Noncompetes and Races to Courthouses

An increasingly common scenario in the world of noncompete enforcement is the so-called “race to the courthouse,” where parallel actions are brought in separate jurisdictions about the same dispute. In one case, the former employer seeks enforcement of the noncompete. In the other, the employee and his or her new employer seek an order declaring that the noncompete is unenforceable. Many of these situations involve California as the location of the new employer. Upon hiring the employee, the California-based employer will immediately seek a “declaration” from a California state court judge (these are called “declaratory judgment” actions) that the non-competition provision is unenforceable under California law and therefore it is okay to hire the employee. The advantage of this approach is that California precedent supports a holding that would disregard the law of the state in which the employee previously worked, even if the contract contained a provision (a “choice of law” clause) stating that a particular state’s law would apply to disputes under the contract.

Often in these instances, it will be argued that the dispute should be adjudicated in the court where the first lawsuit was filed. This is sometimes called the “first filed” rule, and Massachusetts courts generally have followed it. Thus, we get a “race to the courthouse”: the party that files first gets to dictate what court will decide the dispute.

I mention all of this as background for discussion of a Massachusetts case, Ethicon Endo-Surgery, Inc. v. Pemberton and Intuitive Surgical, Inc., decided in late 2010 (but only recently brought to my attention), in which Judge Lauriat of the Superior Court’s Business Litigation Session had occasion to consider the “first filed” rule in the context of a non-compete dispute with some connection to Massachusetts, California, Ohio, New Jersey, New Hampshire and Maine.

The employee, Pemberton, had been employed by Ethicon Endo-Surgery (EES), an Ohio-based medical device company that is a subsidiary of Johnson & Johnson, a New Jersey company. Pemberton was involved first in sales and then later in educational/training activities for EES customers. He worked in northern MA, NH and Maine. He left EES in October, 2010 and was hired by Intuitive Surgical, a Delaware corporation with a principal place of business in California, where he was to be a sales manager based in the Boston area.

On his last day, Pemberton told EES he was going to work for Intuitive. The next day, Intuitive and Pemberton served EES with a California-based declaratory judgment action. Four days later, EES sued in Massachusetts state court to enforce Pemberton’s 18-month non-competition restriction.

Not surprisingly, Pemberton and Intuitive argued that the “first filed” rule required dismissal of the Massachusetts case, with the expectation that the California court would invalidate the noncompete. But based on the facts of the case, Judge Lauriat was not willing to follow that rule. As it turned out, Pemberton gave EES more than a month of notice of his departure, but he didn’t say where he was going and told EES he was still “working out the details.” He informed EES that he was going to Intuitive only on his last day of work. Meanwhile, unbeknownst to EES, weeks before his last day, Pemberton already had signed an offer letter from Intuitive and he and Intuitive already had filed a declaratory judgment action in California. They simply waited to serve the papers on EES until the day after Pemberton’s last day of work at EES.

Judge Lauriat stated that he could “not condone Intuitive’s behavior” by applying the first-filed rule. He noted that that the situation could not even be called a “race to the courthouse,” because EES didn’t even know there was a race until Intuitive and Pemberton “had already crossed the finish line and hoisted the trophy.”

So, Judge Lauriat kept the case and decided EES’s preliminary injunction motion on the merits. He rejected Intuitive’s argument that California law should trump the parties’ choice of New Jersey law in the contract, finding that either New Jersey or Massachusetts had an equal or greater interest in the dispute given the contacts with those states. He then gave short shrift to Pemberton’s argument that the companies were not competitors. He did find that the nationwide scope of the restriction was too broad, and scaled it back to Maine, New Hampshire and Massachusetts. Finally, in balancing the equities/hardships for each party, Judge Lauriat was swayed by the fact that the contract required that EES would compensate Pemberton for every month in which he could not work due to the non-competition agreement. The fact that Pemberton could have made more money at Intuitive did not change the judge’s view.

Injunction granted, despite the employee’s and new employer’s best laid plans to take advantage of California law.

The lesson? Massachusetts courts are not going to be willing to defer to a California court in a non-compete case where it appears to the judge that the parties engaged in subterfuge or manipulation to get a case filed in that state.

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