Section Review

Recent trend holds employee non-competition agreements invalid after change in employment relationship

Kevin Murphy is a shareholder with Yurko & Salvesen in Boston. He focuses his practice on complex business litigation, with an emphasis on shareholder disputes, employment and trade secret cases.
Employee non-competition clauses present a difficult challenge for both in-house and outside litigation counsel because judges disfavor them and they are often difficult to enforce.

Counsel must decide when to spend sometimes significant legal fees attempting to enforce such clauses, considering all the underlying facts. Corporate officials also must conduct relationships with employees in a way designed to maximize the possibility that such restrictive clauses are enforced.

A trend indicated by three recent decisions of the Massachusetts Superior Court could significantly impact the calculus of whether to bring an action upon an employee non-competition clause and could also impact the way businesses deal with such employees.

The cases refuse preliminary enforcement of non-competition agreements where the employee subject to them was promoted or otherwise experienced materially changed employment circumstances after signing the agreement and was not required to sign a new non-competition agreement after the change.

The recent Superior Court decisions

In Cypress Group, Inc. v. Stride Assocs., Inc.1 decided in March 2004, Judge Nonnie S. Burnes refused to preliminarily enforce non-competition agreements against two employees who had been repeatedly promoted or transferred to new jobs but had not been asked to sign new agreements upon the promotion or transfer.

The judge stated that “[e]ach time an employee’s employment relationship with the employer changes materially such that they have entered a new employment relationship a new restrictive covenant must be signed.” Judge Burnes found such material changes in the transfers of such employees into new job titles and new physical locations.

In June 2004, the court again declined to preliminarily enforce a non-competition clause because the employee had undergone a material change in employment without being asked to sign a new agreement. In R.E. Moulton, Inc. v. Lee,2 Judge Diane M. Kottmyer concentrated on the objective facts of the employment, noting the employee had been transferred to a non-management sales position that no longer participated in the company bonus plan, and that the company did not require other salespersons to sign such agreements.

And in August 2004, Judge Julian T. Houston in Lycos, Inc. v. Jackson,3 held a non-competition clause invalid where the employee did not sign a new agreement after getting a new title, new responsibilities and a salary increase. The court used the exact same language from Cypress Group quoted above.

A changed focus — From ‘mutual abandonment’ to ‘changed relationship’

Each of the three decisions rely upon F.A. Bartlett Tree Expert Co. v. Barrington4 and/or AFC Cable Systems Inc. v. Clisham5 for the rule that a non-competition agreement becomes unenforceable after the employee undergoes a material change in the employment relationship such as a job or salary change.

However, neither F.A. Bartlett nor AFC Cable truly stands for such a rule. The three superior court cases depart significantly from the focus of those progenitor decisions in a way that significantly limits the enforceability of non-competition clauses.

The real focus of both F.A. Bartlett and AFC Cable was whether the employer and employee generally behaved in such a way as to show they mutually abandoned a previously signed non-competition agreement. In both cases, the employer requested the employee to sign a new agreement following a change in the employee’s job circumstances, but the employee refused and the employer continued to employ him regardless.

The SJC and the federal District Court for Massachusetts found these actions showed the parties mutually believed the original agreement had been abandoned and did not apply to the new employment relationship.

Cypress, R.E. Moulton and Lycos, while they cite F.A. Bartlett and AFC Cable, de-emphasize the focus of those decisions upon the subjective mindset of the parties displayed by a holistic review of all the facts.

The Superior Court in each case seemed less concerned with whether the employer willingly abandoned a previous non-competition clause by its actions. Rather, the court looked closely at the objective facts of the changed employment, and when it found facts showing changed employment circumstances, held the agreements void with little analysis of what the parties themselves may have intended as revealed by their actions.

Of the three, only Lycos featured facts similar to AFC Cable and F.A. Bartlett that might have shown mutual abandonment, and that case did not rely solely upon mutual abandonment as a legal underpinning. Rather, Lycos adopted the bright-line changed relationship language wholesale from Cypress.

The Business Litigation Session

The Business Litigation Session of the Massachusetts Superior Court deals solely in complex business-related litigations, and is confronted regularly with non-competition agreement cases. It is the forum of choice for many practitioners handling non-competition disputes.

Of the three decisions, only Cypress Group proceeded from the Business Litigation Session. The case was decided by Judge Burnes who was temporarily assigned to the BLS for that month.

After Cypress Group, the question arose whether Judges Allan van Gestel and Margot Botsford of the BLS would adhere to the changed relationship analysis adopted by Judge Burnes. Prior to Cypress Group, the BLS, despite opportunities, had never adopted such a rule. In fact, the BLS has several times since 2001 granted preliminary injunctions upon restrictive covenants where the employees experienced some or all of reduced compensation, changes in reporting structure, reduced responsibilities, changed compensation methods, reorganization of support personnel and increased computerization of job functions. In a 2001 decision, Judge van Gestel stated that alterations in compensation methods, corporate organization and computerization were “to be expected in an employment arrangement with a large company and do not, in and of themselves, relieve [employees] from their contractual obligations.”

In a June 2003 decision of the BLS, Judge van Gestel did deny an injunction where the employee underwent multiple significant changes in her positions and responsibilities, stating that due to those changes, there were “material questions” about the enforceability of a previous agreement. The court however rested its decision upon other grounds, and did not adopt the changed relationship rule.

Since Cypress Group, the BLS does not appear to have again dealt with the issue of enforceability of non-competition agreements in changed employment relationships in a written decision.

In January 2005 Judge Burnes was assigned to the BLS until June 2005, with re-appointment possible beginning in January 2006. It remains to be seen whether the changed relationship rule will take further hold in that session.

Recommendations for counsel

If the trend of these three decisions continues, and the rule takes hold that changed relationships void previous non-competition agreements, significant new burdens will be placed upon employers. An employer will no longer be able to rely upon old agreements, relatively secure in the knowledge that it has not acted as though it abandoned that agreement. A new non-competition agreement will have to be considered, or signed as a matter of course, each time an employee is promoted. If the employee refuses, the employer will face a choice: terminate that employee or continue to employ her without the protections of an agreement.

It is questionable whether employers will be able to “draft around” the rule, for instance by a clause stating that the employee agrees the contract follows him from job to job. That is because the decisions hold the agreements void for lack of consideration, a legal determination that could apply regardless of the text of the agreement.

Drastic action may not be indicated on the strength of three superior court decisions. For now, counsel should monitor the trends of the Massachusetts Superior Court, including the BLS particularly given Judge Burnes’ full-time assignment to that session. Litigation counsel may cite to the significant appellate precedent enforcing non-competition agreements despite changed circumstances. If the trend continues, or is adopted by appellate authority, counsel can attempt to draft clauses disavowing the changed relationships rule, and consider automatic resigning of such agreements upon promotion or changed circumstances.

End notes

1. 17 Mass. L. Rptr. 436 (2004).[back]

2. 18 Mass. L. Rptr. 157 (2004).[back]

3. 18 Mass. L. Rptr. 256 (2004).[back]

4. 353 Mass. 585 (1968).[back]

5. 62 F.Supp.2d 167 (1999).[back]

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