Noncompete doctrine gaining traction

As the economy improves and business litigation heats up, judges are increasingly relying on a quirk of Massachusetts caselaw to invalidate controversial noncompetition agreements.

The “material change doctrine,” a unique feature of Massachusetts employment law, is the principle that a noncompete agreement is voided if there are material changes to an employee’s duties or compensation after the agreement is signed. While the doctrine is not new — it can be traced to the Supreme Judicial Court’s 1968 decision in F.A. Bartlett Tree Expert Co. v. Barrington — business attorneys in Boston say judges have been using it to invalidate noncompetes with increasing frequency since last year.

But even as the doctrine increases in popularity, a number of issues accompanying it remain unresolved.

With few noncompete cases proceeding beyond the preliminary injunction stage, let alone reaching the appellate courts, guidance will be slow and tough to come by, and attorneys are resigned to the fact that the way the doctrine is applied may depend simply on which judge they appear before.

Renewed focus

In Bartlett Tree, the defendant employee left the plaintiff employer in 1966 to start his own competing business. The employer sued to enforce a noncompetition agreement the employee had signed in 1948, but the SJC agreed with the trial court judge “that the 1948 contract was abandoned and rescinded by mutual consent” when the employee’s compensation and sales territory changed substantially. The SJC found that the changes “suggest that the parties had abandoned their old arrangement and entered into a new relationship” and “the 1948 contract was inoperative when the defendant terminated his employment with the plaintiff.”

The doctrine was applied and refined in a series of cases from 1999 to 2006, most notably in the 2004 case Lycos, Inc. v. Jackson, in which Superior Court Judge Julian T. Houston ruled that “[a]ny time a restrictive covenant is signed by an employee, the employer must provide some clear additional benefit” and that  “[e]ach 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.”

After Lycos, it was difficult to find a case in which the defense did not try to raise the issue of material change, according to C. Max Perlman, a business litigator and employment lawyer at Hirsch, Roberts, Weinstein in Boston.

Though the courts did not seem to be embracing the doctrine at the time, Perlman said, employers started including “workarounds” in their agreements to protect themselves nonetheless.

“The defense didn’t really take off much after Lycos,” he said.

That is until now.

John R. Bauer, a commercial and intellectual property dispute litigator at Boston’s Birnbaum & Godkin, said an increasing number of judges are invalidating noncompetes on the basis of material change.

“There are just beginning to be more decisions where courts accept the defense,” said Bauer, who suggested the trend may be emerging now as the economy improves and creates an environment in which employees have the ability to change jobs and employers have the resources to file lawsuits to enforce their restrictive covenants.

“I think it’s truly a reflection of the economy. During the worst years of the economy, there were virtually no noncompete cases filed. Because it’s increased, there are more opportunities for lawyers representing defendants to assert material change as a defense,” Bauer said.

‘Conflicting rulings’

Judges do not agree, however, on a number of key issues related to the doctrine.

“As long as judges keep ruling differently, employers will keep bringing cases,” said Pamela E. Berman, a commercial litigator at Adler, Pollock & Sheehan. “No appellate court has given clear guidance on what is the test. To the extent there’s been rulings in the lower courts, they’re conflicting.”

In the 2012 case Grace Hunt IT Solutions, LLC v. SIS Software, LLC, Superior Court Judge Peter M. Lauriat held that a change in management that resulted in an employee’s base salary being cut voided a restrictive covenant, but did not address whether an increase in pay would have done the same.

Later that year, in Sentient Jet LLC v. Mackenzie, et al., Superior Court Judge E. Susan Garsh rejected a material change defense, stating at the preliminary injunction hearing that “[i]t is not a situation where a covenant not to compete is sought to be enforced after dropping someone’s income by base salary by twenty percent and making it unlikely they’d ever be able to make it up, as was the case in the Hunt case cited.”

While Garsh’s ruling would seem to narrow the scope of Lauriat’s decision to situations in which an employee’s pay is reduced, Superior Court Judge Dennis J. Curran went the opposite direction earlier this year in Intepros, Inc. v. Athy, et al.

“As Chief Operating Officer, Mr. Athy’s title changed, certainly his pay was increased, and by Intepros’s own admission, his authority increased substantially,” Curran wrote. “Therefore this case is governed by F.A. Bartlett and Cypress Group Inc. Just as in Bartlett, the record shows here that Mr. Athy’s employment relationship with Intepros materially changed over his many promotions. … As a result, the non-competition agreement executed in 1997 between Mr. Athy and Intepros must be declared void and unenforceable.”

Bauer said judges in recent cases also have differed on whether employers can draft around the doctrine by including language in noncompetition agreements to the effect that the restrictions apply notwithstanding changes in duties and compensation.

Earlier this year, in A.R.S. Services, Inc. v. Morse, et al., Superior Court Judge Edward P. Leibensperger cited the existence of such language in a noncompete as a reason for rejecting a material change defense, but opposite positions have been taken by other judges in previous cases.

Bauer said the final key issue that remains unresolved is whether the doctrine “only applies where the employer puts a new noncompete in front of the employee after the changes in duties or compensation and the employee refuses to sign the agreement.”

A 2006 decision out of federal court in New York — Iron Mountain Information Management, Inc. v. Taddeo — applied Massachusetts law and stated that “[i]n determining whether there has been a material change to the employment relationship, courts have considered it extremely significant that the employer sought to have the employee sign a new non-compete agreement.”

In other cases, including Intepros, however, there was no evidence that the employers provided their employees with a new agreement that the employees refused to sign, and yet in those cases the court found that material changes invalidated the covenants.

Agreements controversial

According to Bauer, Massachusetts for the most part follows what he calls the “standard model” of American noncompete law, which holds that noncompetition agreements are enforceable only if necessary to protect legitimate business interests; if they are reasonable in scope, duration and geographic reach; and if the noncompete is supported by consideration.

The material change doctrine, however, is a Massachusetts-specific twist.

“This is a somewhat unique aspect of Massachusetts law,” said Matthew C. Moschella of Sherin & Lodgen in Boston. “When we talk to people out-of-state, they are generally surprised to learn that this is an issue courts look at.”

Noting that Connecticut recently passed a law limiting the enforcement of noncompetition agreements, and that similar efforts often are proposed in Massachusetts, Bauer said it is possible that courts are beginning to recognize the “growing antipathy” toward noncompetes that pit business interests against a public interest in worker mobility.

“Courts are receptive to arguments against noncompetes,” he said.

If a judge disagrees with noncompetition agreements on principle or is otherwise inclined to invalidate one, the material change doctrine gives them another way to do so.

“Judges don’t want to limit the mobility of the workforce unless it’s necessary,” said Nancy M. Cremins, who practices at Gesmer Updegrove in Boston. “There’s a theory that judges are simply looking for a way to invalidate these.”