Recent Business Law Decisions From the Mass State Courts

by Lee Gesmer on August 18, 2006

Noncompete Agreements. Plaintiffs seeking to enforce noncompete agreements by means of preliminary injunctions have been up against it as of late. In Payson’s Trucking v. Yeskevicz (pdf file) Judge Peter Agnes denied the plaintiff’s motion, which was brought against a contracting party (as opposed to an employee), on the grounds (among others) that the agreement was too vague as to its geographic reach and in the identification of the plaintiff’s actual customers.

In Merchant Business Solutions v. Arst (pdf file) Judge Richard Connon denied a preliminary injunction against a former sales employee on the grounds that the geographical limits were too broad and that the plaintiff was seeking protection from ordinary competition (among other reasons). Both cases are worth reviewing, since the impression one takes away is that the pendulum has swung (yet again) in the direction away from enforcement of these agreements. A plaintiff simply needs better facts than the parties had here in order to obtain a preliminary injunction to enforce a noncompete agreement.

Derivative Shareholder Suits. When it turns out a company has made an operational mistake it can expect two lawsuits. The ubiquitous and much publicized class action and the less well-known derivative shareholder suit. The latter seeks damages on behalf of the corporation from the officers and directors who allegedly were involved in the wrongdoing. Often the two suits are coordinated by plaintiffs’ counsel,hoping that a squeeze play will bring the corporation to the settlement table that much sooner.

The standard response to the derivative suit is for the corporation to appoint a special litigation committee (SLC) to investigate the claims and recommend whether the suit should go forward or not. Without going into too much detail, this recommendation and the corporation’s decision implicate the so-called “business judgment rule” (read more about this rule here). Not surprisingly, the SLC typically recommends against bringing any claims against the officers/directors, and the plaintiff then accuses the SLC of bias in favor of the officers and board members. Therefore, it is of paramount importance that the SLC not only be independent, but that it not demonstrate any signs of bias in favor of the individuals whom it is investigating.

These issues are highlighted in Massachusetts Superior Court Judge John Agostini’s recent decision in Blake v. Friendly Ice Cream Corp. Judge Agostini held that the recommendation of the SLC appointed by the Friendly’s Board did not act independently, and ordered that the derivative case go forward. This case is an unusually extensive analysis of the law relating to special litigation committees and derivitive suits. For a discussion of some of the interesting and unusual facts underlying the case that do not appear in the decision, click here.

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Freeze-Out of Minority Shareholders. Majority shareholders in a close corporation cannot “freeze- out” a minority shareholder, that much is clear. The Supreme Judicial Court established the close corporation/fiduciary duty doctrine in 1975 in the case of Donahue v. Rodd Electrotype Co. Exactly what constitute a freeze-out is less clear than some might hope. However, the doctrine seems not yet to have reached its outermost limits.

In Brodie v. Jordan, the Appeals Court held that the majority had engaged in a freeze-out of the widow of a minority shareholder when the majority denied her a corporate office, rejected her request for financial and operating information, and stonewalled her efforts to obtain an appraisal of her stock. Of greatest interest in this case is the remedy the court provided to Mrs. Brodie: the Appeals Court affirmed the trial judge’s order that the majority purchase her shares at a price based upon an appraisal value provided by a court-appointed expert. As a dissenting judge noted, this is the first time an appellate court in Massachusetts has ordered such a remedy, thereby venturing, as the dissenting judge noted, “onto uncharted waters.”

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