Massachusetts Noncompete Law : Massachusetts Noncompete Lawyer & Attorney : Foley Hoag Law Firm : Non-competition Agreements, Labor & Employment

            The effort to substantially alter the landscape for noncompete agreements in Massachusetts via legislation has stalled. After advancing out of committee in the Massachusetts House of Representatives, the compromise legislation (described here) was included in an economic development bill with many other provisions and proposed amendments relating to business issues in the Commonwealth. As has been reported here on the Associated Industries of Massachusetts (AIM) blog, an economic development bill recently was passed by the House, but the noncompete legislation was dropped from the bill.   

            On July 20th, the Boston Bar Association sponsored a symposium entitled “Employee Non-Compete Agreements and Job Creation: The Status of Law Reform a Year Later,” at which several of the advocates and opponents of changes to current law presented their perspectives. Russell Beck, an attorney who was involved in drafting the compromise legislation, said that the legislation would not pass this year but that it had made substantial progress and is likely to pass in the next legislative year. (The state fiscal year is July 1 to June 30.) He also mentioned that the garden leave provision in the original compromise legislation (extending the permissible duration of a noncompete under certain circumstances), which had been excised from the bill while in committee, likely would be added back to the proposed legislation in light of significant feedback from interested parties. 

            Representative William Brownsberger, one of the sponsors of the compromise legislation, was not quite as optimistic as Russell Beck. Rep. Brownsberger suggested that a number of “big players” in the business community, who advocate the status quo, weighed in and impeded passage of the legislation. He suggested that going forward, a broader dialogue is required, with further input needed from interested parties, including chambers of commerce and industry groups. When asked to make a prediction, he simply indicated that he did not know whether and when noncompete legislation will pass.

            Given all of the publicity this issue has attracted in the past couple of years, it is interesting that this significant new development so far has garnered little attention in the business press and blogosphere.

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As reported here on the website of Rep. William Brownsberger:

legislation to revise the law of non-competition agreements in Massachusetts took a step forward this week. The Committee on Labor and Human Resources reported out a bill with a favorable recommendation.  Here is the new draft.  It is essentially the bill that Representatives Ehrlich and Brownsberger worked out [with] representatives of many interest groups, but we have not yet had the opportunity to study the language carefully. . . . Over the next few days, the House Clerk will evaluate the bill to determine the next referral for the bill.

I have not yet had an opportunity to carefully compare the new draft to the most recent compromise draft (described here).  Based on a cursory review, the new draft appears to be nearly identical to the previous draft, with one notable exception:  the new draft has removed all of the references to "garden leave" clauses contained in the previous draft.  (The previous draft stated that noncompetes of more than one-year in duration would be permitted in connection with a "garden leave" provision providing for compensation during the extended period.)  Thus, it appears that the revised bill is somewhat more protective of employees (and therefore less protective of the interests of former employers), in that it places an absolute limit of one year on employment-based noncompetes.

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It is often said that noncompete cases differ from other types of civil litigation in that the initial battle in the case often decides the war. If you slip and fall while buying groceries and decide to sue the supermarket, your case will follow the typical path of civil litigation: a complaint will be filed, commencing a lawsuit; the defendant will answer; the parties will spend months or even years gathering information in the discovery phase; and the case will be resolved through the summary judgment process or at trial. All of this will take at least a couple of years. Most noncompete cases, on the other hand, have an intense but brief lifespan. The plaintiff in these cases -- the former employer -- typically will say that there is an emergency and that it will suffer "irreparable harm" if the former employee is permitted to compete in violation of his agreement. The plaintiff therefore will seek an immediate remedy from a judge: a temporary restraining order and/or preliminary injunction. The judge’s decision truly often does decide the war. A party’s ability to challenge the initial injunction decision is quite limited. And, while that decision really is only "preliminary," as a practical matter, by the time the case winds it way through the litigation process, it will be too late: if the request was denied, the employee will have been working at the competitor for months or even years; and if the request was granted, the employee will be put on the "beach" for so long that the company will hire someone else.

A recent decision by the federal appellate court in Boston -- Ansys, Inc. v. Computational Dynamics North America, Ltd. -- illustrates this phenomenon and underscores the limited recourse a party has after losing at the injunction stage. Ansys sued its former employee (Dr. Caraeni) and his new employer (CDNA) in federal court in New Hampshire. (For purposes of this discussion, New Hampshire and Massachusetts law are not meaningfully different.) Ansys alleged (among other things) that Dr. Caraeni breached his noncompete and that CDNA intentionally interfered with the contract by hiring him. There was no question that the two companies are direct competitors and that Dr. Caraeni, a seemingly highly-skilled software engineer, had access to confidential information about Ansys based on his seven-year tenure.

As is typical in these cases, Ansys quickly sought a preliminary injunction to enforce the one-year noncompetition clause. After a one-day evidentiary hearing and submission of briefs by both parties, the federal district judge denied the request. It found that Ansys had not shown a likelihood that it would suffer irreparable injury if Caraeni were permitted to work at its competitor. In particular, the judge accepted as credible CDNA’s testimony that Caraeni had not been and would not be (at least for the noncompete’s duration) assigned to perform any work at CDNA that might allow him to use any of Ansys’s information, and that Caraeni’s knowledge was not useful to CDNA because of the different software architecture used by the two companies.

Ansys immediately appealed the injunction denial to the First Circuit Court of Appeals, which heard the appeal on an expedited basis. But in the end, the First Circuit refused to the disturb the lower court’s decision, emphasizing that it could do so only if the judge "mistook the law, clearly erred in its factual assessments, or otherwise abused its discretion . . ." The appellate court’s decision is replete with statements recognizing that Ansys’s arguments may well have been valid but that it could not say that the district judge’s conclusions were "clearly erroneous." What the First Circuit really signaled is that another judge may have made a different decision based on the same facts, but that the appellate court would not (and could not) question that judgment.

At this stage in the case, with its injunction request denied and its emergency appeal of that denial unsuccessful, Ansys’s options are to pursue what may be a nonexistent damages case to trial, or to find a way to end the case quickly and quietly.

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Many employers require that new hires sign a non-competition or non-solicitation agreement as a condition of hire.  Companies expect that these agreements will be valid and enforceable when the employee leaves, even if the employee and his or her job evolve over time.  In 2004, this basic assumption was called into question as a result of three successive decisions by Massachusetts Superior Court judges which held that a noncompete signed at an employee’s hire may later become unenforceable due to changed circumstances in the employee’s job.  A summary of those decisions is here.  The most generous reading of these cases suggested that any time an employee's job changed in a "material" way -- for example, a promotion involving significant greater responsibility or a transfer across departmental or divisional lines -- an employer would need to require the employee to sign a new noncompete, a practice quite uncommon in most companies.  Unfortunately, in the last five years, little guidance has come from the Massachusetts appellate courts on this important issue.  

This is why a recent decision by a federal appellate court -- the First Circuit Court of Appeals (which sits in Boston) -- is interesting.  In Astro-Med, Inc. v. Nihon Kohden America, Inc., the First Circuit was considering an appeal of a jury verdict in favor of a former employer (Astro-Med) that sued a departed employee and his new employer for breach of a noncompete, tortious interference with contract and misappropriation of trade secrets.  On appeal, the defendants argued (among many other things) that after Astro-Med hired the defendant employee (Mr. Plant), it made "material changes" in his employment, including a change from product specialist in Rhode Island to salesperson in Florida and, later, a substantial reduction in his sales territory.  They argued that that these changes voided the noncompete Plant had signed at hire and therefore there was no contract that could be breached.

Interestingly, even though the First Circuit generally was applying Rhode Island law to the dispute, the parties and the court cited Massachusetts law on the subject of "material change."  The court, citing one of the three 2004 Superior Court decisions mentioned above -- Lycos v. Jackson -- wrote the following:

It is apparently correct that under Massachusetts law, "[e]ach time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed."

However, the court was not willing to take this concept to the extreme that some had suggested in the past (and the defendants were suggesting in Astro-Med).  Looking at the origins of the "material change" rule, the court emphasized that the appropriate question is not simply whether the job changed materially but whether the conduct of the parties clearly showed that they had abandoned and rescinded by mutual consent the earlier employment agreement containing the pertinent noncompete provision and had entered into a new employment relationship that included no such non-compete provision.  Significant evidence of such a change would be that the employer requested a new noncompete and the employee refused to sign.  In Astro-Med, the court held that the original noncompete still governed, as there was no evidence that the former employee's job change was a mutual abandonment of the agreement or that the employer had sought and been refused a new noncompete.    

Under this approach to the material change rule, an employer need not seek a new noncompete from an employee every time the employee's job changes in a significant way (although that approach may be appropriate in certain circumstances).  Indeed, employers should refrain from constantly seeking new noncompetes -- if the employee refuses to sign, the employer will be forced either to end the employment relationship or leave itself exposed to the argument that it abandoned the old noncompete when it asked the employee to sign a new one.

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In a recent post at Innovation Economy, Scott Kirsner describes a discussion he had with an attorney who has been involved with negotiating severance deals for several employees.  The attorney has sought to avoid future noncompete complications for his clients by essentially trading severance pay for noncompete relief.  The attorney told Kirsner that “employees can often get released from the non-competes by giving up about 25% of their severance payment.”  This may be a desirable outcome for departing executives, but employers that regularly engage in this practice are playing with fire.

There is no doubt that waiving or scaling back non-competition or non-solicitation restrictions for departing employees may be an effective tool to reduce the cost of severance.  However, doing so may have an unintended result:  in a future case in which the company is seeking to enforce a restrictive covenant, its earlier waivers may come back to haunt it.  A practice of releasing employees from noncompetes will expose the company to what I refer to as the “selective enforcement” problem.  That is, the attorney for the defendant (i.e. breaching) employee will argue that the company has not sought to enforce the provision at issue against similarly-situated employees who have departed for competitors.  Thus, the argument goes, the employer is not really seeking to protect its legitimate interests – confidential information, trade secrets and/or good will – but rather is trying to stop ordinary competition (which is not a permissible basis for enforcing a noncompete).  When I am involved on the defense side of these cases, I often will try to develop evidence of selective enforcement.  In my experience, judges will be quite interested to learn that a company that is seeking to enforce a noncompete against, say, the director of product development, actually allowed another senior employee (say, the head of engineering) out of his or her noncompete.  Such waiver practices suggest that the company is picking and choosing whom it wants to restrain from competition.  Doing so undercuts the company’s argument that it is consistent and vigilant about protecting its legitimate interests.  Thus, a company that lets people out of restrictive covenants in exchange for cost savings ultimately may find itself penny-wise, but pound-foolish.

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Multiple media outlets (see here  and here, for example) have been covering an alarming report jointly issued recently by the Ponemon Institute, an Arizona-based research group, and Symantec Corp., that data theft is common among departing employees. As reported in the Washington Post, the most significant finding of a joint survey of employees who left a job in 2008 was that almost 60% of ex-employees admitted to taking company data of one sort or another. The most commonly identified kinds of records taken were “email lists,” personnel records, customer information (including contact lists), and “non-financial business information” (which presumably can encompass technical information, strategic information etc.). 

Approximately two-thirds of those who admitted taking company information said they did so in order assist with a new job. The report indicates that employees are stealing data in multiple ways. Most common (61%) is old-fashioned theft of paper documents or hard files, followed by downloading information onto a disc (53%), onto a USB memory stick (42%), and sending documents as attachments to personal emails (38%). Interestingly, comparatively few employees ]were taking information by stealing BlackBerrys and laptops. Another quite alarming finding is that approximately 25% of the employees indicated that they were able to access data on a company’s network even after they had departed.

If these findings are an accurate gauge of employees across a range of industries, they have far-reaching implications. I will put aside the obvious privacy and identify theft issues raised by such security lapses. (See this new blog for a comprehensive discussion of information security issues.) Companies are losing important, competitive information to employees who are taking such information because it may be valuable to a competitor. Yet, it is precisely in order to protect against such unfair competition that states have developed laws prohibiting theft of trade secrets and confidential information. For the same reason, most states permit enforcement of contractual covenants restricting certain post-employment conduct by departed employees.

So, what’s going on? As is surmised in the Washington Post article -- and I can confirm seeing this repeatedly in my own practice -- employees increasingly have a sense of personal “ownership” in the information they work with while employed. Many feel entitled to keep that information -- particularly if it involves their own work product -- after they leave. Coupled with the rapid evolution of technology in the workplace and employee mobility, the taking of valuable information as employees depart has become increasingly prevalent. 

The response from employers worried about these trends should be better planning and increased vigilance. Many companies have a haphazard approach to protecting their IP, particularly as employees depart. They may do a good job of requiring new hires to sign standard agreements, but then fail to remind employees of their obligations as they leave or even to recover company data and equipment. And many companies fail to take even rudimentary steps to protect against theft of information by departing (and often disgruntled employees).  An employer that wishes to protect against the phenomena described in the Ponemon report would do well to develop an approach to protecting information and an exit process that lays the groundwork for the possibility of later enforcement of existing agreements and policies. If the company has suspicions about the outgoing employee’s conduct or intentions, immediate consideration should be given to investigating the employee’s computer-related activities prior to his or her departure.  The fact is that most of the conduct described in the Ponemon report would have been detected by an employer that actually was looking for it.

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It is possible -- at least theoretically -- to have a purely oral noncompete agreement.  A covenant not to compete is, most fundamentally, a contract, and a valid and legally enforceable contract can be formed through purely verbal communications (with some exceptions not relevant here). Nevertheless, given the heightened scrutiny that noncompetes are subjected to under Massachusetts law, any employer wishing to be able to enforce a non-competition restriction in court would want the agreement to be in writing.

This point is driven home by a decision recently issued by Judge Richard T. Tucker of the Massachusetts Superior Court.  At least from a reading of the decision, one is forced to wonder why the case was brought at all.  The plaintiff, Steelcraft, sought a preliminary injunction to stop its former employee, Hensel, from competing through his new company, Mobi Medical. It did so despite the facts that Hensel did not sign a written covenant not to compete and that there was a dispute regarding the existence of an oral noncompete. Judge Tucker observed that even if Steelcraft could show that there was in fact an oral noncompete, that the noncompete protected a legitimate business interest, and that it was supported by consideration (such as Hensel’s hiring), Steelcraft still could not show that the noncompete was enforceable, because it did not allege that the covenant contained any time limit or was limited to a reasonable geographic area. The court next disposed of Steelcraft’s claim that Hensel had used trade secrets and confidential information to advance his own business, by finding that Steelcraft had not shown that the information was in fact confidential. Judge Tucker noted that if trade secrets and confidential business information were truly at stake, Steelcraft would have taken measures to safeguard it, such as by requiring Hensel to execute a written confidentiality or noncompete agreement. The court disposed of Steelcraft’s claim that it would be irreparably harmed absent an injunction by contrasting Steelcraft’s fear of losing business -- which could be compensated by money damages at the end of the case -- with the fact that Hensel had taken out a loan to start up his new business and without the income of his continued work, would face a sever hardship in repaying the loan. Finally, although the court did not focus on this issue, Steelcraft’s cause could not have been aided by the fact that it brought the case more than a year after Hensel left and started competing.

The lesson is a basic one: noncompetition agreements are difficult to enforce. Any business wishing to be able to restrain an employee from engaging in competitive activity after the employment relationship ends should do so through a written document that is drafted with careful consideration of the limitations imposed by applicable law.

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I recently authored an article on planning reductions-in-force, a topic unfortunately on the minds of many businesses in these difficult economic times. (The article is available here.)The last of my “tips” urges companies to remind employees affected by layoffs of the continued applicability of nondisclosure obligations and other restrictive covenants. This raises a question: will a noncompete or other restrictive covenant be enforceable against employees who are let go as part of a layoff? As is often the case in this area, the short answer is: maybe. 

As drafted, noncompetition and nonsolicitation restrictions typically will apply for a specified duration following a termination for any reason, including an involuntary termination such as a layoff. Generally, under Massachusetts law, the fact that an employee was terminated in a layoff (as opposed to leaving voluntarily or being terminated for cause) is not by itself a basis for refusing to enforce a noncompete. (Note that some other states’ laws are different. For example, in New York, while the issue is not entirely settled, most courts will not enforce an otherwise valid noncompete if the employee has been involuntarily terminated without cause.)

Nevertheless, a Massachusetts judge is less likely to enforce a noncompete where the employee was laid off. In considering requests for temporary restraining orders and preliminary injunctions to enforce noncompetes, judges are required to engage in a balancing of the equities, which involves consideration of basic fairness: would it be fair to enjoin the individual from competing with a former employer under the particular circumstances of the case? In a difficult economic environment, with companies laying off workers and unemployment rising, many Massachusetts judges will not want to enforce a noncompete against a laid off worker and will look for ways to avoid or scale back enforcement.  

So, an employer seeking to enforce a noncompete following a lay off needs to stack the deck as much as possible with factors that would favor enforcement. As a starting point, noncompetes should be clear, understandable to employees, and narrowly drafted to protect the company’s legitimate interests in confidential information and/or good will. If the relevant document is vague or overbroad, employers should consider correcting those defects as part of the employee’s departure (for example, in a separation agreement). Relatedly, laid off employees should be reminded of continuing post-termination obligations and should be provided copies of the relevant agreements. Perhaps most importantly, employers should consider paying the laid off employee for some or all of the noncompete period. All other things being equal, Massachusetts judges will be more willing to enforce a noncompete against an individual who has been provided a generous severance package than against an employee who desperately is trying to provide for his or her family. 

Finally, employers that wish to be able to enforce a noncompete following a layoff should gather and preserve any evidence of “bad acts” by the former employee. An injunction will be more likely where the employer isn't merely worried about future harm but can point to evidence of, for example, inappropriate transmission, downloading or retention of confidential information; solicitation of customers or employees; or refusal to return company property. Companies that are consistently vigilant about discovering misuse of their information will improve their chances of stopping inappropriate competition.

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Many litigators of non-competition agreement cases in Massachusetts would reflexively answer “state court” to the above question. That is, given the choice (if jurisdictional principles permit) of bringing an action to enforce a non-compete or non-solicitation provision in state or federal court in Massachusetts, the conventional wisdom would be to avoid what has been perceived as the more exacting scrutiny of the judges in the U.S. District Court in Boston.

But some recent trends might suggest otherwise. Many state court non-compete cases are now heard in the Business Litigation Session (BLS) of Suffolk Superior Court, which although located in Boston, is authorized to hear cases brought in other counties. That court has developed a body of non-compete jurisprudence that includes a healthy degree of skepticism about enforcement of traditional non-competes (as opposed to customer non-solicitation agreement, which are more easily enforced). At the same time, the federal court in Boston periodically will issue a preliminary injunction decision that would suggest a greater willingness to enforce restrictive covenants than has been expressed in the BLS. One example is the recent decision by U.S. District Judge Nathaniel M. Gorton in Bio-Imaging Technologies, Inc. v. Marchant and M2S, Inc., in which Judge Gorton preliminarily enjoined an individual, Marchant, from assuming a position as director of business development with M2S, a competitor of Marchant’s former employer, Bio-Imaging. The decision is notable in that Judge Gorton somewhat summarily dismissed a number of potentially viable defenses to enforcement of the non-compete and non-solicitation clauses at issue.  

For example, the court gave short shrift to the defendants’ argument that enforcement of the restrictive covenants at issue (one-year non-compete and non-solicitation provisions) was not necessary to protect Bio-Imaging’s confidential information. Judge Gorton found that Marchant had access to and knowledge of pricing, sales strategies and customer relationships, presentations and proposals, and found that the fact that some such information was available from public sources did not undermine enforceability of the restrictive covenants. 

Perhaps most notably, the court rejected a “change of circumstances” defense. Marchant had argued that the restrictive covenants, signed at hire, were no longer enforceable because both Marchant’s position at Bio-Imaging, as well as the company’s business in the medical imaging industry itself, had changed dramatically since he was hired. The “changed circumstances” defense has received a fair amount of attention in recent years as a result of several Massachusetts Superior Court decisions in which judges found their way out of enforcement of restrictive covenants based on the concept that material changes in an employee’s job following the execution of the non-compete might undermine the legal “consideration” that is necessary to enforce a restrictive covenant. (See this article for a description of those cases.)  Judge Gorton spent no time on the legal backdrop to this argument and rejected the defense on the facts, finding that Marchant’s role at Bio-Imaging had not undergone any “dramatic” change despite the change in his title from Manager of Clinical Trial Services to Director of Business Development. But he also suggested that a more dramatic change might not have mattered, because the restrictive covenants were not limited to a specific job title but rather applied during and after the employee’s “period of employment with the company” in any capacity. It is unclear whether Judge Gorton had in front of him the recent Massachusetts cases, but his decision suggests that he would give them little weight.

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I would not be the first to observe that the Massachusetts legislature sometimes acts in strange and mysterious ways. It has been known to surprise even those of us who think we are paying attention to such things with unexpected employment-related legislation. The very significant amendment in 2004 to the Massachusetts Independent Contractor Law (.pdf) is a good example of this phenomenon: although it has wide-ranging application and has vexed employment lawyers and the business community since its passage, it was attached to a bill focused on the construction industry and was largely unknown to the outside world for weeks after its enactment, until the Attorney General’s office issued an advisory interpreting it.

A recent -- but fortunately less momentous -- example concerns non-competition agreements. Six weeks ago, on August 23, Governor Patrick signed a new law prohibiting non-competition agreements for social workers in Massachusetts. The text of the law is available here (.pdf). It states that any contract with a social worker licensed under Chapter 112 of Massachusetts General Laws that includes a “restriction of the right of the social worker to practice in any geographic area for any period of time after termination” is void and unenforceable with respect to that restriction. The law does not invalidate or render unenforceable the remainder of a contract or agreement containing such a restriction.

This law adds to a very short list of professions as to which there is a statutory prohibition on post-employment non-competition agreements: physicians, nurses, broadcasters, and now social workers. In addition, non-competes are invalid as to lawyers pursuant to the Rules of Professional Responsibility adopted by the Massachusetts Supreme Judicial Court.

I have been digging -- to no avail -- for some information that might shed light on the source or necessity of this new law. Certainly there has been nothing like the very public debate in the tech and VC community (detailed in this blog) over the past year about the effect of non-competes on the Massachusetts economy. And an Internet search on the subject of Massachusetts-based social workers and non-competes turns up nothing. As far as I know, mine is the very first voice in the electronic universe to mention this new law! (Thanks to my partner, Rob Fisher, for bringing this law to my attention.)

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Whether a successor in a corporate transaction may enforce a noncompete between the predecessor entity and its employees remains one of the more undeveloped and uncertain areas of noncompete law in Massachusetts. A few years ago, in Securitas Security Services USA, Inc. v. Jenkins, now-retired Judge Allan van Gestel of the Suffolk County Business Litigation Session issued a significant decision in this area - albeit at the trial court level - holding that a noncompete agreement is not assignable to a successor entity absent an express agreement permitting assignment, either in the terms of the original noncompete agreement or in a subsequent agreement between the company and the employee. Securitas remains one of the very few decisions in this area. Because no definitive decision exists at the appellate level, there are some who continue to believe that under certain circumstances a noncompete can be assigned absent a specific provision permitting such assignment.

This issue arose very recently in another Massachusetts trial court decision involving an added twist: whether the law of New York or Massachusetts should apply to the question of assignability. In Next Generation Vending v. Bruno, the plaintiff, Next Generation Vending, had acquired a Massachusetts-based company, All Seasons, Inc. All Seasons had a noncompete agreement with one of its employees, Brian Bruno. After Next Generation acquired All Seasons, Bruno formed his own company based in New York, resigned from Next Generation and started competing. Next Generation brought an action in Superior Court in Massachusetts claiming, among other things, breach of the noncompete agreement. Bruno moved to dismiss the claim, arguing that the noncompete could not be assigned to Next Generation and therefore could not be enforced, because it lacked an “assignability” clause. Interestingly, Next Generation countered by asserting that the noncompete was governed by New York law, and that under New York law noncompetes are assignable absent contractual provisions stating otherwise.

Superior Court Judge Regina Quinlan found a divergence in the laws of New York and Massachusetts on this issue, observing that under New York law a noncompete need not be expressly assignable in order to be assigned in a corporate transaction. In contrast, citing only the van Gestel decision in Securitas, Judge Quinlan stated that under Massachusetts law a noncompete cannot be enforced in the absence of express consent by the employee. The case hinged, therefore, on whether Judge Quinlan would apply New York or Massachusetts law to the dispute. New Generation Vending argued that the contractual choice of law should be ignored because New York had a greater interest in enforcing Bruno’s noncompete than Massachusetts. Applying traditional conflict of laws analysis, Judge Quinlan rejected that argument, finding that there was no overriding reason why New York’s public policy should trump the parties’ agreement that Massachusetts law would apply. She therefore dismissed the plaintiff’s claim that Bruno breached his contract by competing.

What to make of this? Although there remains a possibility that Securitas some day will be rejected by a Massachusetts appellate court, in the meantime it appears that other trial court judges are going to continue to follow it. This means that companies in Massachusetts (and companies outside of Massachusetts that choose Massachusetts law for their agreements) should be careful to include a specific “assignability” provision in their non-competition and non-solicitation agreements. Where no such provision exists, care must be taken either to obtain consent to assignment at the time a company undergoes a sale or other change of control, or following such sale the successor should obtain new noncompetes with its employees.

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It is not uncommon for employment agreements, particularly those involving senior employees, to contain provisions requiring that the employee give notice of his or her intention to leave. These “mandatory notice” provisions can have a duration of as little as two weeks and as much as six months. Employers explain them as being intended to minimize the disruption to operations (and customers) caused by the abrupt departure of a valued employee. One potential benefit of such provisions -- if enforceable -- is that they can operate as a kind of short-term non-compete, in that they force employees to sit on the beach (or in the “garden,” to borrow the British usage) while being paid by the employer, rather than immediately joining a competitor. One school of thought is that such provisions are merely aspirational, rather than strictly enforceable, because the general American rule is that individuals cannot be compelled to remain employed at any particular employer. Two recent decisions in Massachusetts, one from the state court and the other from the federal court in Boston, and both involving the brokerage firm Bear Stearns, support that view. [As it happens, Foley Hoag represented the successful defendants in both cases.]

The first decision, Bear Stearns & Company, Inc. v. McCarron, involved Bear Stearns’ attempt to enforce a 90-day mandatory notice provision against three brokers who departed for another brokerage firm. Bear Stearns sought an injunction in the Suffolk Superior Court’s Business Litigation Session to enforce that provision against brokers who had resigned and immediately started at their new firm. Judge Ralph Gants, who regularly hears restrictive covenant cases involving the financial services industry, refused to grant the requested injunction. He had two problems with the restrictive covenants at issue. First, in this case, the defendants had never signed a document that described itself as an employment agreement, or a non-competition or non-solicitation agreement. Instead, the provisions Bear Stearns sought to enforce were “buried” in deferred compensation plan documents. Judge Gants regarded these provisions as “stealth” restrictive covenants and stated that the Bear Stearns should have obtained signed employment agreements in which the employees were “fairly told of the restrictions and knowingly” accepted them. Second, Judge Gants refused to enforce the 90-day notice provision “because it would be fundamentally unfair to the defendants’ private clients at Bear Stearns, who would be left with uncertainty as to whom would actually be servicing their needs.” He noted that if a client wished to remain with Bear Stearns, the client would be in a kind of limbo, as Bear Stearns likely would not have permitted the brokers who had provided notice of resignation to service those clients. He stated that the court would not enforce a contract provision “that may deny clients a choice of financial advisors for up to 90 days.”

Notwithstanding this decision from a Massachusetts state court judge, Bear Stearns tried to enforce a similar provision only a few weeks later, this time bringing its case in federal court in Boston, before Judge Nathaniel Gorton. In Bear, Stearns & Co., Inc. v. Sharon, Bear Stearns sought to enforce what it described as a “garden leave” provision against a senior broker who resigned in the wake of the recent well-publicized turmoil at Bear Stearns. The provision at issue required the individual to provide 90 days’ notice of termination, during which time Bear Stearns reserved the right to decide what duties, if any, the employee would perform and would pay his base salary. The provision specifically stated that it was enforceable by a temporary restraining order in court.

Although Bear Stearns initially obtained a temporary restraining order which lasted several days, Judge Gorton ultimately refused to grant a preliminary injunction enforcing the provision. He found that the 90-notice provision could not be enforced at “equity” -- i.e. via an injunction, because the effect of an injunction would be to require the defendant to continue an employment relationship against his will, a concept at odds with longstanding American jurisprudence. The court noted that the “garden leave” provision was not a simple restrictive covenant in that it barred the individual from working at any employer during the so-called notice period, rather than limiting him from working for specific competitors.

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A newly-decided case by Judge Fabricant of the Business Litigation Section of Suffolk Superior Court highlights some interesting trends with regard to the enforcement of non-compete agreements (Lunt v. Campbell, et al.). The case involves three hairdressers who left the Lunt salon in Beverly Farms, Massachusetts to start a new shop in Peabody, Massachusetts. The hairdressers had signed non-compete agreements midway through their employment with Lunt prohibiting them from competing in Essex County for a period of two years. Lunt sought an injunction when the hairdressers left to start Gichelle's Hair Studio.

The court's decision denying injunctive relief for Lunt illustrates important principals -- namely, what constitutes protectable "good will" and "confidential information." As to the former, the court found that "hairdressers are not fungible" and that the choice of hairdressers is a matter of personal taste. To the court, this meant that the good will likely belonged to the hairdresser, not to the shop -- a finding buttressed by the fact that clients followed the hairdressers to a new shop 10 miles away.

As to confidential information, the court found that there is no evidence that records were stolen, but that at any rate "names and telephone numbers of customers" likely do not constitute confidential information.

While not dispositive, the court also made an observation that could be used in future cases. Though it has been established in Massachusetts that continued employment constitutes sufficient consideration for enforcing a non-compete agreement, Judge Fabricant found that the fact that each employee was called upon to sign the non-compete contact during her employment "weigh[ed] in the Court's evaluation of the equitable factors in deciding whether to enforce by means of a grant of an injunction." In other words, if an employer wants the court to take the non-compete more seriously, it should attempt to have the agreement signed at the outset of employment, or if done mid-employment, tie some concrete new benefit to the non-compete.

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A recent decision illustrates the risks for defendants in non-compete cases who go on the offensive by asserting counterclaims against former employers. In a 2006 opinion, the Massachusetts Business Litigation Session awarded a defendant in a non-compete case significant damages after the defendant proved that the plaintiff had filed the lawsuit for improper competitive purposes. Yet, in a recent decision, the same court dismissed a defendant’s counterclaim, ruling that the counterclaim was based solely on the plaintiff’s filing of the lawsuit and that the plaintiff’s claims were reasonably based in the facts and the law.

In Brooks Automation v. Blueshift Technologies, Inc., Justice Ralph Gants of the Massachusetts Business Litigation Session refused to enforce the plaintiff company’s non-competition agreement with a former employee, but awarded the defendant six-figure damages on its counterclaim.

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This week’s ruling in the ongoing Howie Carr saga, despite the current media splash, essentially maintains the status quo in the case. At issue was Carr’s emergency motion for reconsideration of an earlier order -- described here -- refusing to invalidate the exercise by Carr’s long-time employer -- Entercom -- of a right of first refusal. The effect of that ruling was to continue Carr’s employment with an employer he wishes to leave and to place him at risk of significant damages if he refuses to return to his job and/or tries to take another job.

In the motion for reconsideration, Carr’s lawyers argued that Judge van Gestel was mistaken in finding that Carr’s employment agreement was extended by virtue of Entercom’s exercise of the right of first refusal. In this week’s decision, Judge van Gestel did not disguise his impatience with Carr’s arguments, especially taking issue with his assertion that the judge misread portions of the agreement at issue. And he repeated the fundamental holding of the previous ruling: that a right of first refusal exercised prior to the termination of an agreement that has the effect of extending the term of the agreement is substantively different than a noncompete. (If it were a noncompete, it would run afoul of a Massachusetts statute prohibiting noncompetes in the broadcasting industry.)

Again, the Court stated that Carr should have to live with the choice he made to negotiate an offer from another radio station and inform his employer of that offer while his existing agreement was still in place. Had Carr waited until the agreement expired, the judge found, he would not be in his current predicament. And, the judge again rejected Carr’s argument that this result subjects him to “lifetime employment” with Entercom.

Carr is indicating that he will pursue an emergency appeal of the decision. 

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While it remains quite difficult to predict whether a Massachusetts judge will enforce any given restrictive covenant in a particular case, close observers of recent Massachusetts noncompete decisions would note that judges increasingly are reluctant to enforce post-employment restrictions against "the little guy" -- as contrasted with senior, highly-compensated managers.  A recent insurance-industry dispute exemplifies this trend.  In Banc of America Corporate Insurance Agency, LLC v. Verille, Banc of America’s corporate insurance agency sought an injunction enforcing a client non-solicitation restriction against a former employee, Mr. Verille, who was described as a "Producer" and who took a similar position with a competitor.  Central to the injunction request was evidence that the employee’s new company was involved in providing services to two of the clients previously serviced by the employee.  Verille did not dispute that his new company was providing competitive services to those clients and did not dispute that he had spoken with those clients at the time of his departure.  He denied, however, that he had ever solicited those clients to shift to his new company and asserted that they independently decided to move upon learning of his departure.  Judge Thomas Connors found that Banc of America’s allegation of solicitation was undermined by affidavits from the clients at issue stating that Verille had not solicited them. 

However, Judge Connors found that the agreement at issue prohibited not only solicitation but also apparently barred Verille from servicing such clients on behalf of a third party, in this case his new employer.  Nevertheless, the court accepted Verille’s argument that the restriction should not be enforced, for several reasons.  First, the court concluded that there was some question whether Banc of America could articulate a good will interest with respect to the clients at issue, suggesting that the good will in this instance belonged either to its predecessor, Fleet Bank’s insurance company, or Verille himself.  In addition, Judge Connors concluded that Banc of America’s claim of irreparable harm was not compelling.  On this issue, Judge Connors described Banc of America as "a major corporation with a significant client base," which brought the case based on the loss of "just three clients, a number later whittled down to two."  Under the circumstances, the judge concluded, Banc of America’s legal recourse was only a claim for money damages, rather than an injunction that would affect Virelle’s "ability to pursue a livelihood."

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Under a little known and rarely interpreted Massachusetts statute, non-competition agreements in the broadcasting industry are void and unenforceable. So, how could Entercom Boston, the employer of well-known radio personality Howie Carr, keep him from going to work for a competing radio station?

As Massachusetts-based readers of this blog likely are aware, last week Judge Allan van Gestel, a well-respected judge in the Suffolk County Business Litigation Session, issued an eagerly-awaited decision largely in Entercom’s favor. The decision is here. It turns on the interplay between the Massachusetts statutory prohibition on broadcasting industry noncompetes and a right-of-first-refusal provision in Carr’s employment agreement providing Entercom an opportunity to extend Carr’s employment by matching any offer Carr received from another station. In this case, about 10 weeks before Carr’s contract with Entercom was to expire, Carr provided Entercom with notice of his intention to accept an offer of employment from another Boston area radio station. That same day, Entercom exercised its right-of-first-refusal by matching all of the terms of the offer Carr had received from the other station. Under Carr’s contract, this would have the effect of extending Carr’s employment with Entercom by exactly the same term of years that the other station was offering to Carr.

Carr went to court seeking a declaration that the right-of-first-refusal provision, as well as a 90-day post-employment non-competition provision, were unenforceable under the broadcasting industry noncompete prohibition. Entercom, in turn, sought a judgment that the right-of-first-refusal was valid and enforceable. (Judge van Gestel ruled that the 90-day noncompete provision was unenforceable; but this aspect of the dispute is not particularly important, as Entercom was not seeking to enforce that provision.)

Judge van Gestel went to great lengths to contrast this dispute from the typical non-compete enforcement disputes that he has seen on countless occasions in the Business Litigation Session. He did not strictly scrutinize the provision at issue as he typically would, observing that the parties in the case were “extremely sophisticated,” represented at all times by counsel, and “chose specific language to state their intentions” in the agreement at issue.

Carr essentially argued that the right-of-first-refusal provision was tantamount to a post-employment noncompete, in that it gave Entercom the ability to continue his employment beyond the contractual expiration date of September 19, 2007. Judge van Gestel disagreed, taking great pains to explain that his decision was based on the particular timing of the exercise of the right-of-first-refusal and his quite literal interpretation of the contract at issue. The relevant provision permitted Entercom to exercise a right-of-first-refusal at any time during the term of the agreement and for a period of 180 days after the expiration of the term. In this case, the right-of-first-refusal was triggered before Carr’s employment ended. In Judge van Gestel’s view, the case turned on that timing. He reasoned that the application of the right-of-first-refusal in this context was no more of a limitation on competition than any other provision of the agreement, such as a renewal option, which if exercised would continue the term beyond an initially-stated expiration date. That is, according to the judge, the right-of-first-refusal here operated simply as a mechanism to extend the term of the contract, rather than a post-employment non-competition restriction. Had the right-of-first-refusal been exercised after Carr’s employment had ended, the provision would have operated as a non-compete and the judge would have found it prohibited by the broadcasting industry statute. Judge van Gestel concluded that he was permitted by the contract itself to parse the contractual language in this way, pursuant to a severability clause which stated that a judicial determination of the invalidity of one section of the agreement would not affect the remaining provisions of the agreement.

Quite interestingly, Judge van Gestel observed that Carr “could have quietly, even secretly, met with Greater Boston Radio, Inc. and discussed or negotiated his future with it while his [Entercom agreement] was still operative.” Thus, he suggested that had Carr simply waited until the agreement expired before notifying Entercom of his competing offer, any attempt to exercise the right-of-first-refusal in this post-expiration context would have been struck down by the court.

Finally, Judge van Gestel noted his awareness that Carr claims that he cannot be forced to work for Entercom and its radio station, WRKO, and he mentioned some very old case law going back to 19^th century England establishing that an employer cannot obtain injunctive relief to enforce a personal services agreement. That issue, however, was not before the Court on the motions in play.

The result for now appears to be that Carr’s attempt to invalidate the right-of-first-refusal as a mechanism to terminate his employment with Entercom has been unsuccessful. Whether and for how long he continues to work for Entercom remains to be seen.

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Employers in Massachusetts generally can take comfort in a well-established legal principle that gives judges discretion to enforce a noncompete provision “to the extent that it is reasonable.”  Courts regularly use this concept to modify the duration and/or scope (substantive and geographic) of noncompete provisions to make them “reasonable” based on the particular facts of a case. 

A recent Massachusetts Superior Court decision reminds employers that this concept has its limits.  A court will not enforce a noncompete if it believes it to be so overbroad or unclear that the individual could not have known what post-employment activities were not permitted.  In Edwards v. Athena Capital Advisors, Inc., a young professional at an investment management firm focused on high net worth families signed an agreement stating that for one year after termination he would “not perform any services, either as a consultant, employee, owner, investor or otherwise, with or for any foreseeable business, product or service of the Company.”  The employee left Athena and went to work in the private wealth management division of Goldman Sachs, a much larger firm.  Judge D. Lloyd McDonald found that “although the one year period was reasonable, the breadth and comprehensiveness of the non-compete clause. . . renders it unreasonable.”  He further found that the scope of prohibited activities was “extremely broad and vague, particularly given the comprehensive nature of services and products offered by firms such as the plaintiff Athena.”  Accordingly, the judge concluded that as drafted the provision’s purpose was to restrain ordinary competition, and he enjoined its enforcement.  (Interestingly, the case was brought by the departing employee, who sought an order enjoining enforcement of the noncompete.)

This case underscores a fundamental point:  companies that are serious about noncompete restrictions need to give careful thought to drafting such provisions so that their employees -- and ultimately courts -- have a clear understanding from the words of the agreement of what specific activities are restricted following employment termination.

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The current trend in the world of noncompete litigation in Massachusetts is away from the enforcement of traditional noncompetes -- as distinguished from non-solicitation and non-disclosure provisions.  Massachusetts judges seem to be increasingly skeptical of traditional noncompete provisions in contexts other than very senior, highly-paid employees going to work for direct competitors.  So, when a decision like Eastern Bag & Paper Co., Inc. v. Ross, is issued, one can’t help but take notice.  In this case, Superior Court Judge Dennis J. Curran (a 2006 Romney appointee) issued a preliminary injunction and enforced a noncompete by its terms against a sales employee.  In addressing the defendant’s arguments against enforcement, Judge Curran wrote the following:

These are not mere words.  They are express contract terms.  Mr. Ross, over the age of 18 and of capacity, freely signed a document committing himself to them.  He later reaffirmed them.  He took $5,000 to abide by them; he later re-affirmed them so he could keep the $5,000.  The defendant’s present attack on this contract is simply unavailing; indeed, it reminds one of the expression:

A deal is a deal only until something better comes along

Strong words!  In enforcing the non-compete, the judge was influenced by a number of factors, including the relatively generous financial package being earned by the defendant (exceeding six figures); the limited geographical scope of the non-compete (one county in New Hampshire, four counties in Massachusetts and the state of Rhode Island); the fact that as a territory manager, the defendant was responsible for sales strategy and had extensive customer contact; and the fact that the employee reaffirmed the noncompete and received some cash consideration (although only $5,000) when he departed.  In addition, it should be noted that the court was applying Connecticut, rather than Massachusetts law, although the substantive standard of enforceability articulated by the court was identical to the Massachusetts standard.

The decision ultimately seems to underscore one of the fundamental variables in play in this area:  whether or not a noncompete will be enforced depends very much on the facts of the case and the particular judge deciding it. 

Here are some useful documents:

• Ten tips for hiring without getting sued, MASS HIGH TECH (with Sheila O'Leary) (February 2, 2007)
• Avoiding Legal Risks As You Expand Your Head Count, BOSTON BUSINESS JOURNAL (with Sheila O'Leary) (July 28 - Aug. 3, 2006)

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The Mazonson decision described in the previous post also contained an interesting discussion of the plaintiff’s request to enforce a customer-based restriction against one of the individual defendants.  On this issue as well, the Massachusetts court denied the request for a preliminary injunction.  Interestingly, Judge Murtagh found that the agreement’s restriction prohibiting the employee from providing services or selling insurance to any customer, even if there had been no solicitation by the employee, violated public policy and was unenforceable.  

The provision at issue was something of a hybrid:  it prohibited not only the solicitation of the company’s customers but also the provision of services to them.  As such, it was essentially a limited form of non-compete agreement.  Such provisions have been enforced by other Massachusetts judges in other contexts, particularly where the plaintiff could show that enforcement was necessary to protect customer goodwill.  But Judge Murtagh found it to be a “naked and unreasonable restraint on trade and commerce.”  He went on to find that there was no concrete evidence that any of the three customers at issue in the case were solicited by the individual defendants.  (As it happens, one of the allegedly-solicited customers was Foley Hoag; we played no role as counsel in the case.)   In so doing, Judge Murtagh sent a clear signal that he will scrutinize very carefully any request for injunctive relief in a restrictive covenant case.

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