Contracts

[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.

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Judge Young Lays Down the Law on Earn-Outs

by Lee Gesmer on December 30, 2008

Judge Young Lays Down the Law on Earn-Outs

[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.… Read the full article