An employer could not extend a non-competition agreement with a former employee beyond the agreed-upon duration, the 1st U.S. Circuit Court of Appeals has decided.

Pointing to five unreported Massachusetts state court decisions in support of its position, the plaintiff employer, EMC Corp. in Hopkinton, Mass., asked the 1st Circuit to embrace the reasoning in those cases and reverse a lower court ruling denying its motion for injunctive relief.

But the panel declined.

“The unequivocal character of the state rule creates a frosty climate for EMC’s attempts to avoid it,” retired Supreme Court Justice David H. Souter wrote for the 1st Circuit, where he was sitting by designation. “[W]e are bound … by the obligation of a federal court to take its law in diversity cases from the state’s highest court.”

The six-page decision is EMC Corporation v. Arturi, et al.

Equity for all

Joseph F. Buckley of Newark, N.J., represented the defendant employee. He said it would be “fundamentally unfair” for an employer to extend a non-compete without first putting the employee on notice.

“The rule of the highest court in Massachusetts is clear,” Buckley said, referring to the Supreme Judicial Court’s 1974 All Stainless, Inc. v. Colby ruling, which stated that, after a non-compete expires, the only relief available to an employer for an employee’s contract breaches is monetary damages, not injunctive relief.

Buckley said the plaintiff’s bid for refinement of state law based on a closer look at the unreported Superior Court rulings was misplaced.

“I understand what they were thinking, but federal court is precisely the wrong place to ask for that,” he said.

The real impact of Arturi will be to direct employers to include provisions allowing for the extension of non-competes in the contracts they execute with employees, Buckley said, adding that both U.S. District Court Judge Frank D. Saylor IV and Souter noted the plaintiff could have “contracted” around that issue.

“A company like EMC certainly has the leverage to have employees sign a contract like this, but they didn’t,” Buckley said.

Stacey P. Nakasian, a partner at Duffy & Sweeney in Providence who represents employers, said Rhode Island courts can look to Arturi as “informative.”

Nakasian and Todd M. Reed, an employment lawyer at Edwards, Angell, Palmer & Dodge in Providence, agreed that the state courts have gone both ways on the issue of extending non-competes.

“There isn’t a case like All Stainless in Rhode Island, and that is why it is such an open issue,” Reed said.

Nakasian added that employers like EMC will argue that an employee’s conduct has been so bad that the court should extend a non-compete, knowing that decisions in non-compete cases are always fact specific.

She said the courts will ask, “Did the employee try to pull the wool over the employer’s eyes?” But they will also ask, “Did the employer sit on his rights?”

Reed said the 1st Circuit decided that EMC did just that.

“Souter basically told them, ‘I’m not refusing to give you the benefit of your bargain with the employee, but I’m telling you that you didn’t bargain for what you are asking,’” Reed said. “They could have contracted to toll the agreement, but they didn’t.”

He predicted that Arturi will lead to an uptick in litigation in Rhode Island around the unsettled issue of extending non-competes.

EMC’s in-house attorneys and outside counsel all declined to comment on the case.

Checking references

In 2007, defendant Christopher Blotto signed a contract with his then-employer, business and technology consulting firm EMC Corp.

The contract contained provisions stating that if Blotto were to leave the employ of EMC after rising to the rank of “director,” he would not work for a competitor or solicit business from EMC’s clients for a period of one year.

Blotto left EMC on Dec. 4, 2009, and started working for a competitor within a year of his departure.

Under the All Stainless ruling, even if the court were to view Blotto’s move to a competitor as a clear breach of his agreement not to compete for one year, the breach would not give the court the right to extend or re-start Blotto’s non-compete after the contracted year had passed. After one year, EMC’s remedy for any breach during that year would be limited to money damages.

No competition

The 1st Circuit held that “when the period of restraint has expired, even when the delay was substantially caused by the time consumed in legal appeals, specific relief is inappropriate and the injured party is left to his damages remedy.”

The court’s understanding of the equity standards followed from All Stainless, Souter wrote in explaining how the federal court took its lead from the SJC.

In a footnote, Souter pointed to “a door” to distinguish All Stainless from cases in which an employee has affirmatively concealed his breach. “But that door is not open here where the District Court dealt with no issue of affirmative concealment of breaches of non-competition or non-solicitation clauses.”

In response to the plaintiff’s argument that it did not receive the benefit of the bargain with its employee, the court responded by stating that the employer could “enforce its bargain to the penny by remedy at law if it can prove a breach of the agreement and damages” and “EMC could have contracted … for tolling the term of the restriction … . But it did not.”

Finally, the 1st Circuit declined to address the Superior Court suits cited by the plaintiff because the cases were not binding in federal court.