Non-competes must be updated to remain effective

An employer may not rely on a non-competition or nondisclosure agreement signed at the outset of employment. These agreements may need to be updated and re-signed each time the employee is promoted or their role changes.

Several recent Massachusetts court cases demonstrate the perils of not updating agreements and show that the circumstances under which an employee signs a non-competition agreement can determine whether it will be honored in a later dispute.

In Lycos, Inc. v. Lincoln Jackson, et.al., 18 Mass. L. Rep. 256 (August 2004), Lycos developed proprietary products for various online services and routinely required its employees to sign nondisclosure and non-competition covenants.

In March 2000, an employee signed the Lycos non-competition agreement at the commencement of her employment and her compensation was fixed at $55,000 per year, with additional bonus eligibility. The employee had access to Lycos’ confidential business information, including proprietary plans for new products and marketing strategies.

In July 2001, the employee was promoted, and received an increased annual salary. The employee was responsible for the day-to-day search engine operations at Lycos. In January 2002, she received another pay increase. In neither of these instances was the employee asked to sign a new nondisclosure and non-competition agreement.

In March 2004, Lycos promoted the employee again. Her responsibilities expanded to include work on new product initiatives and marketing plans. Her salary increased substantially.

With this latest promotion, however, the employee was asked to sign an Offer Letter describing her promotion, and specifically referencing the nondisclosure and non-competition agreement she signed when her employment with Lycos began. The employee did not sign the letter.

Instead, four months later she resigned and went to work for a direct competitor. Lycos sought an injunction against the employee to enforce the nondisclosure and non-compete covenants. The court denied enforcement, finding that “Lycos cannot demonstrate that the agreement was supported by consideration.”

The court pointed out that over the four plus years that the employee was employed by Lycos, the employment relationship varied with respect to her job title, increased responsibilities, salary, bonus, and reporting requirements.

The court stated: “Each time an employee’s employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed.”

The decision emphasized that the Offer Letter itself demonstrated that Lycos understood that a material change had occurred in the employer-employee relationship, necessitating a new employment contract containing the desired restrictive covenants.

The Lycos court also explained that “[a]ny time a restrictive covenant is signed by an employee, the employer must provide some clear additional benefit” to the employee.
This is particularly important where the employer asks an employee to sign restrictive covenants after starting a job.

The point is illustrated clearly in Engineering Management Support, Inc. v. Puca, et al., 19 Mass. L. Rep. 352 (April 2005). In Puca, the employer presented the employee with restrictive covenants a week after she began work. No one explained to the employee that she would be required to sign both non-compete and nondisclosure covenants as a condition of employment.

Under the circumstances, the court refused to enforce these covenants against the employee.

“Keeping one’s job is insufficient consideration in this case for either the non-competition or confidentiality covenant,” the judge wrote. The judge also found that presenting Puca with “the Hobson’s choice of signing the restrictive covenants or losing her job” may be considered coercive.

Cypress Group, Inc. v. Stride & Associated, Inc., 17 Mass. L. Rep. 436 (February 2004), is another decision meriting attention by in-house counsel. In Cypress, three former employees of Stride, an I.T. placement company, sought a declaration that the non-competition and non-solicitation agreements they signed were unenforceable.

Stride required its employees to sign restrictive covenants prohibiting the solicitation of Stride’s customers, or working for a Stride competitor, for 12 months following termination.

One employee worked for Stride for approximately seven years and left to start her own competing placement firm. To avoid litigation over the non-competition agreement, the employee and Stride agreed that the competing entity would refrain from soliciting a specified list of Stride clients for a period of six months.

A second employee began as a sales trainee in Stride’s New York office. When promoted four months later he signed the Stride non-compete. In 2000, he signed another non-compete agreement when promoted to practice manager. In October 2001, Caracciolo was again promoted by Stride, but this time he was not required to sign a new non-compete agreement. Fifteen months later, he was fired for poor performance and soon thereafter began working for Stride’s direct competitor.

The third employee began work with Stride as a low-level sales trainee. He signed the Stride non-competition agreement when promoted approximately two years later.

Between January 2000 and March 2003, he was promoted and/or changed positions three more times with Stride. None of these position changes required that he sign a new non-competition agreement.

In July 2003, he left Stride to work at the competitor. The court refused to enforce the restrictive covenants against either employee number two or number three, citing a lack of consideration.

Both Lycos and Cypress rely on the leading Massachusetts case of F.A. Bartlett Tree Expert Company v. Barrington, 353 Mass. 585 (1968). In Bartlett Tree, a salesman left to start his own tree care and landscaping business. His former employer sued, alleging breach of a two-year written non-competition agreement. The court refused to enforce the non-competition agreement, although finding it reasonable in both geographic scope and duration.

The Supreme Judicial Court reasoned that the salesman’s terms of employment changed considerably during his 18 years at Bartlett Tree. In particular, compensation, sales territory and responsibilities were substantially different when he left the company in 1966, than when he began employment in 1948.

“Such far reaching changes strongly suggest that the parties had abandoned their old arrangement and had entered into a new relationship,” the court wrote. Bartlett Tree, 363 Mass. at 587.

Employers seeking to protect confidential and proprietary information or to impose non-competes, must provide new agreements supported by additional consideration when the employee’s role changes within the company. Otherwise, enforcement may prove futile and the old restrictive covenants not worth the paper they are printed on.

Andrew P. Botti is a partner at Donovan Hatem LLP where he advises in-house counsel and corporate executives on a wide range of business litigation and employment matters.

He is a graduate of Northeastern University School of Law and Columbia University.