Mass Law Blog

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

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.

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

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.

The Bill That Would Make Noncompete Agreements Unenforceable in Massachusetts

[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 ….

How to Attract Patent Litigation

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.

Are Apple and IBM Competitors?

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.

Update: This case was settled in January 2009.

(more…)

Bear Not Entirely Without Tooth and Claw

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.

But on the other hand ….

In contast to the Suffolk Business Litigation noncompete cases discussed below, in National Engineering v. Grogan Massachusetts Superior Court Judge Maureen B. Hogan, sitting in Middlesex County, enforced a six month noncompete provision between a recruiting and staffing firm, and its former employee, Travis Grogan.

The heart of Judge Hogan’s decision is as follows:

Other than his employment at NESC, had no experience in the staffing industry. All of his knowledge of the business was gained through training provided by NESC and by working at NESC. His relationships with the customers and accounts of NESC were all developed and maintained while he was employed at NESC, through use of the resources and confidential information of NESC. The success of NESC’s business is grounded upon relationships and good will with its corporate customers and Managed Service Providers, developed through its sales executives, such as Grogan. NESC is entitled to protect its good will and relationships with its customers and accounts through the non-compete covenants to which agreed. These covenants restrict from engaging in competition with NESC and from soliciting and/or servicing its clients and accounts for a reasonable period of time-one year. The general non-competition covenant which restricts from working for a competitor within 50 miles of the office or area in which he worked while at NESC is also reasonable in scope. These covenants do not restrict from using his own skills, knowledge or talent, but rather prevent him from trading on the good will of NESC by restricting him from using the relationships he developed with NESC’s customers, clients and accounts and the confidential information of NESC, including knowledge of these customers and their needs.

Would this case have been decided differently in the Suffolk BLS? One wonders ….

A link to the full case is here.

Smith Barney/Citigroup: Darn, Foiled Again!

Albert Einstein once said that “the definition of insanity is doing the same thing over and over again and expecting different results.”

By this measure, Smith Barney has a problem.

In a recent case decided by Judge Gants in the Suffolk Business Litigation Session, Smith Barney sought a preliminary injunction against Michelle Griffin, who had held several positions with Smith Barney, culminating in “financial advisor.” When Ms. Griffin began at Smith Barney (then Shearson Lehman) in 1994, she had signed an agreement in which she promised not to solicit Smith Barney clients for six months after leaving. In fact, just before and after resigning to join N.Y. Life, she solicited many of her clients, attracting Smith Barney’s ire.

However, Judge Gants teed up the the case with the following comments:

This Court has heard many of these kinds of cases. The pattern is similar in all cases. A stock broker, or person seeking to become a stock broker, joins a brokerage house, signs a non-solicitation agreement and also agrees to keep certain information confidential. After a period of time, the broker, often solicited by a competing brokerage, decides to leave his employing-brokerage for the competition down the street. Without prior warning, the broker resigns at the end of the day on Friday and is up and running at his new employer by Monday morning. These brokers move around with astounding frequency, and the whole industry knows it….What follows is a race to the Court by the jilted brokerage seeking injunctive relief, all in anticipation of industry-mandated arbitration before the NASD.

After this wind-up, you don’t need a weatherman to know which way the wind is blowing. Judge Gants denied the motion on a variety of grounds:

First, the agreements unfairly punish the clients of the departing advisor/broker.

Second, hypocrisy was a factor. While the financial firms suing employees claim to be “shocked, shocked” (quoting Police Captain Louis Renault in the movie, Casablanca) that another financial service company would show so little respect for the sanctity of their contract with a former employee, they are themselves enaged in precisely the same “shocking” conduct:

As this Court observed in its July 12, 2004, order, since the establishment on October 2, 2000, of the Business Litigation Session of the Superior Court, previously to this case, this Court had addressed 29 cases by brokerage firms against individual brokers leaving, abruptly, to join another brokerage firm. In each instance the plaintiff firm sought injunctive relief. In those 29 cases, 21 have been brought by three major brokerage firms: Morgan Stanley DW, Inc., the plaintiff here; UBS PaineWebber , UBS, and Salomon Smith Barney (“SSB”). These three major brokerage firms have been the plaintiffs in seven cases each. In that same aggregation of 29 cases, MSDW and UBS have been the brokerage firm to which the defendant broker has defected in six cases each, and SSB has been that firm in five cases. Whatever happened to the “maxim of equity with the dignity of antiquity … that one who seeks equity must do equity?

Third, the non-solicitation agreements that the financial firms seek to enforce were presented to their new employees at the time of hire, without separate consideration:

the non-solicitation agreements enforced in most of these financial services preliminary injunctions were presented, as here, to the financial advisor when she first commenced employment with the company, without separate consideration beyond continued employment (or perhaps training), and without any choice apart from termination. Consequently, they are routinely signed without significant thought, in large part because the employee has no meaningful alternative. Since all (or virtually all) financial services companies require similar agreements, a refusal to sign such an agreement would effectively bar the employee from employment in the financial services industry. As such, these agreements stand in sharp contrast to comparable agreements involving the sale of a business, where the seller is receiving significant additional consideration for the agreement not to compete or to solicit, and has a meaningful alternative of rejecting such a restrictive covenant (albeit in return for a lower sales price).

This comment by Judge Gants is significant, since it has long been “black-letter” law in Massachusetts that separate consideration (apart from the initial hire or even continued employement, where the employer asks the employee to sign the agreement after employment has commenced) is not necessary for enforcement of a non-solicitation or noncompete agreement.

Fourth, the “goodwill” in these cases (goodwill being the legal term for “the relationship with the customer) is intertwined; it may belong to the employee, to the employer, or to both. If the goodwill belongs to the employee (who did the sales work to develop the customers), the employee should not be prevented from taking those relationships to her new job.

Fifth, although the confidential nature of the customer identities may be an alternative ground for enforcing a nonsolicitation or noncompete agreement, it is questionable whether the identities of the customers in this context can truly be considered confidential.

Motion for preliminary injunction denied. Perhaps after this decision Morgan Stanley, Salamon Smith Barney and UBS Paine Webber will reflect on Einstein’s comment quoted above, and the “Massachusetts broker noncompete wars” will finally come to an end.

A link to the full case is here.

The "Alliance for Open Competition" or "Noncompete Agreements Should Not Be Enforceable in Massachusetts"

In December I wrote a post title Why Has Silicon Valley Outperformed Boston/Route 128 as a High Tech Hub? The topic was whether the legality of noncompete agreements (“NCAs”) in Massachusetts has put the state at a disadvantage to California, where NCAs are not enforceable.

The Alliance for Open Competition is a blog where people and organizations who would like Massachusetts to join California (and other states) and make NCAs illegal express their views on this issue.

The first entry in the blog is Spark Capital’s open letter to Governor Deval Patrick in early December 2007.

The purpose of the Alliance is described as follows:

The Alliance for Open Competition is a group of entrepreneurs, investors and executives dedicated to fostering innovation throughout the US. We seek to breakdown a major barrier to entrepreneurialism: the use of non-competition agreements mandated by employers that force employees to sign away their rights to engage in any business of a competitive nature when they leave their present jobs. Today Massachusetts, New York and Michigan are among dozens of other states that still enforce non-compete clauses.

We believe that employment non-competes are stifling the emergence of start-up companies in these states, forcing innovative entrepreneurs to take on tremendous legal and financial risks, and hampering the ability to meet our fullest economic potential as a nation. To be clear, we do support non disclosure agreements and non-solicitation agreements. The Alliance is opposed to non-compete agreements. They are different issues.This blog will serve to share related topics, stories, news & links about this effort.

Many of the large high tech companies in Massachusetts believe that noncompete agreements are in their best interests, and I suspect that there is quite a bit of lobbying going on behind the scenes on this issue. It will be no small undertaking for the Alliance to unseat over one hundred years of Massachusetts common law permitting enforcement of NCAs.

Why Has Silicon Valley Outperformed Boston/ Route 128 as a High Tech Hub?

In a post on TechDirt Mike Masnick argues (with references to supporting studies) that the fact that noncompete agreements are enforceable in Massachusetts but not in California has been a major factor in Silicon Valley’s success. A few excerpts from the article:

Ronald Gilson . . . [found that the success of Silicon Valley] had much less to do with cultural reasons and much more to do with the legal differences between the two places, specifically: California does not enforce noncompetes, while Massachusetts does. Gilson looks at a few of the other possible explanations for the difference and shows how they’re all lacking, leaving the difference in noncompetes as being the key difference between the two regions in terms of the flow of information and ideas leading to new innovations.

* * *

. . . [T]he Federal Reserve and the National Bureau of Economic Research, . . . produced some data to back up the[se] findings . . . in their report Job Hopping in Silicon Valley. Their data showed that, indeed, there was much greater mobility in Silicon Valley than elsewhere. Their research further backed up Gilson’s suggestion that it was noncompetes that made the difference by showing that other high tech communities in California outside of Silicon Valley also showed greater job mobility — suggesting it was a California-wide phenomenon.

Finally, to make the case even more compelling, some researchers from Harvard Business School . . . found that “The networks of small companies so crucial to Silicon Valley’s growth would be less likely to develop in regions that enforce noncompetes.”

Having been involved in counseling companies on noncompete issues for 20-plus years, I have to admit that I am suprised to read this. While noncompetes are pervasive in Massachusetts, many judges are unwilling to enforce them, or will enforce them only in part (i.e., “you can’t work in this particular area for a period of time”). The sense of lawyers in Massachusetts is that absent theft or trade secret misappropriate of some sort, enforcing a noncompete is an uphill fight, so better to negotiate than attack head-on. Most noncompete disputes are negotiated to a private resolution.

That being said, the pervasive use of noncompetes in Massachusetts is part of the dark matter of the legal landscape in the state. You know it’s there, exerting some gravitational force, but you can’t see it or measure it. You never really know how many employees didn’t move to another job, didn’t start their own companies, and didn’t take the risk of challenging their noncompete agreements in court. So, the studies cited in the TechDirt post may be correct; like most legal/economic analyses involving complex economies with multiple variables it’s almost impossible to prove a hypothesis with certainty. And, there are so many other tangible and intangible factors that have contributed to the relative successes of Route 128 vs. Silicon Valley that to assign too high a degree of causation to the law on noncompete agreements is probably over oversimplistic.