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 Massachusetts non-compete statutes.  Either ground would have invalidated the agreement.  This was a tough outcome for the former employee, and one which might have had a different outcome in Suffolk, Middlesex or Norfolk counties, which tend to have more liberal leanings in these cases.

• Rohm & Haas Elec. Materials, LLC v. Elec. Circuits Supplies, Inc., 2010 U.S. Dist. LEXIS 136080 (D. Mass., Dec. 22, 2010).  In this case, brought against a corporate distributor of Rohm,  Judge Joseph Tauro denied a preliminary injunction for a variety of reasons, including Rohm’s failure to prove the  distributor possessed trade secrets or confidential information, and because Rohm’s damages were quantifiable and relatively small,

• Marino Company, Inc. v. Anderson, 2010 Mass. App. Unpub. LEXIS 448 (2010).  This case was moot on appeal where the employer sought specific performance of a three year non-compete agreement, but by the time of trial more than three years had already passed.  See EMC v. Arturi, below.

• Palladium Group, Inc. v. MacGillivray, 2010-2246 (Middlesex Sup. Ct. 2010).  The court construed the non-compete agreement to provide only for forfeiture of benefits, and therefore injunctive relief against the former employee was not available to the former employer.

• Me. Pointe, LLC v. Starr, 2011 U.S. Dist. LEXIS 10442 (D. Mass. Feb. 3, 2011).  Judge O’Toole found that where a sales representative signed an independent contractor agreement on behalf of his company the agreement committed the company, but not the individual in his personal capacity.

• People’s Choice Mortgage, Inc. v. Premium Capital Funding, LLC, 26 Mass. L. Rptr. 582 (Super. Ct. 2010).  This opinion, written by Judge Stephen E. Neel sitting in Suffolk County, is notable because the new employer was found liable for tortious interference and violation of M.G.L. c. 93A.

• Ansys, Inc. v. Computational Dynamics North America, Ltd., 595 F.3d 75 (1st Cir. 2010).  The First Circuit, applying an “abuse of discretion” standard to denial of a preliminary injunction by the New Hampshire District Court, affirmed the lower court.  This case applied New Hampshire non-compete law.

• Parexel International Corp. v. Nanavati, 26 Mass. L. Rptr. 426 (Super. Ct. 2011).  In an odd twist (one which I can’t recall having seen before), Judge Thayer Fremont-Smith, sitting in Middlesex County, found that the fact that the new employer had agreed to pay the employee during the non-compete period, even if the employee was enjoined from working, was a factor that actually favored entry of the injunction, since the employee would not be injured by the injunction.

And a few cases that have been decided following the MCLE publication:

•  OfficeMax v. Levesque (1st Cir.).  In this case the non-compete agreements were found to be unenforceable because they were not assignable to OfficeMax as part of a corporate acquisition.  This probably came as a surprise to OfficeMax, and shows why “due diligence” is an important part of the corporate acquisition process.   (Applying Maine law).

• Empirix v. Ivanov (Middlesex Sup. Ct., May 17, 2011). Superior Court Judge Frances A. McIntyre, sitting in Suffolk County, issued an injunction enforcing a one year non-compete.

• EMC v. Arturi (1st Cir., Aug. 26, 2011) (Souter, J). In this decision, written by former Associate Supreme Court Justice Souter, the First Circuit upheld the denial of a preliminary injunction where the one-year non-compete period had expired.  “Like any contracting party, EMC makes its agreements subject to the rules of equity governing specific enforcement; rules, moreover, that were clearly in place in the governing federal and state cases well before the company required [the employee] to sign. Being forewarned, EMC could have contracted . . .  for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach. But it did not.”  I would venture to say that this decision puts to rest, once and for all,  the argument that a noncompete provision can be enforced beyond its term in the absence of a tolling agreement.

• Aspect Software v. Barnett (D. Mass., May 27, 2011).  In this decision, Judge Denise Casper’s first non-compete case since she was appointed to the federal district court, the court granted a preliminary injunction that it deemed necessary to protect the former employer’s trade secrets.  The employee had moved to California, and argued that California law (which does not enforce employee non-compete agreements against employees) should apply.  However, the employee’s agreement with Aspect provided that  Massachusetts law controlled the agreement, and  therefore the court rejected the employee’s “California defense.”

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.

I will admit that it could have been worse – they could have agreed not to hire each other’s employees under any circumstances, even when employees came to them seeking to change jobs.   From what I read they didn’t go this far.  But still, no-solicit agreements between companies are borderline illegal at best, and when large companies are involved, the border is receding in the rear-view mirror.  And, given job inertia, a “no solicit” probably accomplishes 90% of what a “no hire” would do, anyways.

But the question that comes to my mind is, where were the lawyers overseeing this behavior?  I will concede that no-hire/no-solicit agreements are not illegal per se, but in this case the companies were competitors (at least for talent) and major employers.  It didn’t take Robert Bork to advise companies like Google and Apple this was not a good idea.

Really, Apple and Google.  Really.

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 satisfy the judge and serve HP as intended.

If you’re wondering why legislation aimed at making non-compete agreements unenforceable in Massachusetts is unlikely to be passed, meditate on this case for a while.

Donatelli will almost certainly file a single-justice appeal – nothing to lose and a lot to gain.

Here is a link to the decision: EMC v. Donatelli.

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 oral agreement. “He said – She said” just doesn’t work here.

To read the full decision in Steelcraft v. Mobi Medical click here.

[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 in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear.”

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 in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear.”

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 in a manner that would limit its coverage. Nothing in this section shall preempt tort or contract claims, or other statutory claims, based upon an employer’s use, or attempted use of an unlawful contract or agreement to interfere with subsequent employment or contractor work.

This section shall apply to all contracts and agreements generated after the effective date of this act.

Section 2. Section 42A of Chapter 93 of the General Laws of Massachusetts is hereby amended by striking the words ‘in violation of the terms of such agreement’ where they first appear.

If enacted, this proposed law would wipe out close to 200 years of Massachusetts law enforcing (in the “right” circumstances, and consistent with equity) covenants not to compete. Massachusetts would join California and a few other states in refusing to enforce these agreements by order of their state legislatures. While I’m not betting on passage, you never know ….

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 of infringement claims and invalidity defenses, address issues associated with claim construction and tutorials for the Court (somewhat common in patent suits), and address various discovery-related issues. By contrast, the Patent Rules in the Eastern District of Texas (which attracts a great deal of patent litigation), sets strict requirements that far exceed the Massachusetts rules.

It’s unlikely that that the Massachusetts patent rules will turn Massachusetts into a hotbed of patent litigation, but you’ve got to start somewhere. Perhaps this will prove to be the first step toward rules that will turn Massachusetts into the “rocket docket” so admired by plaintiffs lawyers and feared by defendants.

An effort to collect links to the various local patent rules is on the New York Intellectual Property Law Association site here.

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 each side’s position are available (docket entries 4 and 10).

Docket entry 18 is the judge’s order, which reads in part:

For the reasons that will be stated in a forthcoming Opinion, Plaintiff’s Motion for Preliminary Injunctive Relief is GRANTED. It is further ORDERED that Defendant, Mark D. Papermaster, will immediately cease his employment with Apple, Inc. until further Order of this Court;  . . .  and it is further ORDERED that the Court will hold a status conference on November 18, 2008, at 10:00 am, at which it will discuss, and encourages the Parties to discuss beforehand, an expedited schedule for discovery and trial.

Expect significantly more activity in this case (including an emergency appeal) if Apple and IBM aren’t able to work out their differences out of court.  I suspect that IBM knows that it got a somewhat lucky role of the dice on this ruling.  At least on the face of it, a settlement that assured IBM that Mr. Papermaster would stay away from any server development at Apple should be enough to resolve this dispute.

Of course, my discussion is based on the public record disclosed in the court filings.  In the world of Steve Jobs (who, according to the court filings, was directly involved in the decision to hire Papermaster), what you see and what’s really going on can be very different.  For the back story on this case, see this Fortune article and this Cringely column, from which the following quote is drawn:

Apple still hopes to convince a judge that it is correct about Papermaster. But if Apple fails in that, Steve Jobs will just pick up the phone and choose IBM Microelectronics as the fab to build the next generation of Apple’s PowerPC processors – a contract worth billions, but ONLY if IBM drops all legal action.

Apple will win in the end — I guarantee it. And the way Jobs negotiates, Big Blue will probably end up losing money on the chip deal, too.

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.

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.

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 a temporary restraining order preventing Mr. Sharon from working for Morgan Stanley, communicating with his former clients, or inducing any Bear Stearns employees to leave Bear Stearns in favor of Morgan Stanley, pending the full court hearing.

Whether this order holds up on full hearing remains to be seen. Bear Stearns was right to be nervous about presenting this agreement to a BLS judge, such as Judge Ralph Gants. Mr. Sharon’s agreement is not a “covenant not to noncompete”; it is merely a notice period. If the 90 day notice period is intended to allow Bear Stearns to transition Mr. Sharon’s work to new employees with his cooperation, the cost of having someone else undertake that task may be adequate damages to compensate Bear Stearns under the contract, and an injunction would be inappropriate.

In state court, Mr. Sharon would appear to have a good argument that while he may be liable for some damages, he should not be enjoined from working for a competitor. Given the possibility that Mr. Sharon is being paid a $10 million signing bonus by Morgan Stanley (according to the Bear Stearns’ complaint), he should be willing to suffer what would, by comparison, be a slap on the hand.

Moreover, Mr. Sharon can use the arguments used to great effect in recent BLS cases, including the argument that preventing him from providing brokerage services to his former Bear Stearns clients will be harmful to those clients, and therefore the noncompete sought by Bear Stearns is against public policy.

However, federal judges are a breed apart from state judges. While they are bound to apply state law, they have a lot of discretion in a case of this sort. Whether Judge Gorton choses to apply the agreement liberally or conservatively remains to be seen.

The complaint is here. Bear Stearns’ preliminary injunction motion is here. And Judge Gorton’s temporary Order is here.