Massachusetts Supreme Judicial Court Holds Oral Arguments in Important Noncompete Case

The Massachusetts Supreme Judicial Court (SJC) recently heard oral arguments in a case that could provide important guidance on the enforceability of noncompetition covenants embedded in executive equity agreements and the proper signatory to such covenants. In Anaplan Parent, LP and Anaplan, Inc. v. Timothy Brennan, the SJC is being asked to consider whether a noncompetition covenant signed by a corporate parent – rather than by the employee's direct employer – satisfies the Massachusetts Noncompetition Agreement Act's (MNAA) requirement that a covered agreement be signed by "both the employer and employee."

Case Background

Anaplan argued that the MNAA does not apply to the equity agreement because it was entered into "outside" of Brennan's employment relationship with the company. At oral argument, however, Anaplan faced tough questioning on this position and eventually conceded that no one who was not employed by either the parent or subsidiary company received such equity agreements.

In its brief, Anaplan asserts that the lower court construed the term "employer" too narrowly when it ruled in favor of Brennan. Although Brennan was employed by Anaplan Inc., the relevant equity agreements were signed by Anaplan Parent LP, which granted Brennan incentive partnership units. Anaplan contends that the LP should qualify as an employer for MNAA purposes because it acted solely and indirectly in Anaplan Inc.'s interests by granting the units in exchange for restrictive covenants. Anaplan also argues that because the MNAA defines "employee" broadly enough to include independent contractors, courts should interpret "employer" with corresponding flexibility rather than limiting the term to a traditional wage-paying entity.

For his part, Brennan points to the text of the MNAA, which provides that a noncompetition agreement must satisfy specified minimum requirements to be valid and enforceable, including signature by the employer. Brennan emphasizes that his undisputed direct employer, Anaplan Inc., did not sign the agreements. He also argues that other statutory definitions of "employer" cited by Anaplan apply only to specific pay equity provisions, not to the MNAA, and that extending the term to a corporate parent or great-grandparent would be inconsistent with Massachusetts corporate separateness principles.

Brennan, like the justices at oral argument, challenges Anaplan's fallback position that the agreements were outside the employment relationship. He points to Anaplan's own pleadings, which described the covenants as connected to Brennan's employment, supported by continued employment and equity, and triggered by the end of his service. Brennan contends that the MNAA should not be read to create a category of agreements that arise from employment but are simultaneously outside the employment relationship.

Potential Compliance Implications for Employers

The appeal is significant because it may clarify how strictly Massachusetts courts will enforce the MNAA's procedural requirements and how companies should structure restrictive covenants connected to equity award programs. Employers that use equity, incentive unit or other executive compensation agreements may need to review whether any Massachusetts noncompetition covenants are signed by the entity that is most clearly the employee's employer. Corporate parents, holding companies and private equity portfolio structures may face increased scrutiny where restrictive covenants are contained in award agreements signed by an affiliate rather than the operating employer.

A ruling for Anaplan could provide corporate groups with greater flexibility to use parent-level incentive agreements to protect business interests. A ruling for Brennan could reinforce a bright-line compliance rule: If a noncompetition covenant is subject to the MNAA, the employee's actual employer must sign it.

For more information on this important SJC case or questions about a specific employment matter, please contact the author or another member of Holland & Knight's Labor and Employment Group.

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