Noncompete Agreements. Our firm used to write “year in review” articles [link], and I decided it was time for a reprise. Here is a year-in-review summary of the most significant Massachsetts state court cases from late 2004 through calender year 2005 involving the attempted enforcement of noncompete or nonsolicitation contracts. Rather than getting bogged down in the detailed facts of the cases I’ll provide a quick summary of the key facts and legal issues that led to the outcome in each case. The goal is to get a feel for how judges are approaching these kinds of cases – what works and doesn’t work in the state courts when employers are attempting to enforce noncompete/nonsolicitation agreements against former employees.
L-3 Communications v. Reveal Imaging [link] involved a complex series of corporate sales, the result of which was that the defendant-employees were several corporate acquisitions down the road from the companies with whom they had signed their agreements years earlier. Their new employer, who had “acquired” the employees via acquisitions, had failed to require the employees to enter into new agreements. Tough luck for the plaintiffs, as Judge Van Gestel concluded in the Suffolk Business Litigation Session in a decision issued on December 2, 2004. One of the employees had signed a noncompete agreement with a company that wasn’t even a predecessor-in-interest with the plaintiff. Another group of employees had signed noncompetes with a predecessor-in-interest, but unfortunately for the plaintiff they had signed a weaker intervening agreement which provided that it superceded the first agreement. Again, the plaintiff was out of luck, since the superceding agreement didn’t contain a post-employment noncompete provision (it contained a noncompete that only applied during the period of employment). Another noncompete agreement signed by this group of employees was not assigned as part of a sale to the current employer, and therefore was not enforceable.
The corporate purchases and sales in this case, and all of the agreements involved, are quite complex. But, the lesson of this case (and a number of other unreported Superior Court cases) is straightforward: if you buy a company make sure that you don’t expect employees who come with the acquisition to be bound by a pre-existing noncompete unless the employee agrees to assignment of the noncompete. Even better, have the employee sign a new noncompete agreement that states the terms you want enforced, rather than relying on the old agreement.
Accordia v. Academic Risk Resources resulted in two decisions. The first decision [link], on a motion for temporary restraining order, was decided by Judge Margot Botsford in Suffolk Superior Court on January 5, 2005. The second decision [link], on a motion for preliminary injunction, was decided a week later by Judge Nonnie S. Burnes.
This case involved the mass defection of an insurance department of 14 employees, who formed a competing company, followed immediately by a swift, targeted appropriation the former employer’s major clients. All of the employees had agreed in writing not to solicit their employer’s clients.
This was the kind of case that puts smiles on the faces of lawyers trying to enforce noncompete/nonsolicitation agreements, and makes the blood of defense lawyers run cold.
Not only did the department resign en masse, but the employees took Accordia client files with them, and even unilaterally moved one client’s business to the new company. These facts made Judge Botsford see red. Her decision is sprinkled with references to breach of fiduciary duty, “arrogation” of Accordia’s business and unfairness in the defendants’ behavior. Judge Botsford gave the former employes 24 hours to return all of Accordia’s property to it, and enjoined them from providing services to their former clients at Accordia. In other words, she shut them down cold.
However, the former employees got a break a week later when, in a second hearing, Judge Burnes took some of the sting out of the ruling by permitting the former employees to service the clients, but ordered them to put all fees from these services into an escrow account. Not surprisingly, that growing pot of money, which couldn’t be touched by either side, led to a quick settlement.
This case has a least two lessons, both of which are as old as the law itself. First, this is a case study in what not to do when leaving an employer – don’t take the employer’s property; don’t solicit your co-employees while you’re still employed if you’re an officer or executive; don’t resign en mass; and don’t move clients to your new company without written prior permission. The second lesson is that even in a case with facts this extreme what may be abhorrent to one judge may leave the next judge cold. However, Judge Burnes may have had the wisdom of Solomon – by permitting the former employees to service their former customers at Accordia (who may have gone to a third party provider and been lost to both parties, had she maintained the injunction), but ordering fees to be paid into escrow, she created a financial incentive for both sides to settle which, after all, is every judge’s primary goal.