Mass Law Blog

Can an employer prevent a former employee from working for a competitor in the absence of a non-compete agreement and with no evidence the employee has violated the former employer’s trade secret or confidentiality rights?  You would think not, but a couple of cases — infamous in the annals of non-compete law  – have imposed a non-compete in these circumstances.  The case cited most frequently on this issue is PepsiCo v. Redmond, a 1995 case in which the 7th Circuit affirmed a preliminary injunction ordering the former employee of PepsiCo to cease working for a competitor for six months, despite the fact that the employee did not have a non-compete agreement.  Another high profile case prohibiting an employee from working for a competitor, even in the absence of a non-compete agreement, is Bimbo Bakeries USA, Inc. v. Botticella, decided by the 3rd Circuit in 2010. In these cases the employee does have non-disclosure/trade secret agreements.  The employer’s argument, based on these, is that the employee will  ”inevitably” disclose the former employer’s trade secrets or confidential information in the course of working for a competitor.

However, cases where the courts have accepted this theory without evidence of actual misappropriation are almost as rare as hens teeth, and Massachusetts U.S. District Court Judge Denise Casper recognized this when she denied the former employer a preliminary injunction in U.S. Electrical Services v. Schmidt in June of this year.

Inevitably, plaintiffs in these cases argue that a preliminary injunction is essential to prevent the former employee from disclosing trade secrets.  After all, the employee, who presumably knows the former employer’s inner-most secrets, is now working for a competitor.  How can the employee be expected to resist?  And, if the secrets were disclosed, how would the former employer prove that?  Too risky, the former employer argues.

However, that argument usually fails, as it should when a non-compete agreement is absent.

Judge Casper said as much: “none of the authorities cited by [plaintiff] stand for the proposition that allegedly inevitable future misuse of trade secrets is by itself sufficient to establish a violation of either common law or statutory obligations regarding trade secrets.”  The law does “not show that a party may rely solely on inevitable future conduct, rather than conduct that has actually occurred, to establish a likelihood of success on the merits of a trade secrets appropriation claim or a breach of confidentiality claim, as [plaintiff] seeks to do here.”

In other words, a plaintiff must have proof that trade secrets have been  disclosed, not that they might be disclosed in the future.

Despite the strong policy against imposing an injunction based on an “implied covenant not to compete,” and the poor track record held by plaintiffs in these cases, employers keep on trying.  It appears that intermittent reinforcement — the rare but occasional win by a plaintiff based on this theory — is enough to keep the hope of such judicial relief alive in the face of bad odds.  After all, a plaintiff may think, why not try, I may get lucky!

By the way, it’s my opinion that the plaintiff made a mistake filing this case in federal court, where the judges have less experience with this area of law and generally are more protective of employee job security.  It’s not always the case that a non-compete case (or, in this case a quasi non-compete case) will have a better chance of success in Massachusetts state court, but I believe the odds favor it.

U.S. Electrical Services v. Schmidt

What is the first thing a lawyer looks for when a client wants to enforce a non-compete agreement?  What is the first thing a lawyer hopes not to find when a client is the subject of a non-competition demand letter or lawsuit? Bad facts. Did the employee take confidential information belonging to the former employer?  Did the employee contact customers of the former employer and solicit them for the prospective employer before leaving the former employer?  If the employee was an executive or owed a fiduciary duty to the former employer, did the employee solicit other employees to leave with her? If the employee did any of these things, did the employee try to cover it up?  Bad facts!  The plaintiff’s lawyer will say.  Give me those bad facts!

OK, I exaggerate a bit – of course a lawyer first wants to see if there is a written agreement that contains a non-compete provision.  But believe me, any experienced lawyer is itching to find those bad facts.  Lawyers know that judges are ambivalent about non-compete agreements, and putting someone out of work by issuing an preliminary injunction to enforce a non-compete provision is something few judges do with an easy conscience.  It’s no secret that there are some judges who will bend over backwards to find a way not to enforce a non-compete.

So, lawyers trying to enforce these agreements know that the one thing likely to motivate a judge to enforce a non-compete agreement is bad facts.  And, if there’s anything better than bad facts its bad facts and a cover-up.  After all, often the cover-up is worse than the crime.

Life Image’s lawsuit against Michael Brown, a former executive of Life Image, shows how bad facts and a cover-up can play out in a lawsuit where the former employer is seeking a preliminary injunction to enforce a non-compete agreement.  Mr. Brown violated almost every rule an employee with a non-compete agreement should follow when leaving an employer.

First, Mr. Brown (V.P. of Business Development at Life Image, a cloud-based medical imaging service) met with his prospective employer and made a suggestion to enhance its forthcoming product, while still employed by Life Image.  (Lesson to employees: do not meet with your prospective employer before leaving your current employer, other than to negotiate employment terms).

Second, Brown left Life Image with a demo copy of Life Image’s software program on his computer.  And, it appears that he copied the program to his personal computer just before leaving Life Image. (Lesson: take nothing from your former employer except your personal belongings. Nothing).

Third, Brown had communicated with his new employer using Life Image’s email system, and he deleted copies these emails from of his “sent” email folder before leaving Life Image.  (Lesson: don’t use your current employer’s email system to communicate with your prospective employer.  if you do, don’t try to cover it up.  Brown worked for a software company – he should have known that he couldn’t get away this this.  Computers never forget.).

Fourth, according to the court Brown transferred a “large volume of information” from his Life Image computer to an external hard drive after giving notice. Brown could not justify doing this as part of his job at Life Image.  (Lesson: see the second lesson, above).

Fifth, after suit was filed, and after the court had ordered Brown to return Life Image data to Life Data, Brown deleted some Life Image data from his computer. (Lesson: don’t violate court orders.  And again, computers never forget.).

Admittedly, Brown would have had a tough case to start with – he was a high level employee at Life Image.  The terms of his non-compete were reasonable, and he was made aware of the agreement as a pre-condition of his employment (as opposed to being asked to sign it after he had already started at the job).   There was no question he had gone to a competitor (in fact, he had admitted this in an email while still employed by Life Image).  According to the judge he had other job prospects, so presumably enforcement of the non-compete wouldn’t leave him unemployed.

However, Brown also had one important, sympathetic fact in his favor: Brown, a citizen of Australia, was in the U.S. on a work visa.  The judge was told that an injunction causing him to become unemployed could result in the loss of his ability to remain in the United States. However, the judge rejected this factor, noting, “it is most unfortunate that Mr. Brown put his visa status in jeopardy when he took the risk of moving to [a competitor of Life Image] with apparent knowledge of possible outcomes.”

Brown also offered the judge a compromise that would have allowed him to continue to work for the new employer, but in areas that do not compete with Life Image.  This can often work, giving the judge a way to reach a compromise decision.  However, the judge rejected this, commenting on Brown’s “lack of judgment” in deleting files after receiving the court’s preservation order, as well as the other conduct discussed above.  Based on these bad facts the judge expressed “doubt that [Brown] is possessed of the ability to wall off in his mind secret strategic marketing information about Life Image” while working for the new employer.

This case is a case study on what not to do when leaving an employer that might sue to enforce a non-compete agreement.  The tragedy (if that’s not too strong a word) is that Mr. Brown might have been able to avoid an outcome that put him out of work had he only acted legally before and after leaving Life Image.  The bad facts, not his contract, are what got him in the end.

Life Image v. Brown

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.  Case over.

The Appeals Court found several problems with this outcome, and sent the case back for a new trial.  First, the judge failed to describe the legal standard he had applied to determine the enforceability of the non-compete agreement. The Appeals Court had no way of reviewing a trial judge’s decision if he failed to state, on the record in open court or in a written decision, the legal grounds  for his conclusion.  Making matters even worse, the Appeals Court indicated that the trial judge had heard evidence developed during the jury  trial which contributed to his conclusion that the non-compete was unenforceable, but he failed to describe these facts so that the Appeals Court could review them and determine if the trial court had correctly applied the legal grounds to them.  The Appeals Court had no record upon which is could review the ruling on the law or the facts.

This case illustrates a crucial aspect of legal proceedings that we sometimes take for granted, but which somehow got lost in this case.  The Appeals Court observed that as far back as 1923 (and likely long before 1923) the Massachusetts Supreme Judicial Court noted “the underlying principle that a judge must set forth the legal grounds on which he makes his legal determination . . .  the court shall specify with particularity the grounds on which his mind rests in reaching his conclusion. The parties thus are advised of the exact foundation for the action taken by the judge.”  Without this information, there is no basis for appellate review.

Of course, when a case is decided by a jury things proceed a bit differently – a jury renders a verdict with no explanation of its grounds, and that decision is inviolate, so long as the judge properly instructs the jury on the law and follows the rules of evidence (more or less).

But, phase two of this case was a judge case, not a jury case, and why the judge didn’t explain the factual and legal bases for his decision is something of a mystery.  The trial took place in early 2009 and now, three years later, the parties will have to undergo a retrial. However, it will still be a “trial within a trial” – as the Appeals Court stated, “we remand the matter for a new trial on the issue of damages, which shall include determination of the predicate issue of enforceability of the [non-compete] agreement.”

Trillium v. Cheung

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 a company that had subsequently been acquired, and the acquiring company was attempting to enforce the non-compete agreement.  Judge Lauriat  seemed to put some weight on the fact that the new employer had asked the employees to  sign new non-competition agreements after the acquisition,  implying that the new employer had thought the employment relationships had materially changed, requiring new agreements.*  Preliminary injunction denied.

*Sometimes an acquisition alone will void a non-compete. That was not the case here, likely because the employment agreements permitted assignment.  However, many agreements do not include assignment clauses, preventing the post-acquisition employer from enforcing a non-compete agreement signed with the pre-acquisition employer.  See the discussion of L-3 Communications v. Reveal Imagining at this prior post (non-compete agreement signed not assigned as part of a sale to current employer was not enforceable).

The second of the two decisions illustrates more of a cookie-cutter approach to the enforcement of a non-compete covenant.  In this case, A.R.S. Services v. Baker, the plaintiff, a company disaster restoration field, asked the  court to enforce a one year non-compete provision against an employee who had resigned from the plaintiff’s firm .  It appears that the only argument Baker could make against enforcement was that his former employer had asked him to engage in “a fraudulent act involving moral turpitude,” and that this was a “material breach” of the non-compete agreement, rendering it unenforceable.  It is true that a material breach by an employer can invalidate a non-compete covenant.  However, this case appears to have involved  little  more than an internal disagreement between Baker and the employer over a cost estimate to rebuild a home.  The judge didn’t buy it – quite rightly, if the evidence in support of this assertion was as weak as the decision suggests.  This case was “plain vanilla.”  Preliminary injunction allowed.

Grace Hunt IT Soutions v. SIS Software, LLC

A.R.S. Services v. Baker