Recent Rulings Reshape Non-Competition Agreements In Massachusetts

Employee non-competition clauses present a difficult challenge for in-house counsel because judges disfavor them and they are often difficult to enforce.

Counsel must decide when to spend sometimes-significant legal fees attempting to enforce such clauses, considering all the underlying facts. Corporate officials also must conduct relationships with employees in a way designed to maximize the possibility that such restrictive clauses are enforced.

A trend indicated by three recent decisions of the Massachusetts Superior Court could significantly impact the calculus of whether, and where, to bring an action upon an employee non-competition clause and could also impact the way businesses deal with such employees.

The cases held non-competition agreements invalid where the employee subject to them was promoted or otherwise experienced materially changed employment circumstances after signing the agreement and was not required to sign a new non-competition after the change.

By contrast, the Business Litigation Session of the Massachusetts Superior Court has not showed any signs of adopting this reasoning, making it a more attractive choice for counsel seeking to enforce clauses under those facts.

The Recent Superior Court Decisions

In Cypress Group, Inc. v. Stride Assocs., Inc., (17 Mass. L. Rptr. 436) decided in March, Judge Nonnie S. Burnes refused to preliminarily enforce non-competition agreements against two employees who had been repeatedly promoted or transferred to new jobs but had not been asked to sign new agreements upon the promotion or transfer.

The judge stated that “[e]ach time an employee’s employment relationship with the employer changes materially such that they have entered a new employment relationship a new restrictive covenant must be signed.”

Burnes found such material changes in the transfers of such employees into new job titles and new physical locations.

In June, another judge declined to enforce a non-competition clause because the employee had undergone a material change in employment without being asked to sign a new agreement.

In R.E. Moulton, Inc. v. Lee (Lawyers Weekly No. 12-233-04), Judge Diane M. Kottmyer concentrated on the objective facts of the employment, noting that the employee had been transferred to a non-management sales position that no longer participated in the company bonus plan, and that the company did not require other salespersons to sign such agreements.

And in August, Judge Julian T. Houston in Lycos, Inc. v. Jackson (Lawyers Weekly 12-273-04) also declined to enforce a non-competition clause where the employee did not sign a new agreement after getting a new title, new responsibilities and a salary increase. The court used the exact same language from Cypress Group quoted above.

From ‘Mutual Abandonment’ To ‘Changed Relationship’

Each of the three decisions rely upon F.A. Bartlett Tree Expert Co. v. Barrington (353 Mass. 585), and/or AFC Cable Systems Inc. v. Clisham (62 F.Supp.2d 167), for the rule that a non-competition agreement becomes unenforceable after the employee undergoes a material change in the employment relationship such as a job or salary change.

However, neither case truly stands for such a rule. The three Superior Court rulings depart significantly from the focus of those earlier decisions in a way that significantly limits the enforceability of non-competition clauses.

The real focus of both F.A. Bartlett and AFC Cable was whether the employer and employee had generally behaved in such a way as to show that they had “mutually abandoned” a previously signed non-competition agreement. In both cases the employer had requested the employee to sign a new agreement following a change in the employee’s job circumstances, but the employee had refused and the employer continued to employ him regardless.

The courts found that these actions showed that the parties mutually believed that the original agreement had been abandoned and did not apply to the new employment relationship.

Cypress, R.E. Moulton, and Lycos, while they cite F.A. Bartlett and AFC Cable, abandon the focus on the subjective “mindset” of the parties displayed by a holistic review of all the facts.

The Superior Court judges in each case seemed unconcerned whether the employer willingly abandoned a previous non-competition clause by its actions. Rather, the judges looked almost solely at the objective facts of the changed employment, and when it found facts showing changed employment circumstances, held the agreements void regardless of what the parties may have intended.

Of the three, only Lycos featured facts similar to AFC Cable and F.A. Bartlett that might have shown mutual abandonment, and that case did not rely upon mutual abandonment as a legal underpinning, but rather adopted the bright-line changed relationship approach wholesale from Cypress.

The Business Litigation Session

None of the three decisions came from the Business Litigation Session of the Superior Court. This session, dealing solely in complex business-related litigations, is confronted regularly with non-competition agreement cases, and is the forum handling the most non-competition disputes in Massachusetts.

The Business Litigation Session, despite opportunities, has never adopted a hard rule that any material change in employment circumstances voids a previous non-competition covenant. In fact, the session several times since 2001 granted preliminary injunctions upon restrictive covenants where the employees experienced some or all of reduced compensation, changes in reporting structure, reduced responsibilities, changed compensation methods, reorganization of support personnel, and increased computerization of job functions.

In a 2001 decision, the session judge stated that alterations in compensation methods, corporate organization, and computerization were “to be expected in an employment arrangement with a large company and do not, in and of themselves, relieve [employees] from their contractual obligations.”

More recently, the session did deny an injunction where the employee underwent multiple significant changes in her positions and responsibilities, stating that due to those changes, there were “material questions” about the enforceability of a previous agreement. The session judge however rested the decision more heavily upon a finding that no good will or confidential information were at stake, and never adopted the “changed relationship” rule enunciated by the later Superior Court decisions.

Recommendations For Counsel

If the trend of these three decisions continues, and the rule takes hold that changed relationships void previous non-competition agreements, significant new burdens will be placed upon employers. An employer will no longer be able to rely upon old agreements, relatively secure in the knowledge that it has not acted as though it abandoned that agreement.

A new non-competition agreement will have to be considered, or signed as a matter of course, each time an employee is promoted. If the employee refuses, the employer will face a choice: Terminate that employee or continue to employ her without the protections of an agreement.

It is questionable whether employers will be able to “draft around” the rule, for instance by a clause stating that the employee agrees the contract follows him from job to job. That is because the decisions hold the agreements void for lack of consideration, which could apply regardless of the text of the agreement.

Drastic action may not be indicated on the strength of three Superior Court decisions, two of which are unpublished. For now, counsel should bring non-competition litigation, when possible, in the Business Litigation Session, and monitor the trends of that session and the Superior Court generally.

Counsel may cite to the significant appellate precedent enforcing non-competition agreements despite changed circumstances. If the trend continues, or is adopted by appellate authority, counsel can draft clauses disavowing the “changed relationships” rule, and consider automatic re-signing of such agreements upon promotion or changed circumstances.

Kevin S. Murphy is a shareholder with Yurko & Salvesen, PC. He specializes in complex business litigation, including employment and trade secret litigation, and shareholder disputes. His practice has also emphasized securities and construction law. Yurko & Salvesen, PC represents a varied client base in all aspects of business litigation and dispute resolution. Mr. Murphy can be reached at [email protected], and at (617) 723-6900.