Category Archives: Executive Advocacy

Non-Competes and Promotions: The First Circuit’s Take in Astro-Med

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Non-compete agreements must be reasonably limited in time and geographic scope and supported by consideration in order to be enforceable (among other factors). In many circumstances, the “consideration” equals a job. As an employee’s job changes, however, a new non-compete may be required. In 2004, three separate Massachusetts Superior Court decisions made clear that a restrictive covenant is likely unenforceable where it was entered into prior to material changes — such as a promotion — in an employment relationship.

Lycos, Inc. v. Lincoln Jackson, 18 Mass. L. Rep. 256 (2004) (Aug. 24, 2004) (Houston, J.) (denying request for a preliminary injunction “[b]ecause a material change in the employment relationship between [defendant] and [plaintiff] voided the previous Agreement, and because defendant did not sign the Offer Letter incorporating the old Agreement, no written nondisclosure, noncompetition and developments agreement now exists between the parties”)
R.E. Moulton, Inc. v. Lee, 18 Mass. L. Rep. 157 (June 17, 2004) (Kottmyer, J.) (denying request for a preliminary injunction where employee’s position and compensation changed, but no new non-compete agreement was signed and the employer did not notify the employee that he was still subject to the non-compete clause)
Cypress Group, Inc. v. Stride & Assocs., Inc., 17 Mass. L. Rep. 436 (Feb. 11, 2004) (Burnes, J.) (denying request for a preliminary injunction because employees did not sign new restrictive covenant after their promotions to new positions at company)

Recently, the First Circuit’s decision in Astro-Med v. Nihon, called this principle into question. The case originated out of the District Court of Rhode Island. In Astro-Med, Kevin Plant signed a non-compete in 2002 when he joined the company as a Product Specialist, which prohibited from working in all of North America and Europe for a period of one year after his employment ended. In 2004, the company promoted Plant to a sales role in which he served the state of Florida. The non-compete agreement, as written, was unenforceable because the geographic scope was far too broad. The District Court revised the non-compete agreement for the employer so that it could enforceable. In doing so, the court curtailed its territorial reach to Florida and certain customers.

Plant argued that, even with the District Court’s revisions, the non-compete was still unenforceable due to material changes in his employment when he was promoted to a sales role in 2004 and assigned a territory. Although the non-compete agreement was governed by Rhode Island law, Plant cited to Massachusetts law as persuasive authority. Noting the employer’s complete lack of effort to have Plant sign a new non-compete agreement following his promotion, the First Circuit rejected this argument:

Assuming that Rhode Island would adopt Massachusetts’ material change rule, the evidence in this case is insufficient to generate its application. Plant’s job change from product specialist to district sales manager does not reflect a mutual abandonment and rescission of the non-competition provision; there is no suggestion that Astro-Med approached Plant with a new employment agreement; and, there is no evidence of intent on either Astro-Med’s or Plant’s part to revoke or supersede the employment agreement.

Unfortunately, the First Circuit ignored language in F.A. Bartlett Tree Expert Co. v. Barrington, which makes clear that a material change in employment, by itself, can be evidence that a prior non-compete has been abandoned:

The defendant worked under the 1948 contract for twelve years. In 1960, the defendant’s rate of compensation and sales area were changed. Such far reaching changes strongly suggest that the parties had abandoned their old arrangement and had entered into a new relationship.

F.A. Bartlett Tree Expert Co., 353 Mass. 585, 587 (1968).

As other courts interpreting the Massachusetts “material change” rule have recognized, whether an employer has requested a new non-compete following a change in the employment relationship is not dispositive. Rather, “such efforts constitute additional proof that a new employment relationship was forming ….” See Iron Mountain v. Taddeo, 455 F. Supp. 2d 124, 134 (EDNY 2006) (emphasis added). Management-side attorneys will likely use the Astro-Med decision to argue in favor of the enforceability of non-competes that pre-date an employee’s promotion. A careful reading of each Massachusetts case addressing the “material change” doctrine, however, makes clear that a promotion by itself can (under certain circumstances) constitute sufficient evidence that a new employment relationship was created — requiring a new non-compete.

Non-Compete Agreements in Massachusetts May Soon Be Guided by New Legislation

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Non-competes in Massachusetts have been a hot topic in 2009. On October 7, 2009, the Joint Committee on Labor and Workforce Development held a public hearing on proposed non-compete legislation, entitled An Act Relative to NonCompete Agreements, sponsored by Representatives William Brownsberger (D-Belmont) and Lori Ehrlich (D-Marblehead). The experience of Caroline Huang, whose career was negatively affected by a broad restrictive covenant that kept her out of her field, encouraged Representative Brownsberger to focus on non-compete legislation. Ms. Huang’s website, Prohibit Restrictive Employment Covenants, provides many resources and updates regarding the proposed bill.

I was fortunate to be in the position to provide commentary on the drafts that led to the final proposed bill. I also testified at the public hearing with a client, who years prior found her livelihood in jeopardy when her former employer tried to enforce an overly broad non-compete agreement. Although we were successful in opposing the employer’s Motion for Preliminary Injunction, the cost in doing so sometimes prevents employees from properly asserting their rights. Employers know this and, unfortunately, often attempt to leverage the disparity in spending power. This creates a perverse outcome in which an employee is forced to abide by an otherwise unenforceable non-compete in order to avoid legal fees.

One of the highlights of the proposed legislation is a clause that entitles employees to attorneys’ fees “if the court declines to enforce a material restriction or reforms a restriction in material respect.” This will discourage employers from pursuing tenuous claims and help to preserve scarce judicial resources. Notably, the bill also limits non-competes to employees earning an annual salary of more than $75,000. Finally, the proposed legislation creates a presumption of enforceability for non-compete agreements that span up to 6 months.

Non-Compete Dispute Pits IBM Against Apple

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Don’t be fooled: Non-compete agreements are enforceable. I say this because the following exchange has been all too typical over the past several months:

Client: “I just landed a new job, with better pay and more room for growth. Can you look at my new employment agreement?”
Me: “Sure. Did you happen to sign a non-compete with your old employer?”
Client: “I think so, but I’ve heard that non-competes are pretty much unenforceable in Massachusetts.”
Me: “Unfortunately, that’s not the case. Non-competes are enforceable in Massachusetts, albeit under limited circumstances.”

In Massachusetts, non-competes are in fact enforceable where they protect a legitimate business interest and are reasonably limited in both temporal and geographic scope. If your employer has asked you to sign a non-compete, its a safe bet that the company’s counsel has crafted the agreement to give it the best chance of standing up in court.

One of Apple Inc.’s newest executives, Mark Papermaster, recently fell victim to the non-compete he signed with his former employer, International Business Machines Corp. (IBM). After leaving for Apple in October, IBM sued Papermaster, claiming that the move violated his non-compete agreement in which he agreed not to work for a competitor within one year after leaving his job.

On October 22, 2008, IBM filed its Complaint in the Southern District of New York in which, among others requests for relief, it petitioned the court for a preliminary injunction preventing Papermaster from working at Apple. In particular, IBM claimed that the agreement is enforceable because it protects a legitimate business interest since Apple is a competitor.

In his Affidavit, Papermaster challenged IBM’s assertion that Apple competes with its business. Specifically, Papermaster noted that “IBM focuses on high-performance business systems such as information technology infrastructure, servers and information storage products, and operating systems software” (Para. 13). Papermaster went on to state that “Apple, on the other hand, is in the business of designing, manufacturing and marketing consumer-oriented hardware and related products” (Para. 14). In the end, IBM’s argument resonated with U.S. District Judge Kenneth Karas, who ordered Papermaster to immediately “cease his employment with Apple Inc. until further order of this court.”

Non-competes have fueled a growing debate in Massachusetts over the last year. As reported in Boston.com’s article entitled, Why ‘noncompete’ means ‘don’t thrive ‘, making non-competes illegal in Massachusetts could greatly benefit the local economy:

The partners at Spark Capital, a Boston venture capital firm, began a campaign … to get rid of noncompetes in Massachusetts. They sent a letter to Governor Deval L. Patrick in which they predicted that the result would be “more start-ups originating in the Commonwealth, a reduction in the exodus of talented people, and the ability for Massachusetts to better compete nationally and globally as a hub of innovation.”

While businesses may oppose such a move, such a position could be short-sighted. Its not unreasonable to assume that IBM has found itself in Apple’s shoes before, hoping to a hire a key employee whose talents and ideas could be fully realized. In the long run, promoting the free flow if ideas and labor is good for employees and employers alike. Some companies seem to be catching on. As reported in the same article, Google’s Cambridge office does not require its employees to sign non-competes. Hopefully, this mindset will continue to gain traction.

The bottom line: If your employer asks you to sign a non-compete, YES it can be enforceable and YES you should have it reviewed beforehand to protect the career to which you have devoted countless late nights, early mornings, and weekends.

Non-Competes Presumptively Illegal as to Certain Professions: Social Workers Newest Category

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In Massachusetts, non-compete agreements are presumptively unenforceable as to certain professions: physicians; nurses; lawyers; broadcasters; and just recently, social workers.

Under M.G.L. c. 112, s. 12X, non-compete agreements are null and void as to physicians. In Falmouth Ob-Gyn Assocs., Inc. v. Abisla, the Supreme Judicial Court struck down a doctor’s contractual obligation to pay $250,000 in liquidated damages after leaving to compete against his former practice. In a similar vein, M.G.L. c. 112, s. 74D nullifies non-competes as to registered or licensed practical nurses.

Under the Massachusetts Rules of Professional Conduct, non-competes are unenforceable as to lawyers. However, in Pettingell v. Morrison, Mahoney & Miller, the Supreme Judicial Court considered the enforceability of a forfeiture-for-competition clause contained in a law firm’s partnership agreement. The clause required partners who withdraw from the firm, and who later compete, to forfeit certain payments. Although the Supreme Judicial Court ruled that the clause was unenforceable in that particular case, it noted that forfeiture-for-competition clauses are not per se illegal and may be upheld if a law firm could demonstrate that its survival and well-being justified such a clause.

In 1998, the Massachusetts legislature exempted individuals in the broadcasting industry, including television stations and radio stations. In particular, M.G.L. c. 149, s. 186, nullifies non-compete agreements in the broadcasting industry where: (1) the employer terminates the employee, (2) the employment relationship is terminated by mutual agreement, or (3) the employee’s contract expires. Notably, Section 186 does not prohibit the enforcement of non-compete agreements where the employee voluntarily terminates his or her employment prior to the expiration of an employment contract.

Recently, in 2008, the Massachusetts legislature made non-competes unenforceable with respect to social workers under M.G.L. c. 112, s. 135C:

A contract or agreement creating or establishing the terms of a partnership, employment, or any other form of professional relationship with a social worker licensed under this chapter that includes a restriction of the right of the social worker to practice in any geographic area for any period of time after termination of the partnership, employment or professional relationship shall be void and unenforceable with respect to that restriction. This section shall not render void or unenforceable the remainder of the contract or agreement.

Beyond these exemptions, a court will refuse to enforce a non-compete against any employee where the non-compete is not: (1) necessary to protect a legitimate business interest, (2) reasonably limited in time and geographic scope, (3) consonant with the public interest, and (4) supported by consideration. The burden of proof as to the enforceability of a non-compete agreement lies with the employer. For more information, please visit our previous blog post entitled, Massachusetts Non-Compete Agreements in a Nutshell.

Is your Employment Contract Watered Down? The First Circuit Provides Insight

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The First Circuit’s decision in Noonan v. Staples provides an informative example of how an employment contract should and should not be written. In that case, Staples discharged Noonan for allegedly padding his expense reports. In doing so, Staples refused to allow him to exercise his stock options, claiming that Noonan was ineligible because he had been fired for “cause.” In particular, Noonan’s employment contract stated as follows:

[I]f [Noonan’s] relationship with Staples is terminated by Staples for “cause” … the right to exercise this option with respect to any shares not previously exercised shall terminate immediately …

The contract provided a definition for “cause,” but gave Staples the discretion to ultimately interpret whether Noonan’s alleged transgressions fit that definition. The question before the First Circuit was whether it could review Staples’ interpretation.

In their respective arguments before the First Circuit, Staples argued that the court had no authority to review its “cause” determination, while Noonan argued that the court could review Staples’ decision de novo with no deference to Staples’ reasoning.

The court rejected both arguments and, relying on precedent, adopted a middle ground. In particular, the court held that while Staples’ decision could be reviewed, it would only be overturned if it was arbitrary, fraudulent, or made in bad faith. This is an extremely high standard. Not surprisingly, in light of this standard, the First Circuit affirmed Staples’ decision to terminate Noonan for “cause.”

The lesson learned: Review your employment contract with counsel before you sign it. Where possible and necessary, revise the language to ensure that your employer does not enjoy total discretion to decide the definition of “cause.”

Garden Leave Provisions Not Subject to Preliminary Injunction

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The garden leave provision in your employment contract may be unenforceable. In Bear, Stearns & Co., Inc. v. Sharon, the U.S. District Court for the District of Massachusetts refused to issue a preliminary injunction to enforce a contractual provision requiring an employee to provide 90 days before resigning or retiring (aka “garden leave”).

Douglas A. Sharon was a Broker and Managing Director of Bear, Stearns & Co., Inc.’s private client services group in its Boston office. According to Bear Stearns, Sharon was the Boston office’s top producer, generating $5.2 million annually in commissions and managing more than $867 million in assets. In December, 2005, the company distributed a memorandum to all of its Senior Managing Directors, including Sharon, which allowed recipients to accept a raise in their base salary, among other benefits, subject to the acceptance of the above-described garden leave provision. Sharon agreed to the garden leave provision.

On March 17, 2008, Sharon resigned from Bear Stearns, effective immediately. He began work for his new employer, Morgan Stanley, the next day. Following Sharon’s resignation, on March 26, 2008, Bear Stearns filed a Complaint, Motion for a Temporary Restraining Order (“TRO”), and a Preliminary Injunction to enjoin, among other things, Sharon’s continued employment at Morgan Stanley.

As an aside, an important distinction exists between a TRO and Preliminary Injunction. Under Rule 65(a) of the Massachusetts Rules of Civil Procedure, a TRO does not generally exceed 10 days. In sharp contrast, a Preliminary Injunction will last until the case has been decided.

On March 27, 2008, the Court entered Bear Stearns’ request for a TRO. After the TRO expired, Bear Stearns sought injunctive relief. To obtain preliminary injunctive relief, Bear Stearns was required to show: (1) a substantial likelihood of success on the merits, (2) a significant risk of irreparable harm if the injunction is withheld, (3) a favorable balance of hardships, and (4) accord with the public interest.

The Court denied Bear Stearns’ request for Preliminary Injunction for three main reasons. First, the company could not establish that it would suffer irreparable harm because any alleged harm could be recompensed through a monetary award. Second, the harm to Bear Stearns was outweighed by the potential harm to Sharon’s “professional standing and the inability to advise his clients in times of economic turmoil.” Finally, the Court noted an inherent inconsistency in the garden leave provision. Specifically, Sharon’s employment was at-will, which meant that Bear Stearns could terminate his employment at any time, for any reason or no reason. Likewise, because he was an employee-at-will, Sharon should be able to resign at any time. Accordingly, enforcing the garden provision would run afoul of the employee-at-will doctrine:

Because the effect of specific performance in this case would be to require the defendant to continue an at-will employment relationship against his will, it is unenforceable in that manner.

Although the court refused to issue the Preliminary Injunction, it is important to note that Sharon could still be held liable for monetary damages. This case, however, sheds much needed light on “garden leave” provisions.

6 Tips to a Better Employment Contract

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The subprime disaster has catapulted employment contracts, and the golden parachutes that sometimes come with them, into the limelight. While negotiating $100 million in severance pay that Countrywide Financial CEO Angelo Mozilo could receive is certainly not the norm, there are certain bases that every employment contract should cover.

Mike Hyatt, Chief Strategy Officer of N2Growth, provides a helpful overview of what every contract should include in his article entitled, Management Matters with Mike Myatt: 6 Tips to a Better Employment Contract. The article outlines 6 main points: (1) Job Description, (2) Term, (3) Compensation, (4) Indemnification, (5) Termination, and (6) Winding Up Provisions.

An ounce of prevention equals a pound of cure. Employment contracts protect an employee’s professional and financial interests in the event that the employer has a sudden change in heart. Every contract will contain its own nuances. The more an employee understands the details of what his or her contract should include going into the negotiation, the smoother the transition down the road.