Noncompetition & Other Restrictive Covenants

In Part I of Key Changes to Massachusetts Noncompetes, I outlined some of the most significant new mandates that will apply to all noncompete agreements executed on or after October 1. In this post, I want to discuss some of the practical implications of the new law and how in-house counsel might address them.

  • The new law does not apply to covenants not to solicit customers, clients, or vendors of the employer

 

While this may not sound like a significant exception, in many instances, it provides the ultimate loophole. For example, if your company uses noncompetes primarily or exclusively to prevent your sales force from competing against you, simply revising those agreements so that they are structured as nonsolicitation agreements may give you most, if not all, of the functional protections of a noncompete – but without having to worry about any of the requirements of the new law.

  • Noncompete agreements entered at the outset of employment only are valid if they are provided to the employee by the earlier of a formal offer of employment or 10 business days prior to the commencement of employment

 

In light of this, it is critical that in-house counsel … Keep reading

Over the years, I have written blog posts related to a plethora of nuances concerning noncompetition agreements. While the signing into law last Friday of new legislation on noncompetes does not eviscerate them (despite advocacy on the part of some for such a result), there are a number of new mandates that significantly change the legal landscape – but only for noncompete agreements entered into on or after October 1, 2018. Here are what I believe to be the most significant changes to Massachusetts noncompete law:

I. The definition of noncompetes does NOT include, and the new law will NOT apply to:

  • A. Covenants not to solicit or transact business with customers, clients, or vendors of the employer
  • B. Noncompetes in the context of the sale of a business or substantial assets thereof, when the individual is a “significant” equity holder and will receive “significant” consideration for the transaction
  • C. Noncompetes in connection with a separation agreement, if the employee is given seven days to rescind the agreement
  • D. Covenants not to solicit or hire employees of the employer

II. To be valid, a noncompete MUST meet ALL of the following conditions:

  • A. The noncompetition period may
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As I have counseled many clients, a non-compete provision is different than most other contractual terms, because simply having mutual consent and consideration will not automatically render it enforceable for reasons of public policy. Thus, even in states like Massachusetts that are known to enforce non-competes, such restrictions will be deemed invalid unless they are reasonable in time and scope and also are necessary to protect against unfair competition – which occurs when the employee uses the company’s confidential information, trade secrets or goodwill to compete against it. As oxymoronic as it may sound, a non-compete that merely prevents “ordinary competition” will be deemed unreasonable and unenforceable.

While some businesses try to make an end-run around this law by requiring an employee to forfeit some benefit or pay liquidated damages if he/she competes against his/her company, any such requirement will be viewed through the same public policy lens used to scrutinize a formal non-compete provision. Indeed, as the Supreme Judicial Court of Massachusetts noted long ago in Cheney v. Automatic Sprinkler Corp.:

If forfeiture for competition provisions were enforced without regard to the reasonableness of their terms while covenants not to compete were subjected to such a

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When two parties reside and/or conduct business in different states, any agreement between them almost always has a choice of law provision. Typically, such a clause is as simple as: “The Parties agree that this Contract shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts.” As the Superior Court held earlier this month in Oxford Global Resources, LLC v. Hernandez, however, such simple and straight-forward language is no guaranty that a court will abide by it.

Oxford is a Delaware corporation and claims to have its principal place of business in Beverly, Massachusetts. Jeremy Hernandez is a California resident and was hired by Oxford to work in the company’s California office. As part of the hiring process, Hernandez was required to sign Oxford’s Protective Covenants Agreement, which included (i) non-compete and non-solicitation covenants; and (ii) a provision stating that the Agreement was governed by Massachusetts law.

Oxford later brought suit against Hernandez, alleging that he breached the Agreement by using information regarding Oxford’s customers to solicit them on behalf of a competitor. Hernandez countered by moving to dismiss, and, in that connection, he argued that the Court should construe the Agreement in … Keep reading

No doubt, having a properly drafted agreement is critical if you wish to prevent a former employee from competing against you or soliciting your customers. But, simply having a clear and straight-forward agreement may not be enough to persuade a court to enjoin someone from violating the terms of it. Rather, a plaintiff must show that a post-employment restrictive covenant is necessary to protect “legitimate business interests” before any injunctive relief will issue. Further, and as the Superior Court reconfirmed earlier this month in ABM Industry Groups, LLC v. Palmarozzo, making such a showing is not always easy to do.

Joseph Palmarozzo was a branch manager for ABM Industry Group, a large, public company that provides janitorial and maintenance services to large facilities. In connection with his job, Palmarozzo entered into an employment agreement that included non-competition, non-solicitation and non-disclosure obligations.

In December of 2016, Palmarozzo left ABM to become the General Manager of Compass Facility Services (“CFS”), a much smaller company than ABM, but one that also provided janitorial services. Shortly thereafter, ABM filed suit and moved for a preliminary injunction to prevent Palmarozzo from competing against ABM and soliciting its customers.

As a prelude to its

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It is standard practice in M&A transactions for the acquired business to assign all if its contractual rights to the purchaser. While that may sound good in theory, depending upon how the underlying contracts are drafted, they could have little or no value to the purchaser. Indeed, as the Massachusetts Superior Court’s decision in NetScout, Inc. v. Hohenstein confirms, this warning can be particularly important when the underlying contract involves an employee non-compete.

Carl Hohenstein was employed by a subsidiary of Danaher Corporation, and in 2011 he and Danaher entered into a contract that included a non-compete agreement. Four years later, NetScout acquired Danaher and its subsidiaries, and as part of that transaction (i) Hohenstein became a NetScout employee; and (ii) Danaher assigned its rights under the 2011 contract with Hohenstein to NetScout. Six years after that, Hohenstein left NetScout and began working for one of its competitors.

NetScout sued Hohenstein and moved for a preliminary injunction, asking the Court to bar him from competing against the company. While the Superior Court found that the non-compete agreement in the 2011 contract between Hohenstein and Danaher was enforceable, and that NetScout was entitled to enforce that contract as Danaher’s assignee, … Keep reading

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.… Keep reading

trade secrets

whistle blower trade secretsThe new Defend Trade Secrets Act (“DTSA”) allows owners of trade secrets to now bring a civil action in federal court to protect their trade secrets and confidential information. Further, under the DTSA, a trade secret owner may be awarded actual damages, injunctive relief, restitution, the extraordinary relief of ex parte seizure orders and, if there is willful or malicious misappropriation, exemplary damages (up to double damages) and attorneys’ fees. Although the DTSA is a big win for employers seeking to protect their trade secrets and confidential information, employers may be precluded from being awarded exemplary damages and attorneys’ fees if the employee’s confidentiality agreement does not contain an express exception for disclosures related to whistleblowing.… Keep reading

I’ve been involved in many cases where it is alleged that someone violated his or her non-compete agreement or misappropriated the company’s confidential information or trade secrets. Often, the key issue has been not what the former employee did, but what the company did not do to protect the information it contends is proprietary. The issue of failing to protect one’s confidential information and trade secrets was highlighted recently in the Appeals Court decision of Head Over Heels Gymnastics, Inc. v. Ware.… Keep reading

No doubt, ensuring that any agreement is consistent with judicial precedent is critical if you want to enforce that agreement at some point in the future. Nevertheless, merely incorporating precedential concepts or language into an agreement may not be enough to get your client to where it wants to be, and may even result in your client being put in a more difficult position than if the precedent had been ignored. Nowhere is this more apparent than when a company seeks to draft and implement a standard and seemingly straightforward noncompete covenant.… Keep reading