PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Bernard Crawford, Responsible Partner, Labor & Employment Devon Archer, Lead Associate, Labor & Employment
FROM: Nadia Petrov, Associate, Labor & Employment
DATE: July 25, 2022
RE: Massachusetts Noncompetition Agreement Act (M.G.L. c. 149, § 24L) — Compliance Checklist for Proposed Non-Competition Agreement with Dr. Marcus J. Elliston
CLIENT: Arbor Health Technologies Inc.
CLIENT NO.: 81-30294
MATTER NO.: 1010-00004
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is prepared in anticipation of litigation and for the purpose of providing legal advice to the client. Do not distribute or disclose without the express authorization of the Responsible Partner.
I. Purpose and Summary
This memorandum provides a comprehensive compliance checklist under the Massachusetts Noncompetition Agreement Act (the "MNAA"), M.G.L. c. 149, § 24L, as applied to the proposed Employee Non-Competition Agreement (the "Non-Competition Agreement" or the "Agreement") between Arbor Health Technologies Inc. ("AHT" or the "Company") and Dr. Marcus J. Elliston (the "Executive") in connection with his prospective appointment as Chief Operating Officer of the Company.
The MNAA, which became effective on October 1, 2018, imposes specific substantive requirements and procedural limitations on noncompetition agreements entered into with employees and independent contractors in the Commonwealth of Massachusetts. The statute represents one of the most prescriptive noncompete regulatory frameworks in the United States and requires careful attention to drafting formalities, durational and scope limitations, consideration requirements, and enforceability restrictions tied to the circumstances of an employee's separation from employment.
AHT is a Delaware corporation headquartered at 400 Brattle Commerce Park, Suite 1200, Cambridge, Massachusetts 02138. Dr. Elliston currently resides at 87 Laurel Hill Road, Wellesley, Massachusetts 02481. The employment relationship will be governed by Massachusetts law, and the proposed Non-Competition Agreement will be subject to the MNAA in all material respects. There is no viable argument that the MNAA would not apply, given both the Company's Massachusetts headquarters and the Executive's Massachusetts domicile.
Summary Conclusion: The proposed Non-Competition Agreement can be structured to comply with the MNAA, provided certain drafting requirements are satisfied and one significant revision is made to the terms proposed in the Company's internal term sheet. Specifically, the proposed 18-month post-termination non-compete period must be reduced to 12 months. Dr. Elliston does not fall within any prohibited category of worker under the statute. Key compliance items include the garden-leave payment requirement, durational limits, scope limitations, termination-circumstance restrictions, and notice and timing formalities. This checklist is intended to guide the preparation of the first draft of the standalone Employee Non-Competition Agreement, which is targeted for circulation to Executive's counsel on August 5, 2022 as part of the broader employment package.
This memorandum does not address the enforceability of the separate non-solicitation and confidentiality covenants under Massachusetts common law, which will be the subject of a companion memorandum prepared by Devon Archer. Nor does this memorandum provide a comprehensive analysis of Section 409A of the Internal Revenue Code as applied to the garden-leave payment structure, which will be addressed by Gregory Tan in a forthcoming tax memorandum.
II. Background on the Proposed Arrangement
AHT engaged Calderwood & Harkness LLP on July 13, 2022 to draft a comprehensive executive employment agreement package for Dr. Marcus J. Elliston in connection with his prospective hire as Chief Operating Officer of the Company. The engagement was initiated by Aaron Whitfield, General Counsel of AHT, in coordination with Lisa Murakami, the Company's Chief Human Resources Officer.
Dr. Elliston's proposed start date is November 1, 2022. In his capacity as COO, Dr. Elliston will report directly to Priya Chandrasekaran, the Company's Chief Executive Officer, and will have oversight of all operational functions, including product operations, customer success, implementation services, and clinical workflow integration. As a member of the Company's executive leadership team, Dr. Elliston will have access to the Company's most sensitive strategic, operational, financial, and customer-related information.
The internal term sheet circulated on July 18, 2022 by AHT (via Aaron Whitfield and Lisa Murakami) contemplates, among other terms, a non-competition restriction of up to 18 months post-termination, with an industry scope covering healthcare IT and SaaS companies. The term sheet also contemplates a separate employee non-solicitation covenant of 18 months, a customer and partner non-solicitation covenant of 12 months, a perpetual confidentiality and non-disclosure covenant, and standard invention assignment provisions. The term sheet reflects input from Ridgeline Capital Partners, the Company's private equity sponsor (holding approximately 68% of the Company's equity), and the AHT Board of Directors.
Dr. Elliston's proposed base salary is $575,000 per annum. The total compensation package also includes a signing bonus of $250,000, participation in the Company's annual incentive plan (target bonus of 75% of base salary), a long-term equity incentive grant of restricted stock units valued at approximately $1,200,000 at grant (vesting over four years), and standard executive benefits.
Dr. Elliston's prior employer is Pinnacle Care Systems, Inc. ("Pinnacle"), located at 1500 Research Boulevard, Suite 600, Rockville, Maryland 20850. Pinnacle is a competing healthcare IT company offering clinical decision support and population health management solutions. Dr. Elliston served as Pinnacle's Senior Vice President of Operations for approximately six years. We are not presently aware of any existing non-compete or restrictive covenant obligations owed by Dr. Elliston to Pinnacle, although this should be confirmed during the negotiation process. If Dr. Elliston is subject to an existing non-compete with Pinnacle, a separate analysis will be required to assess the enforceability of that obligation and any potential exposure to AHT arising from the hire.
Dr. Elliston is represented in connection with the employment negotiations by Catherine A. Fielding, Partner, at Fielding & Rowe LLP, located at 101 Federal Street, Suite 2600, Boston, Massachusetts 02110. Fielding & Rowe is a well-regarded boutique employment law firm with significant experience representing senior executives in restrictive covenant negotiations. We should anticipate that Ms. Fielding will carefully scrutinize MNAA compliance in the proposed Non-Competition Agreement and will likely push for maximum restrictions on the scope and duration of any non-compete, as well as favorable provisions regarding garden-leave payments, termination-circumstance carve-outs, and severability.
III. Applicability of the MNAA
A. Effective Date and Scope
The MNAA applies to noncompetition agreements entered into on or after October 1, 2018. The statute was enacted as part of the Massachusetts economic development bill signed by Governor Charles Tarvick on August 10, 2018, and represents the Commonwealth's first comprehensive statutory framework governing noncompetition agreements. Prior to the MNAA, the enforceability of noncompetition agreements in Massachusetts was governed entirely by common law principles, which provided less certainty regarding permissible terms and required formalities.
The proposed Non-Competition Agreement with Dr. Elliston will be entered into in 2022, well after the October 1, 2018 effective date, and is therefore fully subject to the MNAA's requirements. There is no transitional or grandfather provision that would exempt this agreement from the statute's coverage.
The MNAA governs agreements with "employees" and "independent contractors" as those terms are defined under the statute. Dr. Elliston will be engaged as a W-2 employee of AHT, serving in the capacity of Chief Operating Officer. He is unquestionably an "employee" within the meaning of the statute, and the MNAA applies to the proposed Non-Competition Agreement in its entirety.
B. Definition of "Noncompetition Agreement"
Under the MNAA, a "noncompetition agreement" is defined as "an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employer after the employment relationship has ended." M.G.L. c. 149, § 24L(a). This definition is broadly drafted and captures any post-employment restriction on competitive activity, regardless of how the restriction is labeled or structured.
The statute, however, expressly excludes the following categories of agreements from the definition of "noncompetition agreement," and therefore from the MNAA's specific requirements:
(i) Non-solicitation agreements — agreements that prohibit the solicitation of customers, clients, or employees of the employer, but do not restrict the employee from engaging in competitive business activity generally;
(ii) Non-disclosure and confidentiality agreements — agreements that restrict the use or disclosure of the employer's confidential information, trade secrets, or proprietary data;
(iii) Non-compete covenants made in connection with the sale of a business entity — restrictions entered into by the seller in connection with the sale of a business or substantially all of its assets, where the party restricted by the agreement is a significant owner of the business being sold;
(iv) Forfeiture-for-competition agreements — agreements under which the employee forfeits certain compensation or benefits (such as deferred compensation or unvested equity) upon engaging in competitive activity, but are not affirmative prohibitions on competition;
(v) Agreements not to reapply for employment — restrictions that merely prohibit a former employee from seeking reemployment with the same employer;
(vi) Non-competes arising from separation agreements negotiated at or after termination — noncompetition restrictions contained in separation or severance agreements that are entered into in connection with the cessation of the employment relationship, provided that the employee is given at least seven business days to rescind the agreement; and
(vii) Invention assignment agreements — agreements governing the assignment of inventions, intellectual property, or works of authorship created during the employment relationship.
Relevance to the Proposed Arrangement: The proposed Employee Non-Competition Agreement is a standalone agreement that will restrict Dr. Elliston from engaging in competitive activities following the termination of his employment with AHT. It squarely falls within the MNAA's definition of a "noncompetition agreement" and is subject to the statute's requirements.
The separate non-solicitation covenants (both employee non-solicitation and customer/partner non-solicitation) and confidentiality/non-disclosure covenants that are proposed for inclusion in the Employment Agreement are not subject to the MNAA's specific requirements, including the 12-month durational cap, the garden-leave payment obligation, and the formal notice requirements. These covenants must, however, be independently enforceable under Massachusetts common law, which imposes its own reasonableness requirements. The enforceability of these covenants will be addressed in a separate memorandum prepared by Devon Archer.
Similarly, the invention assignment provisions (contemplated for inclusion as Schedule A to the Employment Agreement) are expressly excluded from the MNAA and do not raise MNAA compliance issues.
It is critical that the Non-Competition Agreement be drafted and structured as a separate, standalone instrument, distinct from the non-solicitation and confidentiality covenants contained in the Employment Agreement. This structural separation serves two purposes: first, it ensures that the MNAA's requirements are applied only to the covenant that triggers them (the non-compete), and second, it insulates the non-solicitation and confidentiality covenants from any challenge to the enforceability of the non-compete. If all restrictive covenants were bundled into a single instrument without clear independence clauses, there is a risk that a finding of non-compliance with respect to the non-compete could taint the entire set of restrictive covenants.
C. Governing Law
The Employment Agreement and the Non-Competition Agreement will be governed by the laws of the Commonwealth of Massachusetts. This is the appropriate and required governing law for the Non-Competition Agreement.
Even if a different governing law were selected — for example, Delaware law (the state of AHT's incorporation) — the MNAA provides that Massachusetts law governs a noncompetition agreement with an employee who is, or has been, a resident of the Commonwealth of Massachusetts and whose employment is, or has been, primarily based in Massachusetts. Dr. Elliston resides in Wellesley, Massachusetts, and AHT is headquartered in Cambridge, Massachusetts. Dr. Elliston's employment will be primarily based at AHT's Cambridge headquarters. Accordingly, there is no choice-of-law issue, and any attempt to evade the MNAA through a choice-of-law provision selecting a more permissive jurisdiction would be ineffective and could undermine the credibility of the agreement.
We recommend that the Non-Competition Agreement include a governing law clause expressly designating Massachusetts law and acknowledging the applicability of the MNAA. This approach demonstrates good faith and reduces the likelihood of a threshold enforceability challenge.
IV. Compliance Checklist
The following checklist addresses each material requirement of the MNAA as applied to the proposed Non-Competition Agreement with Dr. Elliston. For each checklist item, I have identified the statutory requirement, analyzed its application to the proposed arrangement, and provided drafting recommendations.
Checklist Item 1: Prohibited Categories of Workers
Statutory Requirement:
The MNAA prohibits noncompetition agreements with certain categories of workers. Under M.G.L. c. 149, § 24L(b), a noncompetition agreement shall not be enforceable against the following individuals:
(a) Nonexempt employees under the Fair Labor Standards Act — employees who are classified as nonexempt under the FLSA and are therefore entitled to overtime compensation;
(b) Undergraduate or graduate students engaged in short-term employment — including, but not limited to, interns, whether paid or unpaid, and students engaged in cooperative education or similar temporary employment arrangements;
(c) Employees who have been terminated without cause or laid off — this prohibition applies at the time of enforcement, not at the time the agreement is executed, and renders a noncompetition agreement unenforceable as to any employee whose employment is terminated by the employer without cause or who is laid off as part of a reduction in force; and
(d) Employees age 18 or younger — minors who have not attained the age of majority.
Application to Dr. Elliston:
Dr. Elliston holds a Doctor of Medicine degree from the Johns Hopkins University School of Medicine and a Master of Business Administration from the Wharton School of the University of Pennsylvania. He has approximately 18 years of professional experience in healthcare operations and executive management. In his proposed role as Chief Operating Officer of AHT, he will exercise significant executive authority over the Company's operational functions, will supervise multiple direct reports (including senior vice presidents and vice presidents), and will receive a base salary of $575,000 per annum. Dr. Elliston is unquestionably an exempt employee under the executive exemption of the Fair Labor Standards Act, 29 U.S.C. § 213(a)(1), and the corresponding Massachusetts wage and hour regulations. The FLSA nonexempt employee prohibition does not apply.
Dr. Elliston is not an undergraduate or graduate student, nor is he engaged in any short-term, internship, or cooperative education arrangement. This prohibition is inapplicable.
Dr. Elliston is well over the age of 18. The minor employee prohibition is inapplicable.
The prohibition on noncompetition agreements with employees terminated without cause or laid off requires special attention. This prohibition operates at the time of enforcement, not at the time of execution. That is, the MNAA does not prevent AHT from entering into a noncompetition agreement with Dr. Elliston at the outset of his employment; rather, it renders the agreement unenforceable if, at the time the Company seeks to enforce it, Dr. Elliston's employment has been terminated by the Company without Cause (as that term will be defined in the Employment Agreement) or he has been laid off. This prohibition is separate from and in addition to the garden-leave payment obligation — it is a substantive enforceability limitation that cannot be overcome by payment of garden-leave or any other form of consideration.
Drafting Recommendation: The Non-Competition Agreement should include clear language providing that the non-compete restriction shall apply only in the following circumstances: (i) voluntary resignation by the Executive without Good Reason; (ii) termination of the Executive's employment by the Company for Cause; or (iii) expiration of the employment term by reason of non-renewal by the Executive. The agreement should include an express statement that the non-compete restriction shall not be enforceable in the event that the Executive's employment is terminated by the Company without Cause or the Executive resigns for Good Reason (each as defined in the Employment Agreement). The definitions of "Cause" and "Good Reason" should be cross-referenced to the Employment Agreement to ensure consistency.
Conclusion: Dr. Elliston is not in any prohibited category at the time of the proposed execution of the Non-Competition Agreement. However, the agreement must address the termination-without-cause prohibition at the enforcement level through appropriate drafting.
Checklist Item 2: Garden-Leave or Other Mutually Agreed Consideration
Statutory Requirement:
The MNAA requires that a noncompetition agreement be supported by adequate consideration in one of two forms. Under M.G.L. c. 149, § 24L(b)(vi), the employer must provide either:
(a) "Garden leave" — during the period of the non-compete restriction, the employer must pay the employee a sum equal to at least 50% of the employee's highest annualized base salary paid by the employer within the two years preceding the employee's termination of employment; OR
(b) "Other mutually-agreed upon consideration" — the agreement may specify some other form of consideration that has been mutually agreed upon by the employer and the employee. The statute does not define what constitutes "adequate" consideration in this category, and there is limited case law interpreting this provision. However, it is generally understood that nominal or illusory consideration would be insufficient, and that the consideration must have genuine economic value to the employee.
The garden-leave option is the more conservative and predictable approach, as the amount is specified by statute and is not subject to a judicial determination of "adequacy." The "other mutually-agreed consideration" option introduces uncertainty and potential litigation risk, as a court may find the consideration insufficient after the fact.
Application to Dr. Elliston:
Recommended Approach: We recommend structuring the consideration for the Non-Competition Agreement as a garden-leave clause providing for payment equal to 50% of Dr. Elliston's base salary during the restricted period. This is the most conservative and defensible approach and minimizes the risk that a court would find the consideration inadequate.
Calculation: Based on Dr. Elliston's proposed annual base salary of $575,000, the garden-leave payment would be calculated as follows:
50% × $575,000 = $287,500
This amount would be payable during the 12-month post-termination non-compete period (see Checklist Item 3 below regarding the durational limitation). If the non-compete period were shorter — for example, if the parties negotiate a six-month restriction — the garden-leave payment would be calculated on a pro-rata basis (i.e., 50% of $575,000 × 6/12 = $143,750).
Alternative Approach: AHT could alternatively structure the consideration as "other mutually-agreed upon consideration," potentially including the signing bonus ($250,000), the initial equity grant, or some combination thereof. However, this approach presents several risks. First, courts may scrutinize whether the consideration is truly "mutual" or was imposed unilaterally by the employer. Second, the signing bonus and equity grants are arguably provided as consideration for Dr. Elliston's acceptance of employment and performance of services, rather than as consideration for the specific burden of the non-compete restriction — an argument that Fielding & Rowe would certainly advance. Third, if the signing bonus is subject to a repayment obligation (e.g., if Dr. Elliston voluntarily resigns within 12 months), the consideration could be viewed as illusory in certain termination scenarios. For these reasons, the garden-leave approach is strongly recommended.
Payment Structure: The garden-leave payment should be structured as salary continuation, payable in regular installments on AHT's standard payroll schedule (currently semi-monthly) during the 12-month restricted period. This structure is cleaner from a Section 409A perspective than a lump-sum payment (see Checklist Item 10 below for further discussion of 409A considerations). The payment obligation should be conditioned on the Executive's continued compliance with the non-compete restriction — if the Executive breaches the non-compete, the Company's obligation to continue making garden-leave payments should terminate.
Interaction with Severance: A critical drafting point is that the garden-leave payment obligation must be independent of and in addition to any severance amounts owed to the Executive under the Employment Agreement. If the garden-leave payment is structured to overlap with or be offset against severance, Fielding & Rowe will argue (with considerable force) that the garden-leave consideration is illusory because it simply repackages an existing contractual obligation. The Employment Agreement should clearly delineate between severance payments (payable upon qualifying terminations as part of the compensation package) and garden-leave payments (payable as consideration for the non-compete restriction). The two payment streams should be additive, not duplicative.
Drafting Recommendation: Include an express garden-leave clause in the Non-Competition Agreement providing for payment of $287,500 (representing 50% of the Executive's annualized base salary of $575,000), payable in regular semi-monthly payroll installments during the 12-month post-termination restricted period, subject to the Executive's continued compliance with the non-compete restriction. Include language expressly stating that the garden-leave payment is in addition to, and not in lieu of, any severance, accrued benefits, or other amounts payable to the Executive under the Employment Agreement. Address the interaction between garden-leave payments and the Executive's obligation to mitigate (i.e., confirm whether the garden-leave payment is subject to offset or reduction if the Executive obtains new employment during the restricted period — we recommend that it not be subject to offset, as this would be most consistent with the statutory framework and would reduce enforceability risk).
Checklist Item 3: Maximum Duration
Statutory Requirement:
The MNAA limits the duration of a noncompetition restriction to 12 months from the date of cessation of employment. M.G.L. c. 149, § 24L(b)(iv). An exception to the 12-month limitation is available only in cases where the employee has breached a fiduciary duty to the employer or has unlawfully taken, whether physically or electronically, property belonging to the employer. In such cases, the noncompetition restriction may extend to 24 months from the date of cessation of employment.
The statute is clear that the 12-month default maximum may not be extended by agreement of the parties. The 24-month extension is available only upon a demonstrated breach of fiduciary duty or unlawful taking of property — it cannot be established prospectively in the agreement itself.
Application to Dr. Elliston:
The AHT internal term sheet circulated on July 18, 2022 proposes a non-competition period of up to 18 months post-termination. This proposal exceeds the MNAA's 12-month maximum and is not permissible under the statute. The 24-month exception is available only in response to specific misconduct (fiduciary breach or theft of property) that has actually occurred — it cannot serve as a basis for a prospectively agreed 18-month restriction.
This is a critical issue. The proposed 18-month duration must be reduced to 12 months in order to comply with the MNAA. If the agreement were executed with an 18-month restriction, a Massachusetts court would likely either reform the duration to 12 months (under a blue-pencil or equitable reformation theory) or decline to enforce the non-compete altogether. In either case, inclusion of a non-compliant duration would undermine the Company's credibility with the court and with opposing counsel, and could create leverage for the Executive to challenge other provisions of the agreement. We should advise Aaron Whitfield and Lisa Murakami promptly that the 18-month proposal in the term sheet is not enforceable under Massachusetts law and must be revised.
We also note that this is likely to be a non-controversial point in negotiations with Fielding & Rowe. We anticipate that Ms. Fielding will insist on the 12-month statutory maximum in any event, and possibly push for a shorter period. By aligning our initial draft with the statute, we avoid a credibility issue, demonstrate good faith, and expedite the negotiation process. There is no tactical advantage to proposing an unenforceable 18-month period in the initial draft.
Drafting Recommendation: Set the non-compete restriction at 12 months from the date of cessation of employment, without any extension for garden-leave payment periods or any other tolling mechanism. Include a savings clause permitting the Company to seek an extension of the restricted period to 24 months in the event of a judicially determined breach of fiduciary duty by the Executive or an unlawful taking of Company property by the Executive. The savings clause should make clear that the extended period is available only upon a court determination of the requisite misconduct and is not self-executing.
Checklist Item 4: Geographic and Industry Scope Limitations
Statutory Requirement:
The MNAA requires that a noncompetition agreement satisfy the following scope-related requirements under M.G.L. c. 149, § 24L(b)(iii):
(i) The restriction must be no broader than necessary to protect the employer's legitimate business interests, which the statute identifies as including trade secrets, confidential information, and the employer's goodwill;
(ii) The restriction must be reasonable in geographic scope;
(iii) The restriction must be reasonable in the scope of proscribed activities; and
(iv) The restriction must be consonant with public policy.
These reasonableness requirements are consistent with, and in many respects codify, the pre-existing Massachusetts common-law framework for evaluating noncompetition agreements. However, the statute's explicit identification of the relevant factors provides additional clarity for drafting purposes.
Application to Dr. Elliston:
Geographic Scope: AHT operates a cloud-based SaaS platform for clinical workflow optimization and revenue cycle management. The Company's customers include hospitals, health systems, physician groups, and other healthcare organizations throughout the United States. AHT's operations are inherently national in scope — its products are delivered via the cloud and are not geographically limited to any particular region or market. Dr. Elliston, as COO, will have oversight of the Company's national operations and will be exposed to strategic, operational, and customer-related information spanning the entire United States.
Given these facts, a nationwide geographic restriction is defensible and likely reasonable. However, the geographic scope should be carefully justified in the agreement by reference to AHT's national customer base, the national scope of Dr. Elliston's responsibilities, and the nature of the Company's cloud-based delivery model. An international restriction would be overbroad — AHT does not currently have material international operations — and should be avoided.
Industry and Activity Scope: The internal term sheet proposes a restriction on employment with "healthcare IT/SaaS companies." While this description captures AHT's competitive landscape at a high level, it may be viewed as somewhat broad if applied without further qualification. The healthcare IT sector is vast and includes companies engaged in electronic health records, telehealth, medical device software, health insurance technology, clinical trial management, and numerous other sub-sectors that do not directly compete with AHT's clinical workflow and revenue cycle management platform.
We recommend narrowing the industry scope to healthcare IT and SaaS companies with annual revenue exceeding $50 million that are operating in the United States. This revenue threshold targets companies of sufficient scale to be genuine competitors of AHT while demonstrating a reasonable limitation on the scope of the restriction. A restriction covering all healthcare IT companies of any size, including early-stage startups that do not compete with AHT's products, would likely be challenged as overbroad.
Alternatively or additionally, the industry scope could be defined by reference to specific product categories (e.g., clinical workflow management, revenue cycle management, or clinical decision support) rather than or in addition to the broader "healthcare IT/SaaS" label. This product-category approach may provide a more defensible basis for the restriction by tying it directly to the Company's core competitive offerings.
Proscribed Activities: The restriction should be limited to executive, managerial, or operational roles substantially similar to those Dr. Elliston will perform for AHT. A restriction that would prevent Dr. Elliston from accepting any position of any kind — including, for example, a purely clinical role, a board advisory position, or an academic appointment — at a competitor would be overbroad and difficult to enforce. The restriction should target the type of role in which Dr. Elliston could use AHT's confidential information and strategic knowledge to the competitive detriment of the Company.
Legitimate Business Interests: AHT can articulate strong legitimate business interests to support the non-compete restriction. Specifically:
(a) Trade secrets — AHT's cloud-based clinical workflow and revenue cycle management platform embodies proprietary algorithms, data models, integration architectures, and pricing methodologies that constitute trade secrets under Massachusetts law (M.G.L. c. 93, §§ 42-42G);
(b) Confidential business strategies and customer relationships — As COO, Dr. Elliston will have access to the Company's strategic plans, product roadmaps, financial projections, customer contracts, pricing structures, key account strategies, and personnel evaluations, all of which constitute confidential information that could be leveraged by a competitor;
(c) Goodwill — Dr. Elliston will develop relationships with customers, partners, vendors, and other stakeholders on behalf of AHT, and the Company has a legitimate interest in protecting the goodwill associated with those relationships; and
(d) Competitive intelligence — Given Dr. Elliston's senior executive position and his direct access to the Company's competitive strategy, there is a genuine risk that a competitor could gain an unfair advantage by employing Dr. Elliston immediately following his departure.
Drafting Recommendation: Limit the non-compete to a restriction on employment with healthcare IT and SaaS companies with annual revenue exceeding $50 million operating in the United States, in executive, managerial, or operational roles substantially similar to those performed by the Executive for AHT. Include a preamble or recital section in the Non-Competition Agreement that identifies and describes the specific legitimate business interests that the restriction is designed to protect. This recital will serve both as a factual foundation for the restriction and as a persuasive tool in any future enforcement proceeding.
Checklist Item 5: Formal Notice and Timing Requirements
Statutory Requirement:
The MNAA imposes specific notice and timing requirements that must be satisfied as a condition of enforceability. Under M.G.L. c. 149, § 24L(b)(i)–(ii):
(a) For new hires: The noncompetition agreement must be provided to the prospective employee by the earlier of (i) the time of making a formal offer of employment, or (ii) ten (10) business days before the commencement of the employee's employment.
(b) For existing employees: If a noncompetition agreement is entered into during the course of existing employment (rather than at the commencement of employment), the agreement must be supported by fair and reasonable consideration independent of continued employment, and must be provided at least ten (10) business days before the effective date.
(c) Signature requirement: The noncompetition agreement must be in writing and signed by both the employer and the employee.
(d) Right to counsel notice: The agreement must expressly state that the employee has the right to consult with an attorney prior to signing.
Application to Dr. Elliston:
Dr. Elliston has not yet commenced employment with AHT. His proposed start date is November 1, 2022. The Non-Competition Agreement is being prepared as part of the initial employment package and will be provided to Dr. Elliston either simultaneously with or as part of the formal offer of employment. Dr. Elliston is a new hire, and the "new hire" timing provisions apply.
The first draft of the Non-Competition Agreement is targeted for circulation to Fielding & Rowe LLP on August 5, 2022. This is nearly three months before the proposed November 1, 2022 start date and well in excess of the 10-business-day advance notice requirement. The timing requirement will be satisfied with considerable margin.
Dr. Elliston is already represented by sophisticated employment counsel — Catherine A. Fielding of Fielding & Rowe LLP — and the Non-Competition Agreement will be the subject of a negotiated arm's-length transaction between represented parties. The statutory requirement that the agreement advise the employee of the right to consult with counsel is a formality in this context, but it must nonetheless be included in the agreement. The absence of the required notice language could provide a technical basis for a challenge to enforceability, even where the employee was in fact represented by counsel throughout the negotiation.
Drafting Recommendation:
• Include express language advising the Executive of the right to consult with an attorney prior to signing the agreement. This language should be conspicuous — we recommend placing it in bold typeface in a separate paragraph immediately above the signature block.
• Ensure that the Non-Competition Agreement is delivered to the Executive (through his counsel) contemporaneously with or before the formal offer letter. In practice, we anticipate that the Non-Competition Agreement, the Employment Agreement, and all ancillary documents will be circulated as a single package to Fielding & Rowe on August 5, 2022.
• Include signature blocks for both parties. The Company should be represented by an authorized signatory — we recommend either Aaron Whitfield (General Counsel) or Priya Chandrasekaran (CEO), depending on the Company's internal authorization procedures. Dr. Elliston will execute the agreement in his individual capacity.
• Maintain delivery records for compliance documentation purposes. The date and method of delivery of the Non-Competition Agreement to the Executive (or his counsel) should be documented and retained in the matter file. An email transmission with a timestamp and read receipt is sufficient, but a formal transmittal letter is preferred.
Checklist Item 6: Specific Statutory Language Requirements
Statutory Requirement:
In addition to the notice and timing requirements discussed above, the MNAA imposes the following specific language and formatting requirements for noncompetition agreements:
(a) Right to counsel advisory: The agreement must include a statement, in writing, that the employee has the right to consult with an attorney before signing the agreement.
(b) Written and signed: The agreement must be in writing and must be signed by both the employer and the employee. Oral noncompetition agreements are unenforceable under the MNAA.
(c) Consideration recital: The agreement must expressly recite the garden-leave payment or other mutually agreed-upon consideration that supports the noncompetition restriction.
Application to Dr. Elliston:
All three of these requirements are straightforward drafting items that can be readily incorporated into the Non-Competition Agreement. None presents a substantive compliance challenge.
Drafting Recommendation:
• Include a prominent notice regarding the Executive's right to consult with an attorney before signing. We recommend the following language, placed in bold typeface in a separate paragraph near the signature block:
"THE EXECUTIVE IS HEREBY ADVISED OF THE EXECUTIVE'S RIGHT TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT."
• Ensure that the agreement is executed in counterparts with original signatures (or, if executed electronically, in compliance with the Massachusetts Uniform Electronic Transactions Act, M.G.L. c. 110G). Include a counterparts clause.
• Include an express recital in the agreement specifying the garden-leave payment of $287,500 (representing 50% of the Executive's annualized base salary of $575,000), together with a description of the payment schedule and terms. The recital should make clear that the garden-leave payment constitutes the consideration for the noncompetition restriction, as required by M.G.L. c. 149, § 24L(b)(vi).
Checklist Item 7: Interaction with Termination Without Cause
Statutory Requirement:
As discussed in Checklist Item 1, a noncompetition agreement is unenforceable under the MNAA against an employee who has been terminated without cause or laid off. M.G.L. c. 149, § 24L(b)(ii). This prohibition is absolute and cannot be waived by agreement of the parties.
Application to Dr. Elliston:
The Employment Agreement between AHT and Dr. Elliston will separately define the terms "Cause" and "Good Reason." Based on our discussions with Aaron Whitfield and Lisa Murakami, and consistent with standard practice for C-suite employment agreements in the healthcare technology sector, we anticipate that these terms will be defined substantially as follows:
"Cause" — expected to include: (i) material breach of the Employment Agreement or any restrictive covenant obligation; (ii) willful misconduct or gross negligence in the performance of duties; (iii) conviction of, or plea of guilty or nolo contendere to, a felony or any crime involving moral turpitude, fraud, or dishonesty; (iv) act of fraud, embezzlement, or misappropriation of Company property; (v) material violation of Company policies, including the Code of Conduct and Ethics; and (vi) willful refusal to perform lawful duties as directed by the CEO or the Board (in each case, subject to notice and cure provisions where applicable).
"Good Reason" — expected to include: (i) material diminution in duties, responsibilities, authority, or title without the Executive's consent; (ii) material diminution in base salary (other than across-the-board reductions affecting all executive officers); (iii) relocation of the Executive's principal place of employment by more than 50 miles from the Cambridge, MA headquarters without consent; (iv) material breach by the Company of any provision of the Employment Agreement; and (v) failure of a successor to assume the Company's obligations under the Employment Agreement (in each case, subject to notice and cure provisions).
The Non-Competition Agreement should include express language providing that the non-compete restriction shall not apply or be enforceable if the Executive's employment is terminated by the Company without Cause or if the Executive resigns for Good Reason. This language should be included as a substantive limitation on the scope of the non-compete, not merely as a recital or preamble.
This provision aligns with the severance structure contemplated in the Employment Agreement: under the terms of the Employment Agreement (as reflected in the internal term sheet), a termination without Cause or resignation for Good Reason will trigger severance payments to the Executive. These termination scenarios should also extinguish the non-compete obligation. However, as noted in Checklist Item 2 above, the garden-leave payment obligation is separate from and in addition to severance — garden-leave is payable only in circumstances where the non-compete applies (i.e., voluntary resignation without Good Reason or termination for Cause), and severance is payable in circumstances where the non-compete does not apply (i.e., termination without Cause or resignation for Good Reason). The two payment streams should not overlap.
Practical Note for Board and PE Sponsor: Ridgeline Capital Partners (the Company's private equity sponsor, holding approximately 68% of the Company's equity) and the AHT Board of Directors should be clearly advised that the Company cannot "have it both ways" under Massachusetts law — it cannot terminate Dr. Elliston without Cause and simultaneously enforce the non-compete restriction. This is a common misunderstanding among corporate clients and PE sponsors, and it is important that the Company's leadership understands this limitation before the employment package is finalized. The Company's decision to terminate without Cause is, in effect, a decision to release the Executive from the non-compete obligation.
Drafting Recommendation: Include express language in the Non-Competition Agreement stating that the non-compete restriction shall not apply and shall not be enforceable in the event that: (i) the Executive's employment is terminated by the Company without Cause; (ii) the Executive resigns from employment for Good Reason; or (iii) the Executive's employment is terminated by reason of a layoff or reduction in force. Cross-reference the definitions of "Cause" and "Good Reason" to the Employment Agreement.
Checklist Item 8: Relation to Non-Solicitation and Confidentiality Covenants
Statutory Clarification:
As discussed in Section III.B above, the MNAA expressly excludes non-solicitation agreements, non-disclosure/confidentiality agreements, forfeiture-for-competition agreements, and invention assignment agreements from the definition of "noncompetition agreement." This exclusion has significant practical implications for the overall structure of the restrictive covenant package proposed for Dr. Elliston.
Application to Dr. Elliston:
The internal term sheet contemplates the following restrictive covenants in addition to the non-compete:
• Employee Non-Solicitation Covenant (18 months): Restriction on the solicitation or inducement of AHT employees at the manager level and above to leave the Company's employment. This covenant is not subject to the MNAA's 12-month durational cap, garden-leave requirements, or formal notice requirements. The 18-month duration is permissible under the MNAA (as the statute does not apply), though it must be independently reasonable under Massachusetts common law.
• Customer/Partner Non-Solicitation Covenant (12 months): Restriction on the solicitation of AHT customers and strategic partners with whom the Executive had material contact during the last 24 months of employment. This covenant is similarly outside the MNAA's scope and must be evaluated for reasonableness under common law.
• Confidentiality/Non-Disclosure Covenant (perpetual, with carve-outs): Restriction on the use or disclosure of AHT's confidential information and trade secrets, with customary carve-outs for information that becomes publicly available, was independently known to the Executive prior to employment, or is legally compelled to be disclosed. This covenant is excluded from the MNAA.
• Invention Assignment Provisions (Schedule A): Standard assignment of inventions, developments, and intellectual property created during the course of employment using Company resources or related to Company business. These provisions are excluded from the MNAA.
These covenants should be included in the Employment Agreement itself (rather than in the standalone Non-Competition Agreement) and should be drafted as independent, severable obligations. The independence of these covenants from the non-compete is critical for two reasons:
First, if the Non-Competition Agreement is found to be unenforceable for any reason — whether due to non-compliance with the MNAA or otherwise — the non-solicitation and confidentiality covenants should survive as independently enforceable obligations. This requires that each covenant contain its own consideration recital (e.g., continued employment and access to confidential information), its own scope definition, and its own severability clause.
Second, the existence of separate non-solicitation and confidentiality covenants provides AHT with meaningful protections even in scenarios where the non-compete is not enforceable (e.g., termination without Cause). In such circumstances, AHT can still enforce the non-solicitation and confidentiality covenants to prevent Dr. Elliston from raiding employees and soliciting customers, even though he would be free to accept employment with a competitor.
The enforceability of the non-solicitation and confidentiality covenants under Massachusetts common law — including the reasonableness of the 18-month employee non-solicitation period and the 12-month customer/partner non-solicitation period — will be addressed in a separate memorandum prepared by Devon Archer. That analysis is outside the scope of this MNAA compliance checklist.
Checklist Item 9: Remedies and Enforcement Provisions
Statutory Framework:
The MNAA does not prescribe specific remedies for breach of a noncompetition agreement. Enforcement of noncompetition agreements under Massachusetts law is governed by general principles of contract law and equity, including the availability of injunctive relief to prevent ongoing or threatened violations. Massachusetts courts have broad equitable authority to reform noncompetition agreements that are found to be overbroad, applying a judicial modification (or "blue-pencil") approach to narrow restrictions to enforceable terms rather than voiding the agreement in its entirety. See, e.g., Boulanger v. Dunkin' Donuts Inc., 442 Mass. 635 (2004); Corporate Technologies, Inc. v. Harnett, 731 F.3d 6 (1st Cir. 2013) (applying Massachusetts law).
Drafting Recommendations:
• Severability and judicial reformation clause: Include a robust severability clause that expressly authorizes a court to modify or reform any provision of the Non-Competition Agreement that is found to be overbroad, unenforceable, or otherwise inconsistent with applicable law. The clause should provide that if any restriction is found to exceed the permissible scope, duration, or geographic area, the court may reduce the restriction to the maximum enforceable level rather than declaring the entire agreement void. This approach is consistent with the trend in Massachusetts case law favoring judicial modification of restrictive covenants, and provides the best chance of preserving the substance of the non-compete in the event of a challenge.
• Injunctive relief clause: Include a provision acknowledging that a breach of the non-compete restriction would cause irreparable harm to the Company that cannot be adequately compensated by monetary damages, and that the Company shall be entitled to seek temporary, preliminary, and permanent injunctive relief to prevent or restrain any actual or threatened breach, without the requirement of posting a bond or other security (to the extent permitted by applicable law). While Massachusetts courts retain discretion to require a bond, the inclusion of this language establishes the parties' agreement regarding irreparable harm and eliminates the need for the Company to separately prove this element in a preliminary injunction proceeding.
• Choice of forum: Designate the state and federal courts of the Commonwealth of Massachusetts as the exclusive forum for any disputes arising out of or relating to the Non-Competition Agreement. Venue should be specified in Suffolk County, consistent with the Company's Boston-area headquarters and the location of Calderwood & Harkness LLP. Include a waiver of objection to personal jurisdiction and venue.
• Governing law: The agreement should be governed by the laws of the Commonwealth of Massachusetts, without regard to conflict-of-laws principles. As discussed in Section III.C above, Massachusetts law is mandatory under the MNAA for this agreement, and the governing law clause should reflect this.
• Attorney's fees: Consider including a mutual attorney's fees provision providing that the prevailing party in any action to enforce or defend against enforcement of the Non-Competition Agreement shall be entitled to recover its reasonable attorney's fees and costs from the non-prevailing party. A mutual provision (rather than a one-sided provision favoring only the Company) is more likely to be enforced by a Massachusetts court and provides a balanced incentive structure that deters both frivolous enforcement actions by the Company and frivolous non-compliance by the Executive. We note, however, that Fielding & Rowe may resist any attorney's fees provision, or may insist on a one-sided provision favoring the Executive. This is a negotiation point to be discussed with the client.
• Tolling provision: Consider whether to include a tolling provision that extends the restricted period by any period during which the Executive is in breach of the non-compete. Tolling provisions are generally enforceable under Massachusetts law, but they must be carefully drafted to avoid extending the total restricted period beyond the MNAA's 12-month (or 24-month, in applicable cases) maximum. We recommend including a tolling provision, but with a cap ensuring that the total restricted period (including any tolling extensions) does not exceed 12 months from the date of cessation of employment, absent a judicial determination of fiduciary breach or property theft.
Checklist Item 10: Section 409A Considerations for Garden-Leave Payments
Cross-Reference:
The garden-leave payments contemplated in Checklist Item 2 above — structured as salary continuation of $287,500 payable in semi-monthly installments during the 12-month post-termination restricted period — may constitute "deferred compensation" subject to Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A"). Noncompliance with Section 409A could result in significant adverse tax consequences to Dr. Elliston, including a 20% additional tax on the deferred amount and premium interest penalties.
The Section 409A analysis for the garden-leave payments should be coordinated with Gregory Tan, Partner in the Tax Practice Group at Calderwood & Harkness LLP, and potentially with Malcolm R. Sinclair of Hargrove & Sinclair CPAs, who are advising the Company on Section 409A compliance for the broader executive compensation package (including the equity awards and deferred compensation arrangements).
Preliminary View:
If the garden-leave payment is structured as a fixed series of installments payable on the Company's regular payroll dates during a defined 12-month period commencing on the Executive's "separation from service" (as defined in Treas. Reg. § 1.409A-1(h)), the payment should qualify for one or more of the following exceptions to the Section 409A deferred compensation rules:
(a) Short-term deferral exception — under Treas. Reg. § 1.409A-1(b)(4), amounts that are paid by the later of the 15th day of the third month following the end of the service provider's taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture, or the 15th day of the third month following the end of the service recipient's taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture, are not treated as deferred compensation. The applicability of this exception will depend on the specific payment schedule and whether the garden-leave obligation is conditioned on continued compliance with the non-compete (which may be treated as a substantial risk of forfeiture).
(b) Separation pay exception — under Treas. Reg. § 1.409A-1(b)(9)(iii), payments made upon an involuntary separation from service or pursuant to a window program are exempt from Section 409A if they do not exceed the lesser of (I) two times the employee's annualized compensation based on the rate of pay in effect for the year preceding the year of separation, or (II) two times the applicable compensation limit under Section 401(a)(17) of the Code. For 2022, the Section 401(a)(17) limit is $305,000, so the separation pay limit is $610,000. The $287,500 garden-leave payment is well below this threshold. However, the applicability of this exception depends on whether the garden-leave payment is structured as "separation pay" within the meaning of the regulation, which requires further analysis.
A formal Section 409A analysis will be provided by Gregory Tan in a separate memorandum, which is anticipated for circulation on or about August 22, 2022. Pending completion of that analysis, the Non-Competition Agreement should include customary Section 409A savings language — i.e., a provision stating that the agreement is intended to comply with, or be exempt from, Section 409A, and that the parties agree to interpret and administer the agreement accordingly. The agreement should also include a "six-month delay" provision for any payments that are treated as deferred compensation under Section 409A and are made to a "specified employee" (which Dr. Elliston may be, depending on AHT's status as a publicly traded or privately held company — to be confirmed). If AHT is a privately held company (which appears to be the case, as Ridgeline Capital Partners holds approximately 68% equity), the specified employee rules may not apply, but this should be confirmed.
V. Summary Compliance Matrix
The following table summarizes each material MNAA requirement, the proposed treatment in the Non-Competition Agreement with Dr. Elliston, and the current compliance status:
VI. Recommendations and Next Steps
Based on the foregoing analysis, we recommend the following action items to ensure full MNAA compliance and to facilitate efficient preparation and negotiation of the Non-Competition Agreement:
1. Revise Duration from 18 Months to 12 Months. Advise AHT (Aaron Whitfield, General Counsel, and Lisa Murakami, CHRO) that the 18-month non-compete period proposed in the July 18, 2022 internal term sheet exceeds the statutory maximum under the MNAA and must be reduced to 12 months. The 18-month (and up to 24-month) period is available only in cases of a demonstrated breach of fiduciary duty or unlawful taking of Company property, which cannot be established prospectively. This communication should be made promptly, ideally by the end of this week, to align the internal term sheet with the statute before drafting begins.
2. Draft the Standalone Non-Competition Agreement. Prepare the standalone Employee Non-Competition Agreement with a 12-month post-termination restriction, garden-leave at $287,500 (50% × $575,000 base salary), and all required statutory notices and formalities. The Non-Competition Agreement should be included in the first draft employment package to be circulated to Fielding & Rowe LLP on August 5, 2022. The agreement should include the preamble reciting legitimate business interests, the garden-leave payment clause, the right-to-counsel notice, the termination-without-cause carve-out, the severability/reformation clause, the injunctive relief clause, and all other provisions identified in this checklist.
3. Coordinate with Gregory Tan on Section 409A. Coordinate with Gregory Tan, Partner in the Tax Practice Group, on the Section 409A treatment of the garden-leave payments. The preliminary view is that the payments should qualify for the short-term deferral exception or the separation pay exception, but a formal Section 409A analysis is required. Gregory Tan's comprehensive Section 409A compliance memorandum is anticipated for circulation on or about August 22, 2022. Pending completion of that analysis, the Non-Competition Agreement should include customary Section 409A savings language.
4. Coordinate with Devon Archer on Non-Solicitation and Confidentiality Analysis. Coordinate with Devon Archer on the companion memorandum addressing the enforceability of the non-solicitation and confidentiality covenants under Massachusetts common law. These covenants are not subject to the MNAA, but they must satisfy the common-law reasonableness requirements, and their interaction with the Non-Competition Agreement must be carefully managed. Devon's memorandum should address, at a minimum, the reasonableness of the 18-month employee non-solicitation period, the 12-month customer/partner non-solicitation period, the perpetual confidentiality covenant, and the adequacy of the consideration for these covenants.
5. Ensure Structural Independence of Restrictive Covenants. Ensure that the separate non-solicitation and confidentiality provisions in the Employment Agreement are clearly distinguishable from the non-compete covenant in the standalone Non-Competition Agreement and are drafted as independent, severable obligations with their own consideration recitals and severability provisions. This structural independence protects against an argument that overbreadth or unenforceability in one covenant voids all restrictive covenants.
6. Anticipate Fielding & Rowe Negotiation Positions. Anticipate that Catherine A. Fielding of Fielding & Rowe LLP will press for the following positions on behalf of Dr. Elliston:
(a) The narrowest possible industry and activity scope — Fielding & Rowe will likely seek to further narrow the restriction beyond "healthcare IT/SaaS companies with >$50M revenue" to something closer t