Non-competition agreements in Massachusetts have been the center of debate for several years. As bills to ban non-competes before the House of Representatives and Senate continue to swirl, many employees in Massachusetts are forced to agree to restrictive covenants on a take-it-or-leave-it basis as a condition of employment. While Massachusetts is certainly not the only state where non-competes are enforceable, it’s status as a technology hub draws a sharp contrast to its leading rival: California. Unlike Boston or Cambridge, employees in Silicon Valley need not be concerned about such contracts since the California legislature has largely banned such restrictions except in very limited circumstances.
From this perspective, it’s no wonder that Silicon Valley leads the world and eclipses Boston as home to the largest and most prominent global technology companies. The absence of non-competes creates a more friendly business environment for employees and companies alike, with Facebook being a prime example. Founded in a Harvard dormitory, Facebook eventually made it’s home in California. Smart choice. The ability to hire top talent unencumbered by non-competes agreements meant more resources could be dedicated to building the company and less towards defending the inevitable litigation that flows from restrictive covenants.
Given how polarizing this issue has been, it’s unclear what, if any, action the Massachusetts legislature will take on the pending non-compete bills. In the meantime, below are general principles to keep in mind in setting the table to challenge the enforceability of a non-compete agreement along with ten defenses that have proven helpful in the past.
- Woolley’s Laundry v. Silva: “The public and the individual have an interest in every person carrying on his trade or occupation freely. Interference with individual liberty of trade, if there is nothing more, is contrary to public policy, and contracts restraining freedom of employment can be enforced only when they are reasonable, not wider than is necessary for the protection to which the employer is entitled, and not injurious to the public interest.”
- Alexander & Alexander v. Danahy: “[A]n ordinary employee typically has only his own labor or skills to sell and often is not in a position to bargain with his employer. Postemployment restraints in such cases must be scrutinized carefully to see that they go no further than necessary to protect an employer’s legitimate interests, such as trade secrets or confidential customer information.”
- Kroeger v. Stop & Shop: “Reluctance to give full effect to post-employment restraints has a long history in the law. For example, in 1587, a blacksmith was jailed by local justices of the peace when he had the temerity to bring an action an another blacksmith’s (thought to have been an apprentice) bond not to ply his trade in the town of South-Mims.”
- Banner Industries v. Bilodeau: “The public policy of the Commonwealth of Massachusetts favors the right of an employee to move from job to job unencumbered by restrictions that are not narrowly tailored to protect an employer’s interests in the goodwill of a business, a trade secret, or confidential business information.”
1. Blue Penciling & Reformation
- Hurwitz Group v. Ptak, 2002 Mass. Super. LEXIS 565 (2002): “This is, speaking plainly, legal draftsmanship run amok. … While blue-pencilling is permissible within reason … there is a point beyond which it is unreasonable to expect the parties to submit themselves to the post-hoc judgment of a court of equity, as a substitute for their own bargain. A contract should inform the parties with reasonable clarity of their rights and obligations.”
- FLEXcon Co. v. McSherry: “Flexcon has not shown a likelihood of success on the merits of its claim for breach of contract because the non-competition clause in its employment agreement is ambiguous and poorly drafted.”
2. Geographical & Temporal Scope
- All Stainless v. Colby: “The plaintiff has failed, however, to show that its good will could have been harmed through sales activity by Colby outside of the sales territory formerly assigned to him. We see, therefore, no justification for enforcement of the restriction beyond Colby’s former sales territory. Such has been the general nature of the geographical limitations imposed by injunction on route salesmen pursuant to covenants not to compete.”
- Lunt v. Campbell: “Nor does the record presently before the Court establish that the agreement is reasonable in time and scope in relation to the interests served. Massachusetts courts have enforced non-competition agreements up to two years in some circumstances, but it is not apparent that such a long time is necessary in this context, involving a service clients usually require at intervals of weeks or months. As to territorial scope, Essex County encompasses many square miles of territory. Absent further proof on the issue, the Court is not prepared to assume that the entire County constitutes a single market for hairdressing services. To the contrary, a client’s willingness to travel the distance from Beverly Farms to Peabody to receive services from Campbell or Tobin tends to suggest that that client’s good will runs to Campbell or Tobin far more than to Lunt or her salon, so that a non-competition provision encompassing the entire County goes beyond protecting any actual good will of the employer.”
- IKON Office Solutions v. Belanger: “The court also doubts whether the two year restriction is reasonable given the present circumstances. Although two year restrictions are not uncommon, the court does not believe that two years is categorically appropriate here when the time of employ, during which the restrictive covenants were in place, was only slightly greater than one year.”
3. Goodwill
- Sentry Insurance v. Firnstein: “The objective of a reasonable noncompetition clause is to protect the employer’s good will, not to appropriate the good will of the employee.”
- Technical Aid v. Yung: “The good will, however, that TAC legitimately may preserve is its own good will, not the good will earned by the employee that fairly belongs to the employee.”
- Getman v. USI Holdings: “It is not solicitation when an insurance agent, prior to or immediately after his termination, notifies his clients, as Getman did here, that he is leaving his insurance company and joining another insurance company, and provides them with his new address, telephone number, and email address. Such notice is common courtesy to clients who an agent has come to know over the years and who have relied on him to handle their insurance needs. The law does not require his clients to learn of his departure from USI only by informal word of mouth or by calling his office at USI to speak with him and learning then that he had earlier left USI’s employ, perhaps weeks or months ago. Written notice is preferable to oral notice, because its content can be carefully worded and it does not invite further communication with the client unless the client initiates that communication.”
- Routhier Placement Specialists v. Brown: “Legal placement firms are simple middlemen that operate by canvassing law firms for work openings then attempt to arrange for secretaries to fill these positions. Any good will associated with a placement belongs to the person making the placement, not the company they work for. As the uncontested affidavits of the defendants clearly show, there are no exclusive relationships and, in fact, law firms actually use several different agencies at one time in order to create the largest pool of potential applicants. It is irrelevant to the law firms which agency fills the position, all they are looking for is the best applicant.”
- Technical Aid v. Allen: “Technical Aid has no legitimate interest in protecting its entire client base from Allen. As to the majority of Technical Aid’s customers, Allen has no advantage over any other complete stranger; he has no special hold on their goodwill.”
4. Inevitable Disclosure
- Mazonson v. Greenbaum, 2007 Mass. Super. LEXIS 172 (2007): “Mazonson has no real evidence to support its assertions of misuse of confidential or trade secret information; it merely suspects that defendants are acting improperly. Both defendants have denied that they used, or intended to use, any such information.”
- CSC Consulting v. Arnold: “CSC contends that Arnold’s mere acceptance of a similar position at a competitor company makes it inevitable that she will use or disclose trade secret information. If this Court followed the plaintiffs reasoning, any employee who was exposed to confidential information during his or her employment would be barred from working for a competitor, regardless of contractual obligations, based on the mere threat of misappropriation.”
- Safety-Kleen Systems v. McGinn: “Regardless of how much confidential information McGinn possesses (itself a matter of dispute), Massachusetts law provides no basis for an injunction without a showing of actual disclosure.”
5. Legitimate Business Interests
- Marine Contractors v. Hurley: “Employee covenants not to compete generally are enforceable only to the extent that they are necessary to protect the legitimate business interests of the employer. Such legitimate business interests might include trade secrets, other confidential information, or, particularly relevant here, the good will the employer has acquired through dealings with his customers. Protection of the employer from ordinary competition, however, is not a legitimate business interest, and a covenant not to compete designed solely for that purpose will not be enforced.”
- Richmond Brothers v. Westinghouse Broadcast: “[A]n employer cannot by contract prevent his employee from using the skill and intelligence acquired or increased and improved through experience or through instruction received in the course of the employment. The employee may achieve superiority in his particular department by every lawful means at hand, and then, upon the rightful termination of his contract for service, use that superiority for the benefit of rivals in trade of his former employer.”
6. Material Changes
- F.A. Bartlett Tree Expert v. Barrington: “The defendant worked under the 1948 contract for twelve years. In 1960, the defendant’s rate of compensation and sales area were changed. Such far reaching changes strongly suggest that the parties had abandoned their old arrangement and had entered into a new relationship.”
- Lycos v. Jackson, 18 Mass. L. Rptr. 256 (2004): “Because a material change in the employment relationship between Chun and Lycos voided the previous Agreement, and because Chun did not sign the Offer Letter incorporating the old Agreement, no written nondisclosure, noncompetition and developments agreement now exists between the parties.”
- R.E. Moulton v. Lee: “Moulton did not amend the agreement when Lee changed positions and did not otherwise notify Lee that he was still subject to the non-compete clause.”
- Cypress Group v. Stride & Associates: “Each 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.”
- Iron Mountain Information Mgmt v. Taddeo: “It is well-settled under Massachusetts law that each 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.”
- AFC Cable Systems v. Clisham: “These changes, coupled with AFC’s repeated efforts to have Clisham sign a new non-compete agreement, make it clear that Clisham had entered a new employment relationship with AFC, thereby voiding the 1992 Agreement.”
7. Solicitation
- Mazonson v. Greenbaum, 2007 Mass. Super. LEXIS 172 (2007): “The restriction in the agreement which prohibits Greenbaum from providing services or selling insurance to any Mazonson customer, even if there has been no solicitation by Greenbaum violates public policy and is unenforceable.”
- Oceanair v. Katzman: “Solicitation is defined as the act or an instance of requesting or seeking to obtain something. … Neither Katzman nor CHP did the requesting or seeking of the J. Baker business; they simply responded to Lanoue’s request for information. Thus, to the extent that the issue of solicitation is also a matter of law, this Court rules that Katzman did not solicit the Customs brokerage business of J. Baker to leave Oceanair and come over to CHP.”
- UBS Paine Webber v. Dowd: Holding that a “wedding-style” announcement sent by a stockbroker to his former clients does not constitute a “solicitation.”
8. Statutory & Regulatory Carve Outs
- M.G.L. c. 112, §12X: Voiding non-compete agreements with respect to physicians.
- Falmouth Ob-Gyn Associates v. Abisla: “We think the broad term ‘any restriction’ in G.L.c. 112, § 12X, was intended to encompass an agreement having a significant ‘inhibitory effect’ on a physician’s ability to practice in a particular geographic area, and that a liquidated damages clause imposing what is, in substance, a penalty of $250,000 in the event that a physician practices in a geographic area near his former employer, obviously has such an inhibitory effect.”
- M.G.L. c. 112, §74D: Voiding non-compete agreements with respect to nurses.
- M.G.L. c. 112, §135C: Voiding non-compete agreements with respect to social workers.
- M.G.L. c. 149, §186: Voiding non-compete agreements with respect to employees or individuals in the broadcasting industry.
- Massachusetts Rule of Professional Conduct 5.6: “A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or (b) an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a controversy.”
9. Termination
- Economy Grocery Stores v. McMenamy: “An employer may act so arbitrarily and unreasonably in exercising his right of termination that a court of equity will refuse aid in enforcing for his benefit other parts of the contract.”
- Lucente v. IBM: “[W]hen an employee is involuntarily discharged without cause, the employer cannot invoke the benefits of the doctrine. Enforcing the non-competition provision under such circumstances would be ‘unconscionable’ because it would destroy the mutuality of obligation on which a covenant not to compete is based.”
- Insulation Corp. of America v. Brobston: “The employer who fires an employee for failing to perform in a manner that promotes the employer’s business interests deems the employee worthless. Once such a determination is made by the employer, the need to protect itself from the former employee is diminished by the fact that the employee’s worth to the corporation is presumably insignificant. Under such circumstances, we conclude that it is unreasonable as a matter of law to permit the employer to retain unfettered control over that which it has effectively discarded as worthless to its legitimate business interests.”
10. Unclean Hands
- Karns v. Folio Exhibits: “There is a likelihood that the moving party will not be successful after a full hearing on the merits. The counterclaim defendant contends that Folio breached their agreement first by announcing a unilateral change in the commission structure by not only reducing the commission rate but also imposing a sales quota, contrary to the letter agreement, his understanding and his intent regarding his employment with Folio being conditioned upon his receipt of a flat guaranteed commission rate without being subject to a sales quota, thus excusing him from his obligations under the contract.”
- Lantor v. Ellis: “I find that Lantor committed a material breach of its employment agreement with Ellis in 1996 when it unilaterally changed the terms of employment by imposing a new bonus scheme and reserving the right to modify this and any future bonus scheme without limitation. … As a result of Lantor’s material breach of the employment agreement in 1996, Ellis was discharged from his obligations under that agreement, including his obligation not to compete with Lantor after leaving its employ.”
As discussed here, non-compete litigation moves quickly, at least at the outset. An ounce of prevention is worth a pound of cure. Having an employment contract containing restrictive covenants reviewed before signing can go a long way in avoiding costly disputes down the road.
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