The Perils of Promotions: Your Noncompete May be in Jeopardy

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.  InAstro-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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