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.