Noncompete Agreements

Mass. Appeals Court Reverses an Unusual Trial Order in Non-Compete Case: Trillium v. Cheung

April 4, 2012

Here is an unusual spin on Massachusetts non-compete law.  As best I can understand the facts (which require a bit of “between the lines” reading) Trillium sued Cheung, a former employee of Trillium.  Cheung had, it appears, released an employee from a non-compete agreement without company approval. Trillium’s suit asserted breach of fiduciary duty to the company. A trial ensued, but at the outset the judge observed that if the underlying non-compete agreement had not been enforceable the release had caused no harm to Trillium, and hence there had been no legal wrong committed by Cheung.  In other words, the trial involved a concept that lawyers dislike greatly: a “trial within a trial.”  (Think Russian nesting dolls). Here, the two trials involved the question of whether the non-compete was enforceable and, if so, whether Cheung acted illegally by releasing the employee from the agreement. The trial began with a jury proceeding, during which the jury was asked to decide the second of these issues first  - whether Cheung had improperly given the employee a release from  the non-compete.  However, in an odd twist the parties agreed that the judge, not the jury, would rule on damages.  Before doing so, however, the judge addressed the second issue (which, one would think, should have gone first),  held that the non-compete agreement was unenforceable, and concluded therefore that Trillium had suffered no damages….

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Two Recent Noncompete Cases From the Superior Court

March 23, 2012

Noncompete opinions from the Massachusetts Superior Court are few and far between, so the two decisions that have been issued so far this year — one from Judge Peter Lauriat sitting in the Suffolk Business Litigation Section (BLS), the other from Judge Thomas R. Murtagh in Middlesex Cournty — are worth noting.  Both judges are respected judicial veterans, and each decision illustrates a legal principle basic to this controversial and often confusing area of law. The more note-worthy of the two cases is Judge Lauriat’s decision in Grace Hunt IT Soutions v. SIS Software, LLC.   There are relatively few ways to wriggle out of a non-compete, but one that should be near the top of every lawyer’s list is the question whether there has been a “material change” in the employment relationship since the non-compete agreement was signed.  If so, a “pre-change” non-compete may be unenforceable.  In this case the court found that there had been such a change, and therefore it denied a motion for preliminary injunction to enforce the  non-compete  covenant against the defendants.  Of course, what constitutes a “material change” can vary, depending upon the eye of the beholder, which in a preliminary injunction context is the judge.  In this case Judge Lauriat concluded that a 20% cut in salary was enough of a change to satisfy this standard.  Also, the employees had signed the non-compete with…

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Cases Cited in My 2011 MCLE Noncompete Chapter Update

November 7, 2011

Earlier this year Massachusetts Continuing Legal Education  (MCLE)  asked me to update my 2009 chapter on Employee Noncompetition Agreements.   The revised chapter, part of the 2-volume Massachusetts Employment Law series, was published in June. Below are links to the cases I added to this chapter.   I’ve also included a sentence or two regarding each case.  However, I did not make an effort to describe every legally significant aspects of each case. Ethicon Endo-Surgery, Inc. v. Pemberton, 27 Mass. L. Rptr. 541 (Super. Ct. 2010).  This case, decided by Judge Peter Lauriat  in the Suffolk Business Litigation Session, applies New Jersey non-compete law, but Massachusetts procedural law for purposes of ruling on a preliminary injunction.  The former employee filed suit in California first, but Judge Lauriat  refused to dismiss this case based on the “first filed” rule.  The court enforced an 18 month covenant not to compete against the former employee. Inner-Tite Corp. v. Brozowski, No. 2010-0156 (Worcester Super. Ct. 2010).  This lenghy decision was written by Judge Janet Kenton-Walker, sitting in Worcester County, following a bench trial.   The judge enforced a one year convenant not to compete against an employee who had worked for Inner-Tite in Georgia.  Given Brozowski’s  relatively low salary, and the fact that he was asked to sign the non-compete after beginning work for Inner-Tite, this contract would not have been enforceable under the various proposed…

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Apple, Google, Have You No Shame? Really!

October 1, 2010

While the debate over whether Massachusetts should adopt a law restricting the enforceability of non-compete agreements rages on (well, at least among a group of maybe 100 economists, lawyers and business people), California proudly observes that noncompete agreements are unenforceable in that state (except under very limited circumstances).   And, economists argue, that is one reason why the high-tech industry in Silicon Valley is more successful than its counterpart Massachusetts. Now, come to learn, things were not quite what they seemed.  I’m sure that 99% of California companies are in fact impacted by the California law — that is, they cannot impose covenants not to compete on their employees.  But a few companies — Google, Apple, Pixar, Adobe, Intuit and Intel — figured out an end-run around this law.  Apparently, the Federal Trade Commission tumbled to the fact that each of these companies agreed, with one or more of the others, not to solicit that company’s employees. For example, according to the FTC Apple and Google put each others employees on “Do Not Call” lists.

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What Happens When California and Massachusetts Law on the Enforceability of Non-Compete Agreements Clash in Massachusetts Superior Court? Read on ….

May 5, 2009

David Donatelli was an EMC Executive VP. He left EMC, and went to work for Hewlett Packard in California. EMC filed suit to enforce Donatelli’s one year non-compete agreement. Donatelli argued that the Massachusetts court should defer enforcement to California law, which is hostile to non-compete agreements. Judge Stephen Neel, in Suffolk Superior Court in Boston, didn’t buy it. He held that California’s legislative policy against non-compete agreements does not trump Massachusetts common law, at least under the facts of this case. Once he got past this major bump in the road, Judge Neel held that continued employment sufficed as consideration for a non-compete agreement (he also noted that the agreement recited that it had been signed “under seal,” magic words that favor enforceability in Massachusetts), held that the agreement was not overbroad, and issued the injunction. Justice Neel did, however, hold a branch above the waters before Mr. Donatelli sank beneath the waves – he stated that Donatelli could move to modify the order if he could show that his job duties at at HP would not “overlap with products or services being developed, produced, marketed or sold by EMC.” However, since the entire purpose of Donatelli’s hire by HP (according to press at the time) was to head HP’s Enterprise Storage and Server Division, which would be competitive with EMC, it’s hard to see how Donatelli could both…

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An Oral Agreement is Only as Good as the Paper It's Written On

February 2, 2009

You’ve got to wonder what Steelcraft was thinking when it decided to file a lawsuit against its former employee, James Hensel. It’s hard enough to enforce a written noncompete agreement, much less an oral agreement, but that’s what Steelcraft tried to do in this case. The absence of a written agreement didn’t deter Steelcraft, which sought a preliminary injunction against Hensel. Steelcraft was able to allege nothing more than an “oral” noncompete agreement. One of several requirements for enforceability of a noncompete agreement is that it be reasonable in duration and geographic scope, and even though Steelcraft alleged an oral agreement, it said nothing about that element, rendering the agreement unenforceable in the eyes of Worcester County Superior Court Judge Richard T. Tucker. Steelcraft also alleged that Hensel had taken Steelcraft trade secrets (the decision doesn’t discuss precisely what these were), but once again its argument was rejected on the grounds that it had failed to establish that it had properly protected the alleged secrets.  For good measure, the judge noted that Steelcraft had failed to enter into a confidentiality agreement with the former employee. There’s a bit more to this case (favorable to Hensel, harmful to Steelcraft), but the point is made: if you fail even to get a written noncompete agreement from your employee, don’t expect that you’ll be able to stop him from competing based on an…

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The Bill That Would Make Noncompete Agreements Unenforceable in Massachusetts

January 13, 2009

[Update, November 7, 2011]: Almost 3 years later, and still no law. Here is the full text of a bill filed last week that would make noncompete agreements unenforceable in Massachusetts, at least as to employees (as contrasted with noncompete covenants entered into in connection with the sale of a business, the other major category of noncompete covenants): AN ACT TO PROHIBIT RESTRICTIVE EMPLOYMENT COVENANTS Section 1. Section 19 of Chapter 149 of the General Laws of Massachusetts is hereby amended by inserting at the end the following new paragraphs: Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement. For the purposes of this section, chapter 149, section 148B shall control the definition of employment. Whoever violates the provisions of this section shall be liable for reasonable attorneys fees and costs associated with litigation of an affected employee or individual. This section shall be construed liberally for the accomplishment of its purposes, and no other provision of the General Laws shall be construed…

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How to Attract Patent Litigation

November 27, 2008

If you’re a federal district court, that is. The answer? You need something not every federal district has. The Eastern and Southern Districts of Texas have them. The Northern District of California has them. The Districts of Pennsylvania (Western), Georgia (Northern) and Illinois (Northern) have them. In fact, so many U.S. District Courts have them that its getting difficult to keep up. Like so many things in life, at first its an advantage to have them, and eventually it becomes necessity. And now the U.S. District Court for the District of Massachusetts has them. What are they? Local procedural rules that apply only to patent cases. Local patent rules recognize that patent cases present legal, technical and discovery issues that call for specialized handling. In most jurisdictions these rules require early claim identification and invalidity defenses, attempt to schedule early claim construction (by the Court or by stipulation of the parties) and generally attempt to speed up the patent litigation process. After all, plaintiffs tend to seek out jurisdictions where they can get to trial as quickly as possible, since delay only increases expenses, while speed tends to lead to settlements. Frankly, the Massachusetts local patent rules appear on the weak end of the spectrum – they focus entirely on the initial Local Rule Rule 16.1 statement to the court, and require the parties to propose a schedule for disclosure…

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Are Apple and IBM Competitors?

November 8, 2008

Many people knowledgeable about these two companies may be surprised to learn that IBM has persuaded a U.S. District Court judge in New York that indeed, they are competitors.  The judge has enjoined Mark Papermaster, a 25-plus year employee of IBM, from working for Apple Computer.  While at IBM Mr. Papermaster was a product development executive in the area of blade servers.  After Apple engaged in an extensive, year-long interview process it hired Mr. Papermaster as the senior executive for the iPod/iPhone development team. Of course, Apple was well aware of Mr. Papermaster’s non-compete agreement with IBM, which prohibited him from working for a competitor, and I assume that it seriously considered whether it could defend a challenge of this sort by IBM.  Apple probably concluded that servers and iPods were sufficiently far apart that it would be safe hiring Mr. Papermaster.  The fact that this decision went against it highlights once again the extent to which the outcome in a case of this sort is determined by the disposition of the judge who happens to draw the case, rather than the underlying legal principles, which give the judge an enormous amount of discretion to rule either way. The Justia page for this case is here.  It appears that Justia has decided to make access to court filings in the case free of charge, and therefore the legal memoranda arguing…

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Behind The Scenes at Bear Stearns

April 23, 2008

I recently wrote about the Bear Stearns v. Sharon case. (See here and here). Here is a link to a Business Week article, “Bailing out of Bear,” that tells the gruesome story behind the Bear Stearns financial debacle and Bears’ suit against Doug Sharon, the star broker at Bear Stearns who left for Morgan Stanley.

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Decision in Bear Stearns v. Sharon – Motion Denied

April 7, 2008

Here is Judge Gorton’s decision in Bear Stearns v. Sharon, which I discussed last week. Bear Stearns’ motion for a preliminary injunction was denied. Thanks to Michael Boudett (who represented Sharon) at Foley Hoag for providing me with this decision.

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Bear Not Entirely Without Tooth and Claw

March 31, 2008

Recognizing that the Massachusetts Suffolk Business Litigation Session (BLS) is an unreceptive venue for securities firms attempting to enforce restrictive coveneants against former employees, Bear Stearns has sued the former Executive Director of its Private Client Services Group in Federal District Court in Boston. The employee, a 20 year veteran of Bear Stearns, fled to Morgan Stanley on Monday, March 17, 2008, the day after Bear Stearns’ $2/share bail-out sale to Morgan Stanley was announced. The Bear Stearns employee, Douglas Sharon, had an agreement with Bear Stearns that required him to provide 90 days notice of resignation. According to Bear Stearns, Sharon provided notice and left on the same day. Moroever, Bear Stearns asserts that Sharon took confidential and trade secret customer/client information with him, much of which was copied the weekend just prior to March 17th. Then, according to Bear Stearns, he used this information to contact his former clients at Bear Stearns. As noted in the link above, the BLS (where this case would have ended up had Bear Stearns filed in state court) has been less than friendly to “broker” suits of this ilk. Apparently, Bear Stearns is hoping it will get better treatment in federal court, where its case has been assigned to Judge Nathaniel M. Gorton. While a full hearing on Bear Stearns’ motion for preliminary injunction has not yet occurred, Judge Gorton did enter…

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