Header graphic for print
The In-House Advisor Published by Shepard Davidson & Renee Inomata

Careful Drafting of Non-Competes and Other Restrictive Covenants Can Save the Day

Posted in Contracts, Noncompetition & Other Restrictive Covenants, Pre-Litigation Considerations, Separations, Layoffs & Terminations

It generally is a defense to a breach of contract claim if the defendant proves that the plaintiff was the first one to materially breach the parties’ agreement. As a recent case from the Business Litigation Session of the Massachusetts Superior Court confirms, however, a plaintiff seeking to enforce a post-employment restrictive covenant can avoid falling victim to such a defense – if, that is, the company has a carefully crafted agreement is in place.

In United Salvage Corp. of America v. Kradin, United Salvage purchased Richard Kradin’s business. In connection with that transaction, the parties entered into a number of agreements, including one entitled “Proprietary Information and Inventions Agreement.” The “PII” Agreement included a five-year restrictive covenant, precluding Kradin from competing against United Salvage or soliciting any customers with whom he had contact while employed by the company.

Six months after the transaction closed, United Salvage terminated Kradin, alleging that he was not fulfilling his job responsibilities and had engaged in various acts of malfeasance. Almost immediately thereafter, Kradin began soliciting United Salvage’s customers to do business with him, directly, and not with United Salvage. United Salvage then sued Kradin and moved for a preliminary injunction, seeking to preclude him from engaging in such prohibited activity.

Kradin opposed the entry of an injunction, arguing that he was relieved of his restrictive covenants because United Salvage had materially breached its contractual obligations to pay debts that it had assumed as part of the purchase of Kradin’s business and had driven him out of the company on “trumped up charges.” Significantly, however, Kradin had acknowledged in the PII Agreement that:

Each of my obligations to be performed under this Agreement shall be interpreted independent of any other provisions of this Agreement, the Asset Purchase Agreement or my Employment Agreement and any other obligation [United Salvage] may have toward me. The existence of any claims by me against the Company, whether based on this Agreement or otherwise, shall not be a defense to the enforcement by the Company of any of my obligations under this Agreement.

As such, and even though the Court expressly noted that it was construing all of the agreements between the parties “as a whole,” it held that Kradin had contracted away his right to argue that a material breach by United Salvage released him from his restrictive covenants.

The lessons for in-house counsel from United Salvage are clear: when drafting a restrictive covenant (i) specify exactly what the consideration is for the restriction, (ii) state that the covenant and the concomitant consideration are independent of any other agreements between, or obligations of, the parties, and (iii) have the employee acknowledge that any contract breach by the company other than in connection with the consideration for the restrictive covenant may not be used as a defense to the enforcement of that restriction. Doing this can eliminate a potential defense that could thwart an otherwise well-conceived restrictive covenant.