As a follow up to our recent post on the subject, the Massachusetts legislature failed to enact reform to noncompete agreements by the July 31, 2016 legislative deadline, despite both the House and the Senate passing versions of the bill. The primary point of disagreement between the two legislative houses concerned the “garden leave” provision that would require employers to compensate employees during the restrictive period. State legislators involved in the negotiations reported that the House wanted employers and employees to negotiate the monetary value of the “garden leave” clause when the agreement was initially signed, while the Senate wanted employees to be able to negotiate when leaving the employer in order to provide greater bargaining power to the employees. Although noncompete reform will not happen this year, legislators will likely revive the bill in the next session.
We have previously discussed non-competition agreements in the employer/employee context, but non-compete agreements arise in other scenarios. One of the most common events that leads to a non-compete is the sale of a business. The basics are the same as for employers and employees: the non-compete must be reasonable in duration and geographic scope, and for a legitimate business purpose. The difference lies in what is deemed reasonable. A recent Superior Court case, Annunciata v. VPS Services, LLC, et al. (Civil Action No. 15-2985 BLS2) addressed some interesting points on this topic.
The plaintiff, Annunciata, sold her business in return for cash and an equity stake in a new company formed from the sale, known as “VPS LLC.” As part of the sale, Annunciata entered into several agreements. Two of them, the Asset Purchase Agreement governing the sale, and a Service Agreement by which Annunciata was hired to work for VPS LLC, each contained a restrictive non-compete, barring her from competing for five years (which would be reduced to one year if she was terminated by VPS LLC without cause).
Shortly after the sale was completed, Annunciata had disagreements over the direction of the new company with a manager of the company that held the majority of VPS LLC’s shares. The disagreements rose to a point that the other managers (and co-defendants) voted to terminate Annunciata’s employment with VPS LLC. Annunciata filed suit against VPS LLC and the other managers for wrongful termination, who in turn counterclaimed, seeking an injunction to bar Annunciata from competing with VPS LLC, an intention Annunciata had made clear.
The court ruled in favor of the defendants, granting them an injunction. The court reasoned that when a non-compete is negotiated as part of a business sale, the court is inclined to honor such agreements, provided they are reasonable. Here, the plaintiff intended to compete directly with VPS LLC, which would deprive the defendants of a key portion of what they purchased: the good will of the recently purchased business. Further, the plaintiff still owned a portion of VPS LLC, and the specific terms of her non-compete allowed her to work, just not to form a competing company.
The takeaway from this case is that Massachusetts courts will honor non-compete agreements of a longer duration, if such non-competes are negotiated as part of a sale of a business. Any person contemplating buying or selling a business should consult with a qualified Massachusetts business attorney to protect their interests.
In certain circumstances, an effective non-competition agreement can help protect company assets and interests. However, the law recognizes some protections that exist even outside of a signed agreement. A recent Massachusetts appellate court case, AGERO, INC. v. RUBIN, addressed some of these protections. Agero involved a company suing two former employees who were alleged to have taken confidential information from their employer to start a competing business. One of the employer’s claims was that, in the absence of a contractual obligation, the employees still owed the company a “duty of loyalty” that prevented the employees from leaving the company with confidential information to start a competing business.
The law has long recognized that employees occupying positions of confidence and trust owe a duty of loyalty to that employer, which requires the employees to protect the employer’s interests. Employees subject to the duty of loyalty are not mere common employees who are easily replaceable. The courts will only impose such a duty on high-ranking executives and individuals with access to truly sensitive, proprietary information. This includes officers and directors although the individuals in question need not be officers and directors to trigger the duty (corporate directors are also subject to other legally imposed duties beyond the scope of this article).
The duty of loyalty means such employees are bound to act solely for their employer’s benefit during their employ, and among other things are barred from actively competing with the employer during the term of employment. Access to confidential information can also trigger the duty of loyalty, but such confidential information must be of high value and truly confidential, meaning the employer has taken measures to protect the information.
In Agero, the trial court sided with the employees, and that decision was upheld on appeal. Although the courts acknowledged the duty of loyalty argument, the employees in question were not subject to the duty. The two employees were best categorized as “rank and file,” both answering to higher level managers and lacking the authority to move forward on the projects discussed in the suit. Further, the information the employees possessed had minimal value and was not particularly secret.
There are a few takeaways from Agero. Even absent contractual agreements, high-ranking employees are still legally bound to loyalty to their employer. However, only employees occupying positions of trust and confidence will be bound by such a duty, so employers should consider non-competition agreements for lower-ranking but still valuable employees, assuming that employers can demonstrate legitimate business interests. Finally, merely labeling information as “confidential” does not necessarily make it so; the information must be truly valuable and affirmative steps must be taken to preserve its secrecy. Employers should still seek to have non-competition agreements with high-level employees, but even absent such an agreement, employers may still have recourse against a rogue former executive. Under either scenario, employers should contact a Massachusetts employment attorney to maximize their protection.