Will The Material Change Doctrine Reduce Your Ability to Enforce Your Non-Competes?

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Consider this:  An employee signs a perfectly reasonable non-compete/non-solicitation agreement at the inception of employment.  The employee remains with the employer for ten years and during that period, receives several promotions each of which changes or increases the employee’s duties.  Each of these jobs requires the employee to have significant customer contacts and become privy to the employer’s confidential business information.  When the employee leaves, he proceeds to do everything the restrictive covenants forbid.  The employer sues, seeking an injunction.  In Connecticut, the employer would likely prevail.  In Massachusetts, it probably would not.

Here’s why.  Unlike Connecticut’s non-compete jurisprudence, Massachusetts’ law recognizes what it describes as the material change doctrine. One judge expressed the doctrine this way: “Each 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.”  Lycos, Inc. v. Jackson, 18 Mass. L. Rptr. 256. (Mass. Super. 2004).  In other words, a material change voids the existing non-compete.  The judge in that case cited two Massachusetts Supreme Judicial Court cases and a federal District Court decision for this curious proposition, although none of them actually say what the judge wrote.  Nonetheless, in 2012 alone, three different Massachusetts trial court judges in three different cases, each held that subsequent material job changes voided pre-existing non-compete agreements.  In each instance, they cited Lycos, Inc.

The facts in Lycos, Inc. are interesting if only because they are so completely unremarkable.  The non-compete/non-solicitation contract there was not job specific, as is usually the case.  Its term was the duration of the employee’s employment and a year thereafter.  During the employee’s four years with the employer, she was promoted, then demoted and promoted again, each time with significant, but not extraordinary changes in her title, compensation and duties.  Despite these facts, the court had no difficulty declaring these changes material, voiding the non-compete and subjecting the employer to competition from here.

The concern for Connecticut employers is that some employee’s lawyer may discover this unusual Massachusetts doctrine, assert it as a defense in Connecticut to an action to enforce the covenant, and a Connecticut judge will buy the defense.  What can an employer do to prevent this besides arguing that the defense makes no sense and should not become a part of Connecticut’s law?  It should take action before there is any need to sue.  It can do what the doctrine implicitly requires and create a new non-compete with each job chang.  Somewhat less cumbersome is having the employee acknowledge in writing with each job change that the existing non-compete remains in effect.  And the best solution is to include in the non-compete language stating that the non-compete remains in force regardless of any change in the employee’s position, duties, title, etc.

What’s the old saw – an ounce of prevention is worth a pound of cure?

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Topics:  Confidential Information, Employer Liability Issues, Material Change Doctrine, Non-Compete Agreements, Restrictive Covenants

Published In: Business Torts Updates, 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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