First Circuit Holds Massachusetts Salesman Violated Nonsolicitation Covenant, Even Though Customer Made “Initial Contact”

On September 23, 2013, the First Circuit Court of Appeals, applying Massachusetts law, upheld a preliminary injunction in a nonsolicitation covenant case, and discussed the often-murky line between “soliciting” and “accepting business” from a former customer. The court  affirmed the district court’s preliminary finding that the employer was likely to succeed in establishing that its former salesman and his new employer crossed that line in breach of his non-solicitation covenant. The First Circuit held that, although there was no authoritative Massachusetts law on this topic, the Massachusetts courts would likely find that there should be no per se rule that a customer’s initial contact with the former employee foreclosed a finding of solicitation—particularly when, as is often the case, that customer was prompted to contact the employee by a targeted announcement of the salesman’s new affiliation. Corporate Technologies, Inc. v. Harnett, No. 13-1706 (1st Cir. Sep. 23, 2013).

The Decision

At the start of his employment with Corporate Technologies, Inc. (CTI), an information technology solutions provider, Brian Harnett had executed an agreement that contained both nonsolicitation and nondisclosure provisions. The nonsolicitation provision barred Harnett from “solicit[ing], divert[ing] or entic[ing] away existing [CTI] customers or business” for 12 months after the end of his CTI employment. Harnett, who had been a CTI salesman for nearly a decade, later started working for OnX USA, LLC, which was one of CTI’s competitors. While working for OnX, Harnett communicated and participated in sales activities with some of his CTI customers who had made contact with him in response to OnX’s email blast announcing Harnett’s hiring.

As a result, CTI sued Harnett and OnX. The district court entered a preliminary injunction, finding  that the preliminary evidence showed that Harnett had participated in sales-related communications and activities with certain of his customers for  OnX, and thus that CTI was likely to succeed in proving that Harnett had (with OnX’s help) violated the nonsolicitation covenant. On appeal, the principal argument by Harnett and OnX was that their conduct could not constitute improper solicitation as a matter of law because the customers made the “initial contact,” and thus all Harnett and OnX did was “accept business,” not engage in improper solicitation. Rejecting this argument as a “linguistic trick,” the First Circuit held that the Massachusetts Supreme Judicial Court, if confronted with the question, would find that such a per se rule was inappropriate.

The court found that such a rule would undermine the value of a nonsolicitation provision to a former employer. First, the court found that the initial contact could easily be manipulated by an announcement, targeted at former customers, that piques their curiosity and causes them to make contact. Harnett’s and OnX’s announcement—an email blast sent to a select group of recipients, 40 percent of whom were Harnett’s former CTI customers—illustrates just such manipulation, the First Circuit found, and was “part and parcel of a pattern of solicitation.”  The court also pointed out that the initial contact could vary greatly in the degree to which it implicated a former employers’ interests, ranging from a quick call to ascertain the circumstances of the new employment to placing an order.Finally, the court explained that the significance of who makes the initial contact will vary greatly based on the industry and products or services at issue. In this case, the initial contact was only a small part of the business solicitation effort, which required extensive meetings, discussions, and customer-tailored bid design after Harnett’s CTI customers had reached out to him at OnX. Thus, the court found that the identity of the party making the initial contact is just one of many factors that courts should consider in determining whether a former employee has improperly crossed the line from acceptance of business to solicitation.

Significance for Employers

This case is significant for employers that have nonsolicitation restrictions in agreements with their employees, as well as those hiring employees subject to such restrictions in agreements with their former employers. For the latter group, the First Circuit’s decision provides some cautionary guidance. The practice of using targeted announcements of a new hire’s arrival is common, and the First Circuit did not hold that all public announcements of employment changes were improper. It did find, however, that such announcements can cross the line into improper solicitation when the list is short and is composed largely of the new employee’s client contacts from his or her former employment.

In addition, employers should not place too much weight on the identity of the person making the initial contact. Although it is obviously helpful to the new employer if the customer was the one that reached out initially, the mere fact that the first email or call was inbound may have limited significance if the restricted employee then engages in extensive business communications with that restricted customer. That is particularly true when, as in this case, the sales process involves some continued communications before the “pitch” is fully made, as opposed to a one-off sale of fungible goods. As the First Circuit stated, the former employer’s rights “cannot be thwarted by easy evasions, such as piquing customers’ curiosity and inciting them to make the initial contact” with the employee’s new firm.

The First Circuit’s opinion is not a binding interpretation of Massachusetts law. It is, however, a decision by the highest court to have weighed in on this issue under Massachusetts law, and its lengthy analysis will likely be given persuasive weight by both federal and state courts in the Commonwealth. The persuasive value of this decision may be limited to situations in which the non-solicitation agreement contains terms like “entice,in addition to the commonly used phrase “solicit. The court found that the inclusion of the additional term “entice” buttressed the district court’s finding of likely violation, although it also opined that the word “solicit” has a broad meaning.

Topics:  Breach of Contract, Employer Liability Issues, Non-Solicitation Agreements, Restrictive Covenants

Published In: General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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