Section Review

Covenants not to compete after Boulanger

David McCay is an associate at Mirick, O'Connell, DeMallie & Lougee, LLP in Worcester. He represents businesses, business owners and employers in a variety of business and employment disputes.
The Massachusetts Supreme Judicial Court recently revisited the issue of the enforceability of covenants not to compete in Boulanger v. Dunkin' Donuts, Inc.1 Although covenants not to compete can arise in a variety of circumstances, they are most common in an employment relationship or in connection with the sale of a business. In Boulanger, the court for the first time addressed the enforceability of a covenant not to compete in a franchise agreement.

Although the court did not alter the general principles governing the enforcement of covenants not to compete, the case highlights the equitable, fact-intensive nature of the inquiry and the liberal enforcement of covenants made in the context of a sale of a business or analogous situations. The decision may also signal the court's greater willingness to enforce covenants not to compete in other contexts as well, provided the party seeking enforcement can establish that a legitimate business interest is at stake.

The facts

The plaintiff had a long history with Dunkin' Donuts, beginning as an employee at a Dunkin' Donuts franchise in the late 1970s. He advanced through the organization and became general manager of several franchises and ultimately purchased his own franchise in Syracuse, N.Y. By October 2000, Boulanger and his partner owned three Dunkin' Donuts franchises.

Boulanger signed covenants not to compete as part of his franchise agreements. The broad covenant restricted him from owning or working for a competing business within five miles of any Dunkin' Donuts establishment in the world for two years after the expiration or termination of the agreements. In 2002, Dunkin' Donuts had approximately 3,700 franchises in the United States, including 704 in Massachusetts and 122 in New Hampshire, and 1,400 franchises outside the United States.

As a franchisee, Boulanger was given access to confidential information from Dunkin' Donuts. The information included recipes for coffee and baked goods, financial information, marketing and promotion materials, new product development information and the location and building plans for new stores. This information was contained in operating manuals, videotapes, CD-ROMs and Web sites. Boulanger signed a number of documents by which he acknowledged the proprietary and confidential nature of the information.

In February 2002, Boulanger sold his franchises and moved to New Hampshire. Later that year he contacted Honey Dew Donuts and had an opportunity to become either an employee or franchisee of Honey Dew. Dunkin' Donuts refused to waive the covenant, although it offered Boulanger the opportunity to purchase another Dunkin' Donuts franchise. When Honey Dew learned of Boulanger's covenant not to compete, it withdrew its offer. Boulanger sought a declaratory judgment that the restrictive covenant was unenforceable.

General principles

A covenant not to compete will be enforced as necessary to protect legitimate business interests to the extent it is reasonable under the circumstances.2 Noncompetition agreements are enforceable so long as they are necessary to protect a legitimate business interest, supported by consideration, reasonably limited in time and space and consonant with the public interest.3 A covenant not to compete must be no broader than is necessary to protect a legitimate business interest.4 Legitimate business interests include the protection of trade secrets, confidential business information and goodwill.5 Protection from ordinary competition is not a legitimate business interest.6 Such a covenant will not be enforced.7

The context of the covenant not to compete is critical in the enforcement analysis. Covenants not to compete arising out of an employer-employee relationship are more strictly scrutinized than those arising out of the sale of a business.8 Noncompete agreements in the employment context are subject to great scrutiny because of the likely unequal bargaining power between the employee and the employer.9 "[T]he employee is likely to give scant attention to the hardship he may suffer later through the loss of his livelihood."10

On the other hand, courts more liberally enforce covenants not to compete arising out of the sale of a business "so as to prevent the seller from taking back that which he purported to sell."11 As the Appeals Court in Alexander & Alexander articulated:

[T]here is more likely to be equal bargaining power between the parties; the proceeds of the sale generally enable the seller to support himself temporarily without the immediate practical need to enter into competition with his former business; and a seller is usually paid a premium for agreeing not to compete with the buyer.12

The court's analysis

At the outset, the court articulated many of the general principles outlined above and noted their application depends on the context of the covenant not to compete: "Historically, covenants not to compete typically have arisen in either the employment context or in the context of the sale of a business."13 Noting covenants not to compete in the context of a sale of a business are more liberally enforced than those in the context of an employment relationship, the court concluded Boulanger's covenant was more akin to one in the sale of a business. The court reasoned Boulanger voluntarily sold his franchises and profited from the sale. Boulanger was not an employee, he paid for his franchise and he entered into the franchise agreement with the advice of counsel.

The court held that the noncompete was necessary to protect Dunkin' Donuts legitimate business interests. The protection of the confidential marketing and product information disclosed to franchisees was sufficient to constitute a legitimate business interest.

The court rejected Boulanger's argument that the restriction, effectively worldwide, was unreasonable in time and space and against public policy. The court reasoned that the large geographic restriction was permissible, particularly under circumstances analogous to a sale of a business.14 The restriction did not prohibit Boulanger from employment altogether, and Dunkin' Donuts had offered Boulanger another franchise. The scope of the covenant was reasonable in light of Dunkin' Donuts need to protect its confidential business information, which, if disclosed, could be used by competitors to the detriment of Dunkin' Donuts. The court further reasoned that the covenant was reasonable under the circumstances because it was a component of the larger franchise structure. The covenant was part of what Dunkin' Donuts sold, part of what each of the franchisees purchased, and it worked to Boulanger's benefit when he was a franchise owner.

Conclusion

Although Boulanger is not a departure from existing law on the enforceability of noncompetition agreements, the Supreme Judicial Court has made clear that it views the protection of the franchise system as a legitimate business interest for which a covenant not to compete will be enforced. Although the central holding of the case is limited to covenants not to compete in a franchise agreement, the case has broader implications for the enforcement of noncompetes in more traditional contexts as well.

With respect to covenants not to compete in the sale of a business, Boulanger's implications are obvious. The court reiterated that such covenants are enforced more liberally, and that, at least in this instance, the franchise agreement at issue was analogous to the sale of a business. Clearly, the court will not permit the seller of a business to diminish or undermine the value of what he or she sold by competing with it. In short, the Supreme Judicial Court will enforce covenants not to compete when such a covenant is deemed necessary to protect a legitimate business interest.

Proponents of noncompetition agreements in the employment context are also likely to rely on Boulanger given the scope of the restriction enforced by the court. Parties seeking to enforce such covenants, however, should proceed with caution. The deference extended to covenants not to compete in the franchise context or in the sale of a business may not be afforded to covenants not to compete between an employer and employee.

Regardless of the context in which a covenant not to compete arises, Boulanger demonstrates that the facts of each case will drive the court's analysis and ultimate determination on enforceability. Whether the noncompete arises from the sale of a business, an employment relationship or in some other context, the court will consider all of the attendant circumstances of the covenant, among them the nature of the parties' relationship, the context in which the agreement was reached, the relative bargaining position of the parties, the nature of the business interest being protected by the agreement and the manner and extent to which the party seeking enforcement of the covenant has protected its business interests in the past.

End notes

1. 442 Mass. 635 (2004).[back]

2. Marine Contractors Co. v. Hurley, 365 Mass. 280, 287 (1974); All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974). [back]

3. All Stainless, Inc., 364 Mass. at 778; Novelty Bias Binding Co. v. Shervin, 342 Mass. 714, 716 (1961); Lycos, Inc. v. Jackson, No. 2004-3009 (Middlesex Sup. Ct. Aug. 24, 2004).[back]

4. Marine Contractors Co., 365 Mass. at 287-88.[back]

5. Id. at 287; New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 674 (1977); All Stainless, 364 Mass. at 779-80 (1974). Massachusetts General Laws chapter 93, section 42 and General Laws chapter 266, section 30 define "trade secret" to mean and include "anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement." [back]

6. Marine Contractors Co., 365 Mass. at 287-88.[back]

7. Id. [back]

8. Alexander & Alexander, Inc. v. Danahy, 21 Mass. App. Ct. 488, 496 (1986); EMC Corp. v. Kempel, 14 Mass. L. Rep. 131, 2001 Mass. Super. LEXIS 532, 17 (2001). [back]

9. Sentry Insur. v. Firnstein, 14 Mass. App. Ct. 706, 707 (1982), quoting Restatement (Second) of Contracts ß 188 cmt. g (1981); W.B. Mason Co. v. Staples, Inc., 12 Mass. L. Rep. 603, 2001 Mass. Super LEXIS 50, 20 (2001). [back]

10. Id. [back]

11. Alexander & Alexander, 21 Mass. App. Ct. at 496, citing United Tool & Indus. Supply Co. v. Torrisi, 356 Mass. 103, 106-107 (1969), Tobin v. Cody, 343 Mass. 716, 720-24 (1962). [back]

12. Id. [back]

13. Boulanger, 442 Mass. at 639. [back]

14. Id. at 644. The court made particular reference to Marine Contractors Co., 365 Mass. at 289 (covenant not to compete covering area within one hundred miles of Boston reasonable) and Novelty Bias Binding, 342 Mass. at 717-18 (covenant not to compete covering 26 named states, signed as part of defendant's restitution in criminal case, not unreasonable). See also Oxford Global Resources, Inc. v. Guerriero, 2003 U.S. Dist. LEXIS 23503, 29 (D.Mass. 2003) (nationwide noncompete agreement against recruiting firm employees was reasonable); Marcam Corp. v. Orchard, 885 F.Supp. 294, 299 (D.Mass. 1995) (noncompete with nationwide coverage reasonable in scope); EMC Corp. v. Allen, 8 Mass. L. Rep. 21, 1997 Mass. Super. LEXIS 102, 3 (1997) (noncompete with no geographic restriction reasonable in scope because it was necessary to protect employer's legitimate business interests and former employee's responsibilities were worldwide). [back]



1. 442 Mass. 635 (2004).

2. Marine Contractors Co. v. Hurley, 365 Mass. 280, 287 (1974); All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974).

3. All Stainless, Inc., 364 Mass. at 778; Novelty Bias Binding Co. v. Shervin, 342 Mass. 714, 716 (1961); Lycos, Inc. v. Jackson, No. 2004-3009 (Middlesex Sup. Ct. Aug. 24, 2004).

4. Marine Contractors Co., 365 Mass. at 287-88.

5. Id. at 287; New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 674 (1977); All Stainless, 364 Mass. at 779-80 (1974). Massachusetts General Laws chapter 93, section 42 and General Laws chapter 266, section 30 define "trade secret" to mean and include "anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement."

6. Marine Contractors Co., 365 Mass. at 287-88.

7. Id.

8. Alexander & Alexander, Inc. v. Danahy, 21 Mass. App. Ct. 488, 496 (1986); EMC Corp. v. Kempel, 14 Mass. L. Rep. 131, 2001 Mass. Super. LEXIS 532, 17 (2001).

9. Sentry Insur. v. Firnstein, 14 Mass. App. Ct. 706, 707 (1982), quoting Restatement (Second) of Contracts ß 188 cmt. g (1981); W.B. Mason Co. v. Staples, Inc., 12 Mass. L. Rep. 603, 2001 Mass. Super LEXIS 50, 20 (2001).

10. Id.

11. Alexander & Alexander, 21 Mass. App. Ct. at 496, citing United Tool & Indus. Supply Co. v. Torrisi, 356 Mass. 103, 106-107 (1969), Tobin v. Cody, 343 Mass. 716, 720-24 (1962).

12. Id.

13. Boulanger, 442 Mass. at 639.

14. Id. at 644. The court made particular reference to Marine Contractors Co., 365 Mass. at 289 (covenant not to compete covering area within one hundred miles of Boston reasonable) and Novelty Bias Binding, 342 Mass. at 717-18 (covenant not to compete covering 26 named states, signed as part of defendant's restitution in criminal case, not unreasonable). See also Oxford Global Resources, Inc. v. Guerriero, 2003 U.S. Dist. LEXIS 23503, 29 (D.Mass. 2003) (nationwide noncompete agreement against recruiting firm employees was reasonable); Marcam Corp. v. Orchard, 885 F.Supp. 294, 299 (D.Mass. 1995) (noncompete with nationwide coverage reasonable in scope); EMC Corp. v. Allen, 8 Mass. L. Rep. 21, 1997 Mass. Super. LEXIS 102, 3 (1997) (noncompete with no geographic restriction reasonable in scope because it was necessary to protect employer's legitimate business interests and former employee's responsibilities were worldwide).

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