In dividing up the marital assets of divorcing business owners, the Massachusetts probate and family court typically awards the business to one spouse. Now, in Cesar v. Sundelin, the Massachusetts Appeals Court has ruled that the broad equitable powers of the probate and family court include the authority to prohibit an ex-spouse from competing with the one receiving the business. This new power provides significant protection of the value of the intangible goodwill in the family business.
Massachusetts law has long upheld non-compete agreements in the context of employment and in the sale of a business. These types of non-competes are regarded to be of a voluntary nature (or will be implied upon the sale of a business), in contrast to a probate judge ordering a non-compete. Any inequities in this distinction of agreed/implied agreements not to compete versus court-ordered non-competition can be addressed in the broader divorce judgment.
Importantly, Massachusetts law on non-compete agreements limits a probate judge’s authority. A non-compete order must be “reasonable and no broader than necessary to protect the goodwill included in the valuation and transfer.” In employment contracts, non-compete provisions will be upheld only for the amount of time and within the geographic region deemed reasonable under the circumstances, and taking into account their effect on the public interest. In the sale of a business, Massachusetts courts will uphold somewhat broader non-competes and, on occasion, have even allowed permanent non-competes.
A spouse receiving the business in a divorce is not automatically entitled to a non-compete order. Rather, the judge determines whether a non-compete order is appropriate and, if so, the proper scope in terms of time, geography and public interest concerns, such as any effect on the parties’ ability to provide for themselves and their children. In determining the division of assets and any support orders, a probate judge necessarily has to consider many factors such as the parties’ ages, health, education, training, experience and opportunities for future employment. A judge might consider:
- Whether causing one party to move outside the restrained geographic area to earn a living would complicate shared parenting;
- Whether the restrained party has other avenues of income — in Sundelin, for example, the spouses operated a feed and grain store, but the wife was also a veterinarian;
- What other assets are available for an equitable division; and
- Whether the party receiving the business needs to maintain a certain income level to afford alimony or child support orders.
Under Massachusetts’s new (2011) alimony statute, probate court judges may now award up to five years of “rehabilitative alimony,” designed to support an ex-spouse until he or she becomes economically self-sufficient. This could be a useful tool where awarding the business to one spouse leaves the other spouse unemployed.
Business-owning couples can plan for future contingencies by negotiating for a non-compete provision in a pre-nuptial agreement. Or, since the Supreme Judicial Court adopted the standard I proposed in 2010's Ansin v. Craven-Ansin, couples can include a non-compete provision in a post-nuptial agreement. Whether such provisions will be upheld depends on both non-compete law and the different legal standards for enforcing pre- and post-nuptial agreements. Nonetheless, the new availability of post-nuptial agreements and non-compete orders in divorce signals modern thinking regarding the realities of today’s marital partnerships.
This is new territory for judges, lawyers and divorcing spouses, so the details, parameters and frequency of the exercise of this power have yet to be tested. In any case, the availability of non-compete orders in the division of marital assets offers Massachusetts business owners some protection against devaluation of a major asset upon divorce. Your Burns & Levinson attorney can guide you through this process to ensure that your interests are protected in a divorce.