by Lee Gesmer | Oct 26, 2007 | Noncompete Agreements
Litigation over noncompete agreements rarely gets this interesting.
The Contestants. In one corner you have Howie Carr, one of the most popular talk show hosts in the country. In next corner (there are players in all four corners of this ring) stands Entercom Boston, owned by Entercom Communications, one of the largest radio broadcasters in the U.S. and owner of Boston radio station WRKO-AM, which hosts the popular Howie Carr Show. Opposite WRKO stands Greater Media, owner of numerous media assets, including WTKK-FM in Boston, and would-be employer of Carr. Finally, in the corner directly opposite Mr. Carr is Massachusetts Superior Court Judge Allan Van Gestel.
The Contest, In Brief. Howie Carr wants to leave WRKO and work for WTKK. However, his contract with WRKO gave WRKO the right to match the offer made by WTKK, and WRKO did match WTKK’s five year, $7 million offer. Carr filed suit, claiming that this provision of the contract is unenforceable under Massachusetts law. Judge Van Gestel ruled that under the circumstances present here WRKO had the right to match WTKK’s offer, requiring Carr to honor his contract with WRKO. Carr has appealed this ruling, but at the moment Carr is off the air, refusing to broadcast for WRKO (which wants him back), and unable to work for WTKK, which (smartly) made its offer contingent on Carr being legally unencumbered. Due to Carr’s absence from the air, WRKO is suffering economic losses (advertising revenues that are tied to Carr’s popularity and which disappear in his absence), and WRKO is threatening Carr with a claim for damages based on those losses. Carr has appealed.
The Judge. A word about Judge Van Gestel: Judge Van Gestel has been the mainstay of the Business Litigation Session in Suffolk Country since its inception in 2000. He is retiring at the end of this year, at the age of 71 (he has been on recall since reaching mandatory retirement at age 70). It’s a safe bet to suggest that no other judge in the history of the Superior Court has had the impact on business law that Judge Van Gestel has had. Because of his seat in the Business Session he has decided more “business” cases in eight years than many Superior Court judges with a much longer tenure. And, because he is a prolific writer (and Superior Court opinions are now published in a reporter and by the online legal services, giving judges a much broader audience), he has left behind an important legacy: a large body of Superior Court case law that has attained the status of “persuasive” precedent in Massachusetts (trial court decisions are not considered “binding” precedent). And nowhere has Judge Van Gestel been more active than in the area of noncompete agreements. Underpaid, understaffed and working in poor conditions (as he has often publicly stated, drawing a humorous comparison between his situation and the lawyers who appear before him), he is (through year-end) one of the most powerful men in Boston.
Well, Judge Van Gestel was presented with a whopper of a noncompete dispute to wrap up his career in the Business Session when the Howie Carr/Entercom case arrived in his courtroom. Most noncompete cases involve no-name companies and no-name employees. These cases get no attention outside of the legal communiity (and very little there). The Carr case, every step of which has been reported in the major Boston news media and beyond, has attracted public attention unlike any noncompete case I can recall. The details of Carr’s relationship with the two stations, and the moderately titillating economics of Carr’s contracts (warning: we’re not talking Dice-K level salaries here) are discussed in detail in this Boston Globe article. The strategic decisions made by the parties in this case, and how Judge Van Gestel chose to interpret Carr’s contract with WRKO in light of an unusual and never-before applied state statute, make the case particularly interesting.
The Facts. There are two legal documents that bear on Carr’s legal ability to walk away from his contract with WTKK. The first is Carr’s contract with WRKO, which states that if he receives an offer from another station during the term of the contract, or within 180 days following expiration of the contract on September 19, 2007, WRKO will have a “right of first refusal.” Under the right of first refusal WRKO has the option to continue Carr’s employment for the same term and compensation as the new offer.
The second document is Chapter 149, Section 186, of the Massachusetts General Laws. This law, enacted in 1998 but never before applied in court, makes void and illegal any contract that restricts the right of an employee in the broadcasting industry to obtain employment in a specific geographic area “after termination of employment” or following “termination of the employment relationship.”
As an aside, it’s worth noting that in addition to giving WRKO the “right of first refusal” to match another broadcaster’s offer during its contract with Carr and for 180 days after expiration, the WRKO contract also prohibited Carr from providing broadcasting services in WRKO’s market for 90 days after the contract expired.
Apart from the contract and the statute, the “facts” in this case were straightforward and undisputed. In fact, all of the events occurred in a single day, suggesting that there was a lot of behind-the-scenes activity preceding what became “D-Day” for Howie Carr. WTKK gave Carr a five year, $7 million (including incentives) written offer on July 9, 2007, about two months before Carr’s agreement with WRKO was due to expire. WTKK was careful to steer clear of any claim that it interefered with Carr’s contract with WRKO – the offer was contingent on Carr not being bound by that contract. The same day Carr presented the offer to WRKO, WRKO immediately exercised its right of first refusal, informing Carr that it would match the five year term, and the $7 million compensation. The next day Howie Carr filed suit.
The speed with which these events unfolded suggests that the dominos were lined up and ready to fall – Carr must have warned WRKO that he was going to receive an offer from WTKK, and WTKK’s same-day acceptance suggests they may have known the financial terms of that offer, and were prepared to match them. Carr’s filing of his lawsuit, the very next day, suggests that Carr knew that WRKO was going to match WTKK’s offer, and that a suit would be necessary to attempt to break free of WRKO’s contract rights.
Howie Carr’s plea to Judge Van Gestel was simple: relieve me of this post-employment restriction. My contract with WRKO, Carr stated, restrains my legal right to pursue a new employment opportunity after my contract with WRKO expires in September.
The Decision. Not so fast, responded Judge Van Gestel in a written decision issued on September 12, 2007. The Massachusetts law that Howie Carr invoked prohibits restrictions on employment “after termination of employment of the employee by the employer or by termination of the employment relationship by mutual agreement of the employer and the employee or by termination of the employment relationship by the expiration of the contract or agreement.” MGL c. 149, Section 186. None of these things had occurred – Howie Carr had not been terminated involuntarily, there had been no mutual agreement to terminate, nor had the contract expired. All of the events before the court had occurred before the contract expired. Once WRKO exercised its right of first refusal, the judge reasoned, the employment contract was simply continued. Reading the contract literally, there was no post-employment restriction on Carr’s employment.
Timing is Everything. After delivering this news to Howie Carr, Judge Van Gestel turned the knife in the wound – he suggested that Carr could have avoided this outcome had he met with WTKK, even secretly, and discussed potential employment following expiration of the contract with WRKO. The mistake he made, in Judge Van Gestel’s eyes, was receiving an offer and presenting it to WRKO while the contract with WRKO was still in effect.
Will Judge Van Gestel’s reasoning hold up on appeal? I do think Howie Carr has a decent chance of getting Judge Van Gestel’s decision reversed. Judge Van Gestel sliced the baloney very thinly in basing his decision on the technicality of a pre-expiration offer from WTKK versus a post-expiration offer, and the Appeals Court may not endorse Judge Van Gestel’s literalist approach. On the other hand, the Appeals Court may not have much sympathy for Howie Carr on these facts – after all, he can earn the lucrative salary he was offered by WTKK simply by going back to WRKO. And, while Carr can’t be forced to work for WRKO, the pressure on him must be enormous – he may be liable for breaching his contract and could be forced to pay damages based on WRKO’s reduced advertising revenues resulting from his absence from his show. Carr may decide this isn’t worth the trouble and risk, throw in the towel, and return to work for WRKO.
One final note: when I first heard about this case one of my first thoughts was that Carr might be using WTKK as a stalking horse – that is, another player that he could use to force a higher salary from WRKO than it would be willing to pay without another station bidding for his services. However, Carr’s continued absence from work at WRKO, along with his appeal, suggests that this is not the case.
Judge Van Gestel’s decision is here.
Update, October 30,2007: Boston Globe reports that Howie Carr’s appeal was denied.
Update, November 20, 2007: Howie Carr has returned to WRKO
by Lee Gesmer | Aug 18, 2006 | Minority Shareholder/Fiduciary Duty, Noncompete Agreements
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.”
by Lee Gesmer | Aug 4, 2006 | Business Lit. Session, Noncompete Agreements
It’s a bad day when your client wants you to enforce a noncompete agreement against a $10/hour Russian immigrant with “a very limited command of English,” who sends most of her earnings back to her son and elderly parents in Russia, and who, after a year of at-will employment and with no further payment of consideration, was told that unless she signed the noncompete agreement she’d be fired the next day.
Nevertheless, that’s what the plaintiff’s lawyer faced in Zabota Community Center, Inc. v. Frolova.
Not surprisingly, Judge Allan van Gestel of the Suffolk County Business Litigation Session threw the book at the plaintiff in this case, denying the motion for every reason conceivable.
You can read the case here (pdf file).
by Lee Gesmer | Jun 21, 2006 | Noncompete Agreements
Noncompete Agreements. Plaintiffs trying to obtain preliminary injunctions to enforce noncompete contracts in the Massachusetts states courts are off to a bad start this year.
In February Superior Court Judge Richard Connon refused to enforce a noncompete clause against a former employee for a reason we see all to often: the employee signed the noncompete with one company, and then worked for another (presumably related) company with which he had not signed a noncompete. Sorry, this may be only a technical detail, but it’s always enough prevent the noncompete from being enforced. The case is Merchant Business Solutions v. Arst.
In mid-March Judge Jonathan Brant refused to enforce a preliminary injunction when the plaintiff’s former employee went to work for a competitor with the former employer’s blessing. A year later the former employer changed its mind and filed suit, seeking a preliminary injunction. A year is far too long, the judge ruled – motion denied. The case is New England Speciality Lumber v. Jarvl.
Finally, in late March Judge Peter Agnes denied a request for a preliminary injunction that the plaintiff brought against a contractor (as opposed to an employee). Judge Agnes denied the injunction, holding that two years was too long in the context of the business in question and the agreement was too vague as to its geographic reach. The case is Payson’s Trucking v. Yeskevicz.
The lessons from these cases are, for the most part, obvious. Make sure the employee signs the noncompete with the company he works for. Don’t sit on your hands for a year before signing trying to enforce an agreement; and try to keep the duration and geography as narrow as possible. Although Massachusetts judge used to be willing to narrow these contracts as written to make then reasonable, there seems to be a trend away from this practice.
by Lee Gesmer | Mar 29, 2006 | Noncompete Agreements
Noncompete Agreements. Clients frequently present the following issue: we have existing employees who have not signed noncompete agreements. We’d like to ask them to sign them. Any problem with that?
The knowledgeable lawyer then struggles with the following question: does the employee need to be given some consideration for the noncompete to be enforceable? Consideration is not an issue when an employee signs a noncompete at the beginning of employment, since the job itself provides the consideration. But when the employee already has the job, does the employer have to give the employee some new consideration? – a raise, a bonus, a promotion?
There is a line of Massachusetts cases suggesting that continued employment (for an at-will employee) is itself adequate consideration, but the rule is not as clear as most lawyers would like, and many lawyers are forced to equivocate on this issue. And, some states have clearly held that continued employment is not adequate consideration, adding to the uncertainty.
In a decision issued on February 2, 2006 in Metropolitan Removal Co. v. D.S.I. Removal Specialists, Inc. [click here for the decision] Superior Court Judge Peter Agnes, a well-respected judge in Massachusetts, held that a noncompete agreement was not enforceable where the employee did not receive new consideration. Citing no cases one way or the other, Judge Agnes noted that the employee “did not receive consideration in return for signing this agreement whether in the form of increased compensation, increased authority, or both. Neither his job title nor his job description changed after he signed the agreement.”
Massachusetts companies seeking to impose noncompete restrictions on existing employees should take note.
by Lee Gesmer | Mar 21, 2006 | Business Lit. Session, Noncompete Agreements
Noncompete Agreements. If I had a dollar for every time a client who had been sued asked me if they could recover attorney’s fees or damages if they won, I’d have, well, probably hundreds of dollars. Even when a lawsuit proves to be frivolous the Massachusetts courts have traditionally been extremely reluctant to turn the tables on a plaintiff and make it pay damages for the harm its suit has caused to the defendant.
Every once in a while, however, a judge shows some courage and punishes a company the judge concludes has brought a frivolous case. In January 2006 Judge Gants, in the Suffolk Business Litigation Session, turned the tables on Brooks Automation, a Massachusetts company with a billion dollar-plus market valuation, ordering it to pay over $600,000 in damages for bringing a frvolous lawsuit against a former employee. After a trial Judge Gants concluded that the suit was devoid of both any reasonable factual support or any arguable basis in law. A link to the decision is [here].
Judge Gants found that the suit, which Brooks brought against a former employee and a new company he had formed to compete with Brooks (but which was not, as yet, actually competing), had been filed with “reckless disregard” for its merits and to disrupt a potential relationship between the former employee and one of Brooks’ customers (Brooks actually emailed the complaint to the customer, Applied Materials, immediately after filing it, and before even serving it on the former employee).
After an expedited discovery and trial schedule (trial took place only two months after Brooks filed suit), the jury held that the employee had not stolen Brooks’ trade secrets and had not violated his noncompete agreement. The jury did, however, find that Brooks had intentionally interfered with the employee’s relationship with Applied Materials, and awarded the employee $200,000 in damages. Talk about your case backfiring.
The Judge then found that this interference was a violation of Mass. Gen. Laws. c. 93A (which makes illegal “unfair and deceptive acts or practices”), and trebled the $200,000 award. While not mentioned in the decision, the judge is almost certain to also award the former employee his attorney’s fees.
Importantly, the Judge made it clear that he intended to send a message: Judge Gants wrote that his decision was –
necessary to send a loud and clear message to Brooks and to any other corporation that seeks to abuse the right to sue in order to interfere with a competitor’s efforts to develop a contractual relationship with a coveted customer. A start-up company is especially vulnerable to such an abuse of process, since time, effort, and money are needed to defend even a frivolous lawsuit and all are generally in short supply in a start-up company. It is important to make clear to any corporation that contemplates crushing a vulnerable competitor by conjuring a frivolous lawsuit that it will pay dearly for its misuse of the judicial process.
One case does not make a trend, and cases like this do appear occassionally in the decisions of the Superior Court. However, because this decision originated with the Massachusetts Business Litigation Session it carries more weight, and sends a stronger message to the business community and the bar, than if it it had been decided by one of the non-Business Litigation Session judges. Massachusetts lawyers who are defending former employees (and their new employers) will be well served by studying this decision carefully and keeping its teachings (which have been greatly abbreviated here) in mind in defending cases of this sort. Of course, Brooks still has the right to appeal this decision. If it does, I’ll report the outcome.
by Lee Gesmer | Mar 8, 2006 | Business Lit. Session, Noncompete Agreements
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.
