Two recent Massachusetts Superior Court decisions have refined the considerations used to examine the enforcement of non-compete agreements, and whether a material change in one’s employment status is a valid defense. When evaluating non-compete agreements, no two situations are exactly alike and therefore the analysis is individualized and fact intensive.
In Grace Hunt IT Soutions v. SIS Software, LLC, (Suffolk Superior Court, Civil Action No. 12-00080-BLS1), Judge Lauriat, of the Business Litigation Session, ruled that a non-compete agreement was unenforceable because of a “material change” in the employment relationship that occurred after the agreement was signed. As confirmed by Judge Lauriat, in certain circumstances a “pre-change” non-compete may be unenforceable. Indeed, “[e]ach 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, 2004 WL 2341335 at *3 citing Marine Contractors. Co. v. Hurley, 365 Mass. 280, 285-86 (1974). Factors such as compensation terms, work territory, and job duties have been considered sufficiently material in considering the enforceability of restrictive covenants. F.A. Bartlett Tree Expert Co. v. Barrington, 353 Mass. 585, 588 (1968). “[F]ar reaching changes strongly suggest that the parties had abandoned their old arrangement and had entered into a new relationship.” Id. at 587.
In Grace Hunt IT Soutions, the court found that there was such a “material change,” and denied a motion for preliminary injunction, declining to enforce the non-compete covenant against the defendants. This confirmed that what constitutes a “material change” can be broad and vary depending upon the facts and the particular judge hearing the matter. In this case, Judge Lauriat concluded that a 20% decrease in the employees’ salary was enough of a change to satisfy this materiality standard. More specifically, the defendants had previously signed non-compete agreements with a company acquired by plaintiff. Once plaintiff purchased the assets of the old business, thus becoming the new employer, the employees were told that they had to sign new non-compete agreements. The employer/plaintiff further planned to implement a different compensation structure and change eligibility for fringe benefits.
According to the defendants, their base salary was decreased by 20%, but they were informed that they could earn the difference through discretionary bonuses based on billable hours. The individual defendants signed and returned their offer letters, but refused to sign the new non-compete agreements. Relying on the fact that the defendants rejected the new non-competes, and because of the “material changes” in the employment relationship (20% decrease in pay), the Court deemed the non-compete agreements to be unenforceable.
The second of these two decisions relating to non-compete agreements illustrates that not every claim of generalized “unfairness” will be sufficient to avoid enforcement of a non-competition agreement. In this more typical restrictive covenant enforcement case, A.R.S. Services v. Baker, (Murtagh, J., Middlesex Superior Court, Civil Action No. 12-00105), plaintiff, a disaster restoration company, asked the court to enforce a one year non-compete provision against an employee who resigned.
Defendant argued that his former employer asked him to engage in “a fraudulent act involving moral turpitude,” and that this was a “material breach” of the non-compete agreement, rendering it unenforceable. It appears that the employee did not argue that the reasonableness or scope of the non-competition agreement rendered it unenforceable. Instead, the employee merely alleged that the company’s president coerced him to improperly reduce an estimate to rebuild a home. Despite this argument, the court, ruled that there was insufficient evidence that the employee was engaged in any fraud or illegal activity. Instead the Court opined that mere business disagreements with an employer are not sufficient grounds to avoid the covenants of a non-compete.
As these two cases demonstrate, the enforcement of non-compete agreements (and other restrictive covenants) often depends on a fact intensive review. While the scope, geographic area and duration of a non-compete remain important factors in assessing non-competition terms, careful review of job changes and perceived wrongful conduct must be conducted. The attorneys at Bennett & Belfort are well versed in the legal intricacies involved with evaluating and litigating non-compete agreements and similar restrictive covenants.
