Recent Conflicting Decisions Make It Potentially Easier and Harder to Enforce Non-Competition and Non-Solicitation Covenants

What you need to know:

The enforceability of restrictive covenants continues to be a heavily litigated area in Massachusetts.  Massachusetts courts recently issued three decisions relating to the enforceability of employee non-competition and non-solicitation agreements. 

What you need to do:

Employers seeking to draft and/or enforce non-competition or non-solicitation agreements under Massachusetts law should determine whether their current contracts comply with the law as construed in Interpros and Hartnett and whether ARS Services might provide additional protection.

The Decisions

Interpros, Inc. v. Athy

In Interpros, the Massachusetts Superior Court decided that in order to be enforceable, a new non-compete agreement must be executed each time there is a significant change in an employee’s responsibilities.

A long-time employee, Paul Athy, left Interpros, a staffing and employee recruiting company, to start his own competing company.  Upon discovering this, Interpros sued Athy, seeking to enforce a non-compete agreement that Interpros and Athy had signed 15 years earlier.

The Superior Court refused to issue a preliminary injunction enforcing the non-compete, reasoning that the nature of Athy’s employment had materially changed as he rose through the ranks of the Interpros hierarchy from branch manager, to regional vice president, to chief operating officer.  Because of the material change in the nature of his employment between the time when Athy signed the non-compete and the time of the lawsuit, the court declared that the non-compete agreement between the parties must be declared void.

The court explained that, under Massachusetts law, “ . . . each time an employee’s relationship with the employer changes materially such that they have entered into a new relationship, a new non-competition agreement must be signed.”  Though the court offered little specific guidance about what constitutes a “material change,” it reasoned that the change in the relationship between Interpros and Athy was material because his title changed, his pay increased and his authority increased substantially.

ARS Services, Inc. v. Morse

In ARS Services, a different  Massachusetts Superior Court judge issued a preliminary injunction enforcing a non-compete despite changes in an employee’s title and compensation. 

Before commencing work with ARS Services, a company that provides emergency property restoration and reconstruction services, Daniel Morse had no experience in the industry.  After working with the company for approximately four years, and in exchange for a bonus of nearly $9,000, Morse signed an employee non-compete agreement providing, among other things, that Morse’s obligations under the agreement would continue “notwithstanding any change in duties, responsibilities, position, or title.”

When Morse left ARS Services to work for a competing company, ARS sued to enforce the agreement.  Morse argued that his 2011 change in title from general manager to director of operations, and the accompanying reduction in his salary, represented a material change in his employment relationship with ARS.  He argued that the change rendered the non-compete void as a matter of public policy, regardless of the provision in the agreement stating otherwise.

The court disagreed with Morse and issued an injunction in favor of ARS.  The court held that Morse had contractually agreed that changes in his title would not invalidate the agreement, and that there was no reason to ignore that provision.  The court further held that even leaving aside that clause, the relatively minor changes in Morse’s title and compensation were not sufficiently material to invalidate or render unenforceable the non-compete agreement as matter of equity.

Corporate Technologies, Inc. v. Hartnett

In Hartnett, the United States District Court for the District of Massachusetts issued an injunction enforcing a non-solicitation agreement, even though Hartnett, a former employee of Corporate Technologies Inc., did not initiate contact with the clients of his former employer.

At the beginning of their employment relationship, CTI, an IT solutions company, signed a confidentiality and non-solicitation agreement with salesperson Brian Hartnett.  The agreement provided, among other things, that Hartnett would not “directly or indirectly, … solicit, divert or entice away” business from CTI’s customers for a period of one year following the end of his employment with CTI.

Subsequently, Hartnett left CTI and commenced employment with CTI’s competitor OnX USA, LLC.  Hartnett’s employment contract with OnX specifically provided that OnX would indemnify Hartnett for any disputes with CTI regarding his non-solicitation agreement. 

Upon Hartnett’s hire, OnX sent an announcement to potential clients, including a number of Hartnett’s most active clients while employed at CTI, announcing that OnX had hired Hartnett.  Though Hartnett contended that he played no role in determining which entities would receive the announcement, he subsequently met with those of his former clients who responded to the announcement, encouraging them to do business with OnX.  Hartnett contended that because he played no role in initiating the contact with his former CTI clients, he did not violate his non-solicitation agreement. 

The court disagreed, refusing to draw an “artificial distinction” based on “first contact.”  Instead, the court held that actively pursuing the business of his former clients and seeking to convince them to do business with OnX “necessarily involved solicitation.”  The court further found that Harnett would inevitably breach his confidentiality obligations to CTI by meeting and working with his former clients, and that OnX’s offer of indemnity to Harnett for disputes relating to his non-solicitation was further evidence of wrongdoing by OnX.

What These Decisions Mean for Employers

The Interpros decision clarifies that, under Massachusetts law, when the relationship between an employer and an employee undergoes a material change, the parties must execute a new non-compete agreement.  Employers desiring the protection of such agreements should work with counsel to determine what types of events should be considered “material” and should plan to re-execute non-compete agreements upon the occurrence of these events.

The ARS Services decision offers employers a potential avenue for fortifying their non-compete agreements.  By including a clause providing that such agreements will remain in force despite changes in the employment relationship, employers may be able to create more durable non-compete agreements and avoid the re-execution of agreements seemingly demanded by Interpros.

The Hartnett decision provides protection for former employers seeking to enforce non-solicitation agreements.  However, the decision may create some confusion for employers seeking to hire persons who are currently bound by non-solicits.  In order to solicit business from all potential clients, employers who hire such persons may consider creating policies to shield new employees from contact with potential clients that may fall within the scope of non-solicitation agreements signed with former employers.

However, employers should also note that each of these decisions, though instructive, was made by a lower court, based on a specific set of facts.  This area of the law is continually in flux, and these cases do not necessarily represent the final word by Massachusetts courts on the subjects addressed.

Conclusion

The enforceability of restrictive covenants continues to be a heavily litigated area in Massachusetts and elsewhere.  As the law of surrounding restrictive covenants continues to evolve, it becomes increasingly important that employers work with counsel to draft enforceable agreements with their employees.  Employers seeking to maximize the protections offered by such agreements should consult with Choate’s Labor, Employment & Benefits Group to discuss how to navigate recent developments in the law such as the Interpros, ARS and Hartnett decisions.