In Susan Miele v. Foundation Medicine, Inc., the Supreme Judicial Court ruled that a forfeiture clause triggered by a breach of a nonsolicitation agreement does not constitute a “forfeiture for competition agreement” subject to the Massachusetts Noncompetition Agreement Act.
Law
The 2018 Massachusetts Noncompetition Agreement Act, G. L. c. 149 § 24L (a)-(f), sets forth the requirements for an employee noncompetition agreement to be enforceable. The Act provides stronger substantive and procedural protections for employees subject to such agreements, and limits employers to substantially reduced post-employment restrictions. A “forfeiture for competition agreement” is one that imposes financial consequences on a former employee for engaging in competitive activities. G. L. c. 149 § 24L (a). The Act expressly includes forfeiture for competition agreements within the definition of noncompetition agreements, but excludes covenants not to solicit or hire employees of the employer.
Facts
In 2017, Foundation Medicine, Inc. (FMI) hired Susan Miele, who, as a condition of employment, signed a restrictive covenant. That agreement included a nonsolicitation provision barring Miele during her employment and for one year thereafter from directly or indirectly soliciting any other employee of FMI to leave the services of FMI. In 2020, Miele and FMI executed a Transition Agreement in connection with her separation from the company. In exchange for certain benefits, the Transition Agreement included a forfeiture clause providing that, if Miele committed a breach of any agreement with FMI, any unpaid benefits would be forfeited and any previously paid benefits must be immediately repaid. FMI ultimately paid Miele approximately $1.2 million in transition benefits.
FMI alleges that during the one-year period following her departure, Miele recruited several then-current FMI employees to work with Miele at a new company. Pursuant to the forfeiture clause, FMI ceased further payments to Miele and demanded repayment of benefits already disbursed. Miele refused to comply.
The Superior Court judge partially granted Miele’s motion for judgment on the pleadings. Although the Massachusetts Noncompetition Agreement Act expressly excludes nonsolicitation agreements from its scope, the judge concluded that the Transition Agreement qualified as a “forfeiture for competition agreement” and was therefore subject to the Act. The judge reasoned that the agreement imposed “adverse financial consequences on Miele,” specifically, the loss of transition benefits, based on her competitive conduct of soliciting former FMI colleagues.
Supreme Judicial Court
The Court answered the following reported question on direct appellate review:
“Does G. L. c. 149 § 24L, the Massachusetts Noncompetition Agreement Act, apply to a non-solicitation agreement incorporated into a termination agreement if the termination agreement includes a forfeiture provision in the event that the employee breaches the non-solicitation agreement?”
The Court construed the plain language of the Massachusetts Noncompetition Agreement Act: (1) noncompetition agreements do not include nonsolicitation agreements, and (2) forfeiture for competition agreements is a subset of noncompetition agreements. “It follows, by necessary implication, that forfeiture for competition agreements also exclude nonsolicitation agreements. . . . A nonsolicitation covenant remains just that – regardless of whether the remedy for breach involves forfeiture of benefits.”
The Court engaged in careful statutory analysis of the employee’s argument that the term “competitive activities” in the definition of forfeiture for competition agreement is broader than the phrase “certain specified activities competitive with” in the definition of noncompetition agreement. Finding it would render the statute internally contradictory, the Court rejected this argument. Accordingly, the Court held the Massachusetts Noncompetition Agreement Act does not cover a breach of a nonsolicitation agreement which triggers a forfeiture clause.
If you have questions about the applicability of this case or regarding employment and/or severance agreements, please do not hesitate to contact any member of our Employment Law team – Denise Chicoine, Katherine Brustowicz, David Gabor or Johanna Matloff.