Massachusetts Noncompetition Agreement Act Ruled Not Applicable to Non-Solicitation Agreement with Forfeiture Clause

The Massachusetts Supreme Judicial Court recently clarified that the Massachusetts Noncompetition Agreement Act (“Act”) does not apply to a non-solicitation agreement incorporated into a termination agreement even if the termination agreement includes a forfeiture provision if the employee breaches the non-solicitation agreement. In the matter of Susan Miele v. Foundation Medicine, Inc., Susan Miele (“Miele”) signed a transition agreement that included: (i) a non-solicitation provision barring Miele from directly or indirectly soliciting, enticing or attempting to persuade any other employee or consultant of Foundation Medicine, Inc. (“FMI”) to leave FMI during her employment and for one year thereafter and (ii) a forfeiture clause providing that if Miele committed a breach of the transition agreement, any unpaid benefits she was entitled to would be forfeited and any previously paid benefits must be immediately repaid to FMI.

FMI alleged the Miele improperly solicited employees to work for her new employer in breach of the transition agreement. FMI demanded repayment of benefits disbursed to her (valued at $1.2 million) and ceased future payments based on the forfeiture clause. Miele sued FMI alleging that FMI breached the transition agreement by withholding payment of her transition benefits. FMI counterclaimed for breach of the non-solicitation provision of the transition agreement and sought a ruling that it was not obligated to pay Miele any remaining transition benefits.

Miele contented the FMI’s counterclaims were unenforceable under the Act, claiming that the requirement that she forfeit her remaining severance benefits in the event of a breach made the covenant not to solicit subject to the Act. The lower court judge noted that the Act defined “noncompetition agreement” to include “forfeiture for competition agreement[]” – one that “imposes adverse financial consequences on a former employee” for engaging in competitive activity following termination and concluded that the transition agreement qualified as a “forfeiture for competition agreement” and was subject to the Act. The judge concluded that non-solicitation agreements are only excluded from the Act if they do not impose forfeiture of benefits upon a breach.

On FMI’s application for direct appellate review, the Supreme Judicial Court clarified that because the plain language of the Act states (i) noncompetition agreements do not include non-solicitation agreements and (ii) forfeiture for competition agreements are a subset of noncompetition agreements, it follows by implication that forfeiture for competition agreements also exclude non-solicitation agreements. As a result, a forfeiture clause triggered by a breach of a non-solicitation agreement does not constitute a “forfeiture for competition agreement” subject to the Act, and is enforceable. This is an important clarification provided by the Supreme Judicial Court which allows employers to continue to enforce non-solicitation agreements with forfeiture clauses without being subject to counterclaims for violation of the Act. We recommend that employers consult with employment counsel prior to presenting non-competition, non-solicitation and non-disclosure agreements to employees to ensure compliance with Massachusetts law.