Consulting company cannot enforce non-compete

An information technology consulting firm could not enforce a non-compete agreement against employees who quit after the company cut their base salaries but gave them an opportunity to make up the difference through bonuses based on billable hours, a Superior Court judge in Massachusetts has ruled.

The defendant employees argued that the new salary structure — which the company instituted after acquiring the defendants’ old employer — constituted a “material change” in the employment relationship that voided the pre-existing restrictive covenant.

Judge Peter M. Lauriat agreed.

“There is sufficient evidence … to suggest that under the new compensation plan, [the defendants] would have made significantly less, at least until there was sufficient work to enable them to bill enough hours to be eligible for bonuses,” Lauriat wrote, denying the plaintiff company’s motion for a preliminary injunction. “That their fringe benefits were better, as the [plaintiff] suggests, is also immaterial.”

Lauriat said under the Supreme Judicial Court’s 1968 decision in F.A. Bartlett Tree Experts v. Barrington and its progeny, “it is the existence of a material change in the relationship that voids the prior non-compete agreement, not the nature of that change.”

The 13-page decision is Grace Hunt IT Solutions, LLC v. SIS Software, LLC, et al.

Message to employers

Stephen B. Reed, who represented the employees, said the ruling sends the message that, when a client purchases a company, employment attorneys need to be able to advise on exactly what the client is acquiring.

“If it wants an employee to continue to be subject to a non-compete restriction, it must have the employee sign a new non-compete,” he said, noting that the plaintiff employer in Grace Hunt actually requested that the defendants each sign a new non-compete, which none of them did.

“In such a case, you need to make a decision about whether to continue to employ that person or not,” said Reed, who practices at Beck, Reed, Riden in Boston.

Reed also noted that it is an ever-evolving area of the law in which most decisions come from trial courts instead of appellate courts.

“So lawyers should do their best to stay up-to-date with these trial court decisions,” he advised.

Andrew Botti, a business and employment lawyer at McLane, Graf, Raulerson & Middleton in Woburn, Mass., said the case “stands for the proposition that any material change in the employer-employee relationship may void a non-compete.”

A change in compensation is always going to be considered material, added Botti, who was not involved in the case. “The request that the employees sign a new offer letter with restrictive covenants was at least a tacit admission by the new employer that the employer-employee relationship had changed to the extent that the old agreements were no longer in effect.”

David Conforto, a Boston employment attorney, said the ruling highlights the increased costs of doing business in Massachusetts due to non-compete agreements.

The defendants justifiably sought new employment after their salaries were cut, and an out-of-state company hired them with the intention of opening a Boston office, only to be named in the suit, he said.

“While they were successful in defeating the preliminary injunction request, it may be a pyrrhic victory,” Conforto said. “Not only did the lawsuit cause the defendants to incur legal fees, it likely created a great deal of unpredictability, potentially causing the out-of-state employer to slow down its expansion into the Boston market and perhaps rethink it altogether.”

Had the out-of-state employer expanded into California instead, where non-competes are generally void as a matter of law, it would have faced virtually no risk of a lawsuit, Conforto said.

“There’s a good reason why startups like Facebook leave the commonwealth and set up shop in California; it makes good business sense,” he said.

Joseph P. Crimmins of Posternak, Blankstein & Lund in Boston, who represented the plaintiff, could not be reached for comment prior to deadline.

New conditions

Plaintiff Grace Hunt IT Solutions, a software consulting firm, purchased the assets of Grace Hunt LLC, a predecessor entity, on Sept. 30, 2011.

Pursuant to the purchase, defendants John Joyce, George Olsen and Robert Remick, who had been working for Grace Hunt, became employees of the plaintiff.

Joyce and Olsen had both signed non-compete agreements with their old employer.

After the purchase, the plaintiff sent each defendant an offer letter outlining new terms of employment and requesting that they each sign a new non-compete agreement.

They were also told that the plaintiff planned to implement a new compensation structure and change eligibility for fringe benefits.

According to the defendants, their base salary was cut by 20 percent, but they were told they could make up the difference through bonuses based on billable hours. However, the defendants claimed that there was not enough work available for them to actually earn the bonuses.

The plaintiff contended that the benefits improved.

All three defendants signed and returned their offer letters but none signed the new non-compete agreement accompanying the letters.

In late October, one of the defendants was contacted by Georgian company SIS Software about opening a Boston office. That defendant forwarded the information to the other two.

All three resigned from Grace Hunt effective Dec. 23, 2011, and joined SIS. They also each contacted certain clients to let them know they were leaving Grace Hunt, though they claimed they did not inform the clients where they were going at the time, nor did they encourage any clients to switch consultants.

Once the defendants started working for SIS, they sent emails with their new contact information to individuals on their respective client lists.

According to the plaintiff, several clients ultimately dropped Grace Hunt for SIS.

On Jan. 6, the plaintiff filed a breach-of-contract claim against the defendants in Superior Court. Additionally, the plaintiff sought to enforce the defendants’ original non-compete agreements against them.

Unenforceable covenant

Lauriat found that the non-compete agreements were unenforceable.

Under Massachusetts law, non-compete agreements are voided by “material changes” in the employment relationship between employees and their employer, the judge said.

And in determining whether there has been such a “material change,” courts consider it “extremely significant” when an employer has sought — like here — to have the employee sign a new non-compete agreement, Lauriat said.

With respect to Remick, who never signed an employment agreement or non-compete with his original employer, he certainly could not be bound by the non-compete, the judge observed.

Regarding the other two defendants, the change in their compensation plan was enough to suggest a “material change” that would render the original non-compete unenforceable, Lauriat said.

Given that no Massachusetts court has apparently enforced a pre-existing non-compete agreement in the face of materially changed employment terms and an employee’s refusal to sign a new non-compete, “the plaintiff has … failed to meet its burden of establishing a likelihood of success on the merits of its claims,” Lauriat concluded, denying the plaintiff’s motion for a preliminary injunction.