Employers Should Revisit Their Non-Compete Agreements after Latest Massachusetts Superior Court Ruling

A recent decision from the Massachusetts Superior Court has put “employers” on notice. In Anaplan Parent LP and Anaplan Inc. v. Timothy Brennan, the court interpreted the term “employer” under the Massachusetts Non-Competition Agreement Act (“MNAA”) narrowly in refusing to enforce non-competition provisions set forth in three equity agreements an employee signed with the parent company of his employing entity, but not the employing entity itself. 

Employers who broadly use restrictive covenants across multiple employment and other documents should carefully review the decision and consider whether they need to address their existing restrictive covenant scheme to ensure enforceability under the MNAA.

Noncompetition Law in Massachusetts 

Restrictive covenant law – i.e., enforcement of non-competes, non-solicits, and other covenants – is state-specific, developing either through common law or, in recent years, by statute. In Massachusetts, the MNAA generally applies to all noncompetition covenants entered into on or after October 1, 2018: (1) between an “employer and an employee;” or (2) “otherwise arising out of an existing or anticipated employment relationship.” The MNAA expressly excludes from its coverage, among other things, (a) noncompetition agreements made in connection with the sale of a business (or substantially all assets of a business) when the party restricted is a significant owner/member/partner who will receive significant consideration or benefit from the transaction; (b) noncompetition agreements outside of an employment relationship, and (c) 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. The statute also does not apply to nonsolicitation agreements.

When drafting noncompetition provisions or agreements that are subject to the MNAA, employers must carefully consider the MNAA’s various requirements, including that: 

• The employer must provide at least ten business days’ notice before the commencement of employment or, if already employed, prior to the effective date of the agreement for the applicant/employee to review the noncompetition covenant.
• Employers must provide current employees fair and reasonable consideration for the noncompetition covenant independent from the continuation of employment; for new hires, the consideration must be either “garden leave” (i.e., one-half salary pay following termination) or some other “mutually-agreed upon consideration” that is specified in the agreement.
• The agreement must be in writing.
• The agreement must expressly state that the employee has the right to consult with counsel before signing.
• Both the employer and the employee must sign the agreement.

The meanings of various terms in the MNAA have been subject to ongoing judicial interpretation, as was the case in Anaplan, where this last requirement – execution by the employer and employee – was the focus of the court’s decision.

The Issue in Anaplan: Who is an “Employer?” 

In Anaplan, the employee had previously entered into three equity agreements containing noncompetition provisions with the parent company of the entity who actually employed him.  At issue was whether the agreements were unenforceable because the employee’s employing entity was not a signatory to the agreement. 

The court analyzed whether the MNAA’s definition of “employer” was broad enough to capture the parent company (and other entities and affiliates). After noting that the statute itself did not explicitly define “employer,” it analyzed various canons of statutory interpretation and other statutes utilizing the term “employer” and concluded that none of those statutes “suggest that an ‘employer’ includes a parent or subsidiary entity of an actual employer.”  

As part of this, notably, the court analogized the MNAA to the Workers’ Compensation Act, finding that “courts construing th[e] [Workers’ Compensation] Act have declined to extend worker’s compensation immunity to parent corporations based on the doctrine of corporate separateness,”  which dictates that corporations are to be regarded as separate entities and which is the default presumption under Massachusetts common law. The decision did not expressly analyze whether the noncompetition covenant could have been deemed signed by an employer of the employee under a joint-employer theory. 

Also notable was the court’s dismissal of the company’s argument that they entered into the equity agreements with the individual outside of the employment relationship, and therefore, outside of the MNAA. The court rejected this argument because the restrictive covenant period itself ran based on the end date of the employee’s employment and because of the parties’ other intentional efforts to comply with the MNAA. It is possible that the court’s analysis would have been different if the restrictive period was measured by a different metric (e.g., tied to equity holding). 

What Does the Anaplan Ruling Mean for Massachusetts Employers? 

The key takeaways from this statutory interpretation exercise are these: 

• Prospectively, employers should ensure that they draft and distribute their noncompetition agreements to meet the statute’s strict compliance requirements, including the requirement that the employee’s actual employing entity countersign the noncompetition agreement.
• For existing agreements, employers should consider whether amending their noncompetition agreements to add the employing entity as a party is an appropriate solution – a solution the Superior Court offered in its opinion, noting “to make the noncompetition agreements enforceable, such contracts need merely be amended to include the actual employer as a party and signatory thereto.” But before doing so, employers must examine the specific factual circumstances including to whether and how to: (i) account for the fact that additional consideration may be required, and/or (ii) ensure the employing entity is added for the limited purpose of advancing noncompetition enforceability.
• Relatedly, the high-level issue of noncompetition protection must be examined holistically.  Employers often use several layers of noncompetition protection (e.g., deal-related covenants, operating agreements, equity agreements, and employment agreements) (for a more detailed dive into restrictive covenants in private equity transactions, refer to our blog post here). So, in the scenario where the only restrictive covenant in place is: (i) subject to the MNAA and (ii) such agreement is signed only by the parent-issuer and not the actual employer, the employer may want to consider whether it is appropriate to pursue an amendment. 
• This decision, and the MNAA more generally, applies to noncompetition covenants only; it does not apply to nonsolicitation or other restrictive covenants. Employers can continue to include such other covenants in employment, equity and related agreements without the need to satisfy MNAA compliance requirements, provided they are reasonable and consistent with Massachusetts common law.
• This is not the end of the road on this issue. The decision itself was at the temporary restraining order and preliminary injunction stage, meaning that the court could later reach a different conclusion after a final resolution on the merits. Other state or federal district courts could also view the issue differently. Further, the decision has already been appealed to a higher court. Employers should track developments here to determine whether any different course of action is warranted on their covenant schemes. 

Mintz’s employment team will continue to monitor any further legal developments on this issue and stands by ready to assist with any compliance-related matters under the MNAA. 

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