Mass Law Blog

The Bill That Would Make Noncompete Agreements Unenforceable in Massachusetts

by | Jan 13, 2009 | Contracts, Noncompete Agreements

[Update, November 7, 2011]: Almost 3 years later, and still no law.

Here is the full text of a bill filed last week that would make noncompete agreements unenforceable in Massachusetts, at least as to employees (as contrasted with noncompete covenants entered into in connection with the sale of a business, the other major category of noncompete covenants):

AN ACT TO PROHIBIT RESTRICTIVE EMPLOYMENT COVENANTS Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear.”

Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear.”

Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

For the purposes of this section, chapter 149, section 148B shall control the definition of employment.

Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual.

This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear.

If enacted, this proposed law would wipe out close to 200 years of Massachusetts law enforcing (in the “right” circumstances, and consistent with equity) covenants not to compete. Massachusetts would join California and a few other states in refusing to enforce these agreements by order of their state legislatures. While I’m not betting on passage, you never know ….

Judge Young Lays Down the Law on Earn-Outs

Judge Young Lays Down the Law on Earn-Outs

by | Dec 30, 2008 | Contracts

[Update: the decision discussed below was reversed by the First Circuit in October 2009.  Decision here]

So, you have a great little business, and a large company wants to acquire it. The buyer argues that payment for your company should be determined by an “earn-out” — the buyer’s sales of your product will determine the purchase price (in whole or in part) based on an agreed-upon formula. “Perfectly normal,” your lawyer assures you. “Seen it done in 8 acquisitions out of 10,” he says. You say nothing – your lawyer knows the ropes, right?

But, as Massachusetts federal district court Judge William Young made clear in his recent decision in Sonoran Scanners v. PerkinElmer, if you (the seller, in this case tiny Sonoran Scanners) expect the buyer (in this case the much larger PerkinElmer) to market your product (leading to sales and payments to you under the earn-out formula), you’d better make sure that the contract spells out the actions the buyer is expected to take to promote the product. Otherwise, you risk the fate that Sonoran Scanners experienced after it sold its business to PerkinElmer – PerkinElmer did little or nothing to promote the product properly during the five year earn-out period, sales were almost zilch, and in the end Sonoran Scanners was paid nothing.

It’s true that sometime you just gotta sell, and you have to take what you can get. That may have been the situation in this case – the decision doesn’t tell us. But if that’s not the case, it’s just not enough to assume that the buyer will promote your product, and if it doesn’t help much to argue breach based on “implied” contractual terms, breach of “good faith,” and other “soft” legal theories, as Sonoran Scanners did in this case. In all but the most extreme cases, “implied” will get you nowhere – if the judge doesn’t throw your claims out of court before trial (as Judge Young did to the plaintiff in this case), the jury almost certainly will. Why do you have to argue “implied” contract terms , most jurors will ask. If you were counting on the buyer of your company to make an effort to sell your product after the acquisition, why wasn’t it express?

Bottom line: avoid earn-outs when possible, but if you can’t make sure you have a good, strong contract, in black ink on white paper (preferably in a bold, large font), that nobody can misread, misinterpret or deny. That contract should state as precisely as possible what the buyer will do to promote and sell your product during the earn-out period. Most sellers know this, but sometimes the opportunity to sell a business for what the seller naively hopes will be a big payday if all goes well, when combined with the hard-nosed negotiating tactics of many buyers, can blind the seller to the risks of assuming the buyer will act in the seller’s best interests.

Judge Young’s decision in PerkinElmer is a good guide to the law in this area. As usual, Judge Young does a thorough job of analyzing the issues and educating businesspeople on what they can expect if they’re forced to go to court in this situation. In the end, Judge Young left Sonoran Scanners with a couple of minor claims, but 90 percent of Sonoran’s case was dismissed before trial on summary judgment. It would be surprising if the case doesn’t settle at this point, with PerkinElmer holding the stronger hand.

  • Link to the decision here

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