obligations are valid, enforceable, and unaffected by the agreement, rather than obtaining a “reaffirmation.” Of course, in those instances where the reaffirmation complies with the MNAA, this will be a nonissue.

I expect that, if the case does not settle, this aspect of the decision will be appealed.

What constitutes a forfeiture-for-competition agreement within the meaning of the MNAA?

The third issue — the scope of “forfeiture-for-competition agreements” — is the issue that is likely to have the most impact.

Forfeiture-for-competition agreements are defined in the MNAA as follows: “an agreement that by its terms or through the manner in which it is enforced imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities.”

As the court notes, forfeiture-for-competition agreements are defined as a type of noncompetition agreement, whereas nonsolicits and no-recruits (among other types of restrictive covenants) are not.

The court then explains the issue as follows:

This case presents the question whether “covenants not to solicit or hire employees of the employer” or “noncompetition agreements made in connection with the cessation of or separation from employment,” although excluded from the statutory definition of “noncompetition agreements,” are, nonetheless “forfeiture for competition agreements” if they include provisions that “impose[] adverse financial consequences on [the] . . . former employee . . . [who] engages in competitive activities.” Id. This question, in turn, depends on whether the phrase “competitive activities” in the statutory definition of “forfeiture for competition agreements” is broader than the type of agreements that are “noncompetition agreements” under the statute.

The court then notes that the Transition Agreement seems to fit the definition of a forfeiture-for-competition agreement, as it is an agreement imposing adverse financial consequences for soliciting former colleagues. The court’s point was that soliciting former colleagues is a “competitive activity” within the meaning of that term as it’s used in defining forfeiture-for-competition provisions. (One might question then whether a forfeiture tied to soliciting former colleagues for noncompetitive businesses would be considered a forfeiture-for-competition.)

Foundation Medicine argued that, because the MNAA expressly excludes nonsolicits and no-recruits from the definition of “noncompetition agreements,” it must similarly limit the scope of forfeiture-for-competition agreements.

The court responded to that argument as follows:

The question unresolved by the text of the statute is whether the Legislature intended to exclude non-solicitation agreements from the statute entirely or, instead, to exclude them from the scope of the statute unless they contain forfeiture provisions. Neither party points me to any authority on point, likely because the Act is still relatively new. . . .

* * *

In the MNAA, the Legislature expressly provided that “[n]oncompetition agreements include forfeiture for competition agreements” but do not include several other types of agreements. G. L. c. 149, § 24L. The Legislature could easily have incorporated – either directly or by reference – the same exclusions from the definition of “forfeiture for competition agreements” that it enumerated in the definition of “noncompetition agreements,” but it chose not to do so. Instead, in that context, it used a very broad phrase: “competitive activities.” As a matter of statutory construction, “when the Legislature has employed specific language in one part of a statute, but not in another part which deals with the same subject, the language should not be implied where it is not present.” . . . Thus, I see no basis to apply the exclusions to the definition of “noncompetition agreements” to the definition of “forfeiture for competition agreements.”

The court then explained:

It is not difficult to imagine why the Legislature might have excluded certain types of agreements from the definition of “noncompetition agreements” but not from the definition of “forfeiture for competition agreements.” In regulating both “noncompetition agreements” and “forfeiture for competition agreements,” the Legislature might have concluded — with justification — that the latter type of agreements give employers heightened leverage over their employees. That is, it is one thing for an employee to know that, if the employee violates a restrictive covenant forbidding recruitment of former colleagues, the employee may be subject to an injunction and / or a lawsuit for damages resulting from the violation. It is quite another for the employee to know that, in the event of a violation, the employee can be required to disgorge benefits already conferred — regardless of the degree of harm resulting to the employer from the violation. The Legislature might well have concluded that the latter situation should be subject to the Act.

In summary, it seems to me that it is overwhelmingly likely that the Legislature did not intend the definition of “competitive activities” in the Act’s definition of “forfeiture for competition agreements” to be co-extensive with the types of agreements excluded from the definition of “noncompetition agreements.” It makes more sense — given the purpose of the Act to regulate restrictive covenants in employment contracts — to construe the Act as exempting from its scope several types of agreements unless those agreements provided for forfeiture in the event of a violation.

But does it?

There are several issues with the court’s analysis and conclusion.

As to the court’s last point, if the court is right, an employee can, in connection with the cessation of employment, agree to a noncompete that does not comply with the statute, but cannot sign a forfeiture-for-competition that does not comply with the statute. Given that noncompete agreements are inherently more restrictive than forfeiture-for-competition provisions, that result makes no sense.

More fundamentally, there is a syllogism problem. If forfeiture-for-competition are a type of noncompete, and noncompetes exclude nonsolicits and no-recruits, how can forfeiture-for-competition agreements be broader than noncompetes? Let’s play out the syllogism:

• All noncompetes exclude nonsolicits and no-recruits.
• Forfeiture-for-competition agreements are noncompetes.
• Therefore . . . (yep) forfeiture-for-competition agreements exclude nonsolicits and no-recruits.

Consistent with that, although the definition of “noncompetition agreement” does not include the precise phrase, “competitive activities,” it does incorporate that very idea: “an agreement . . . under which the employee . . . agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” (Emphasis added). So, “competitive activities” should not be read in isolation as having some broader meaning than the scope of noncompetition agreements.

In fairness, the exclusion of nonsolicits and no-recruits from the definition of “noncompetition agreements” could suggest that they involve competitive activities (or activities competitive with the employer). But, as I drafted most of that language and was involved with the discussions about the reasons for it, I know that the addition of those exclusions was to make sure that the statute did not inadvertently open the door to changing the law about those contracts.

The same was true for forfeiture-for-competition agreements — and forfeiture agreements — which were expressly called out in direct response to Pettingell v. Morrison, Mahoney & Miller, 426 Mass. 253 (1997) (involving lawyer forfeiture-for-competition agreements) and Pierce v. Morrison Mahoney LLP, 452 Mass. 718 (2008) (involving lawyer forfeiture agreements).

Further, the term “forfeiture-for-competition” was intended to have the meaning that has been ascribed to it historically, both in Massachusetts caselaw (see, e.g., Cheney v. Automatic Sprinkler Corp. of Am., 377 Mass. 141, 147–48 n.7 (1979), Kroeger v. Stop & Shop Cos., 13 Mass. App. Ct. 310, 321–22 (1982)), and Pettingell v. Morrison, Mahoney & Miller, 426 Mass. 253 (1997)) and in the late Larry Reece’s seminal article, Employee Non-Competition Agreements and Related Restrictive Covenants: A Review and Analysis of Massachusetts Law, 76 Mass. L. Rev. 2 (1991). As Larry Reece explained, “Forfeiture for competition clauses provide that the employee will forfeit certain benefits in the event competes with his former employer. A forfeiture competition clause is distinguished from a typical non-competition clause since it does not absolutely proscribe competition by the employee; it merely makes it economically undesirable. A typical clause will provide that the employee will forfeit deferred compensation benefits in the event of competition.”

As those cases and Larry Reece’s article demonstrate, forfeiture-for-competition agreements involve the same type of conduct as noncompete agreements, but instead of prohibiting it, they provide a monetary disincentive. Accordingly, while forfeiture provisions triggered by a breach of a nonsolicit or no-recruit exist, they are not typically referenced as a “forfeiture for competition.” See Palladium Group, Inc. v. MacGillivray, 27 Mass.L.Rptr. 424 (Mass. Super. Ct. 2010) (referring to such an agreement only as a “forfeiture”).

This is not to say that there is never a circumstance in which the term “forfeiture-for-competition” might be broader. For example in the much heralded Cantor Fitzgerald, L.P. v. Ainslie case in Delaware, the term “forfeiture-for-competition” was used to describe a provision that required forfeiture for not just actual competition, but also for breach of nonsolicit and no-recruit obligations (among others). But that is not how it has typically been viewed in Massachusetts, nor is it what the Massachusetts legislature had in mind.

Ad to that point, as banal as it may be, the name of the statute is the “Massachusetts Noncompetition Agreement Act” for a reason. If it had been intended to cover other agreements, it would have been named the “Massachusetts Restrictive Covenant Agreement Act.” It was not.

Like the reaffirmation issue, I expect that, if the case does not settle, this aspect of the decision — which has very broad implications — will be appealed.

We’ll see.

Bonus case: Perella v. United Site Services Northeast, Inc.

The takeaway (whether you are seeking the modification or opposing it) is that the details of how the noncompete should be narrowed should (and may have to) be provided to the judge. It would also presumably be advisable to explain to the court why the proposed modification to the noncompete is reasonable and appropriate.

* * *

*Hat tip to Jeff Rosin for his representation of Miele and thank you to Max Perlman and to Erika Hahn for bringing the Miele case to my attention. And thank you to Steve Riden and to Erika for bringing the Perella case to my attention.