Lawyers Journal

Recent Superior Court decision provides important lessons

Most cases involving non-competition and non-solicitation agreements are resolved at the preliminary injunction phase or settle shortly thereafter, and they rarely get appealed. So when Superior Court judges face non-competition and non-solicitation cases involving difficult issues, they set the precedents for their fellow judges to follow. That is why Superior Judge Edward P. Leibensperger's recent decision in A.R.S. Services, Inc. v. Morse is worth studying. See C.A. No. 2013-00910 (Middlesex Super. April 5, 2013). In that case, Leibensperger issued a preliminary injunction to enforce a non-competition and non-solicitation agreement and rejected several defenses offered by the defendant employee, including that the employee's employment had "materially changed" to void the agreement, the employer's president had orally agreed not to enforce the agreement, and to enforce the agreement would cause the employee harm. But the employee won on one issue when Leibensperger refused to enforce one non-solicitation clause and scaled back the duration, geographic breadth and scope of another. Below is a summary of the facts and some highlights from the 30-page opinion, including the lessons it provides for both employers and employees.

The facts


The facts in and of themselves are interesting. The defendant Daniel Morse was hired by plaintiff A.R.S. Services in 2004 to work in the field of "disaster restoration," which deals with the cleanup and restoration of properties after fire, smoke, water, mold or biohazard damage. A.R.S. had offices in Massachusetts, New Hampshire, Rhode Island and Connecticut, and received business from insurance adjusters who referred people with insurance to it. When he was hired, Morse signed an agreement that included a non-competition clause that prohibited him from working in the disaster restoration business within 50 miles of any A.R.S. office for one year after he left A.R.S. The agreement also included two non-solicitation clauses that prohibited Morse, for two years after he left A.R.S., from: (1) soliciting or providing products or services competitive with those of A.R.S. to any customer or prospective customer of A.R.S. (i.e., customers and prospective customers of A.R.S. at the time Morse worked there); and (2) soliciting A.R.S.'s customers, clients, subcontractors, or vendors. Further, the agreement stated that it remained in force notwithstanding any change in Morse's employment responsibilities at A.R.S. and any modification to the agreement had to be in writing. During his employment, Morse was promoted to general manager from branch manager, and then became director of operations in 2011, what Morse believed was a demotion. In that role, he reported to the general manager, but from 2008 until he left A.R.S. in 2012, though there were variations in how much he made, Morse was one of the five highest-compensated A.R.S. employees.

Morse resigned in 2012. But before he left, he spoke to A.R.S.'s president about what he planned to do next. In a vague e-mail to the president summarizing their conversation, Morse wrote, among other things, that "[y]ou said yourself that you do not begrudge anyone from making a living and I appreciate your giving me your approval as I embark into a scary situation." And he wrote that "[i]t is not my desire to compete with A.R.S., but my desire to find a small niche for myself where I can add some value and grow a business over the next 20 years and beyond." There was no response to Morse's e-mail. Morse said that he later met with the president who told him that, although he could not give Morse written permission to compete with A.R.S., it was acceptable for him to compete with A.R.S. so long as Morse did not solicit any of A.R.S.'s customers, which Morse interpreted to mean property managers. The next month, Morse was hired by 24 Restore, another company in the disaster restoration business. 24 Restore knew that Morse had signed the agreement with A.R.S. That same month, Morse met with a consultant to A.R.S. and an insurance property loss manager who referred business to A.R.S. though a third-party administrator. He asked both for referrals. After A.R.S. demanded in a letter that Morse stop violating the agreement, Morse began working only in Maine for Restore 24. Nonetheless, A.R.S. sued Morse and Restore 24 and requested a preliminary injunction.

Leibensperger's rulings and lessons for employers and employees


Leibensperger made four rulings worth highlighting:

"Material change" defense: One of the most interesting and evolving issues involving non-competition and non-solicitation agreements is the "material change" defense, which states that, if an employee's employment relationship with a company materially changes after the employee signs a non-competition or non-solicitation agreement, the original agreement is void for lack of consideration and the employee has to sign another agreement in exchange for the "new" employment relationship. The courts have struggled to define when a material change occurs and to determine whether the parties intended the old agreement to remain operative after a material change.

Perhaps recognizing this uncertainty, Morse led with the material change defense. He argued that his employment relationship with A.R.S. materially changed after he signed the agreement, in particular when he was allegedly demoted from general manager to director of operations, so the agreement should not be enforced because he did not sign a new agreement in exchange for this new employment relationship. Yet Leibensperger rejected this argument based on the intention of the parties because the agreement itself stated that it remained in force regardless of "any change in [Morse's] duties, responsibilities, position or title with [A.R.S.]." And Leibensperger concluded that, although Morse became director of operations in 2011 after being general manager, any change in his responsibilities was not material because "both roles required Morse to be involved in A.R.S.' disaster restoration projects and to promote A.R.S.' brand by attending industry seminars and maintaining his industry relationships." What is more, although his base salary went down by 4 percent in 2011 and 2012 from what it was in 2010, he remained one of the five highest-compensated employees at A.R.S. Interestingly, Leibensperger discussed in a footnote a Superior Court case from October 2012 that Morse presented to support his argument. See Akibia Inc. v. Hood, C.A. No. 2012-02974F (Suffolk Super.). The judge in that case ruled that a non-competition agreement was void because of a material change in the defendant's employment, even though the agreement stated that a material change in the employee's employment would not void the agreement. Leibensperger noted that a single justice of the Appeals Court had affirmed Akibia in part because no existing appellate case in Massachusetts had addressed such circumstances. See Akibia Inc. v. Hood, 2012-J-0390 (Mass. App.) (Sullivan, J., single justice). The implication is that Leibensperger did not follow Akibia because there was no material change in his case and no controlling appellate authority to support Akibia's rationale.

Lesson for employees: Include a provision in non-competition and non-solicitation agreements stating that the agreement remains in force regardless of any changes in the employee's job title, duties and compensation at the company.

Non-Solicitation Clauses: Leibensperger refused to enforce one non-solicitation clause and modified the second because both were too broad. In particular, both covered a larger geographic territory and lasted for a longer period of time than the non-competition clause, which the court held was reasonable and enforceable. The first clause prohibited Morse, for two years after he left A.R.S., from soliciting or providing products or services competitive with those of A.R.S. to any customer or prospective customer of A.R.S. at the time Morse worked there. Leibensperger refused to enforce this clause for two reasons. First, the non-competition clause of the agreement only applied for one year within 50 miles of any A.R.S. office and A.R.S. gave no reason why this first non-solicitation clause needed to last for two years everywhere. Second, the term "prospective customer" was vague enough to conceivably cover "every entity that might hire A.R.S.," which basically turned the non-solicitation clause into a non-competition clause. So, Leibensperger refused to enforce the first non-solicitation clause altogether. For the second non-solicitation clause, which prohibited Morse from soliciting A.R.S.'s customers, clients, subcontractors or vendors for two years after he left A.R.S., Leibensperger reduced it to one year, limited its applicability to within 50 miles of any A.R.S. office, and struck the portion applicable to A.R.S. vendors and subcontractors. As above, he modified the durational and geographic scope because of the non-competition clause, and he struck A.R.S. vendors and subcontractors from the clause because A.R.S. had no protectable interest (such as customer goodwill) to justify preventing its vendors and subcontractors from working with other disaster restoration services. Leibensperger implied that, if anything, the clause hurts the legitimate business interests of A.R.S. vendors and subcontractors who may want to work with Restore 24.

Lesson for employees: If the time periods of non-competition and non-solicitation clauses in the same agreement differ, make sure there is a good reason for the difference.

Oral modification of the agreement: Morse argued that, during his conversations with A.R.S.'s president, the president agreed not to enforce portions of the agreement. But the agreement itself required any modification to be in writing. Nevertheless, Leibensperger determined that a "subsequent oral modification" to the agreement was still possible if the evidence had "sufficient force" to overcome the presumption that the written agreement expresses the intent of the parties. But here Morse's email summarizing one of the conversations did not include specific terms of any modification. So it was not evidence of "sufficient force" to overcome the terms of the parties' written agreement.

Lesson for employees: If you agree to a change in the terms of a non-competition or non-solicitation agreement with your employer, get your employer to put the change in writing.

Employee's conduct after A.R.S. sent a cease and desist letter: After A.R.S. sent a letter to Morse demanding that he stop violating the agreement, Morse agreed to work in Maine for Restore 24, outside the geographic restrictions of the non-competition clause. As a result, Leibensperger rejected out-of-hand Morse's argument that issuing a preliminary injunction enforcing the agreement would cause Morse harm because he would be unemployed. For the same reason, Leibensperger rejected Morse's request that A.R.S. post a surety bond of $500,000 for the payment of costs and damages to Morse if the preliminary injunction were later found to be wrongly issued.

Lesson for employees: If you are going to claim that a non-competition or non-solicitation clause prevents you from finding employment, do not find employment while the lawsuit is pending.


Conclusion


Liebensperger's decision shows that employers (and their lawyers) must be careful when drafting non-competition and non-solicitation agreements. But employees must be careful too. The old adage "get it in writing" is just as important for employees as it is for employers when it comes to non-competition and non-solicitation agreements, and an employee's post-termination conduct can mean a lot to judges who must decide whether to exercise their equitable powers to enforce them.

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